Last week, the Capital Markets Authority approved the issuance of the first Sukuk bond in Kenya, which will be rolled out by a trust that is developing 3000 institutional houses for the government.
The approval of Linzi Finco Trust will be a test of the country's readiness for the Shariah-compliant bonds, which have been aided by law changes a few years ago to provide clarification on the taxation of Islamic financial products in the country.
Over the years, the government has been speculating about the possibility of floating a Sukuk bond, mainly to diversify its options for external commercial financing of its budget deficit beyond the traditional European and North American markets.
The private sector has beaten the state to the punch through the issuance of the Linzi Sukukuk, which will offer an internal rate of return at 11.13 percent, according to the CMA.
What are the characteristics of Sukuk bonds? How are they different from conventional bonds?
The Sukuk is a bond-like instrument whose trading and issuance copies with Islamic law.
Although it is referred to as a bond, a Sukuk differs from traditional bonds issued by the government and corporations in that it is not a debt instrument that pays interest.
It offers the holder a share in the returns generated by an underlying asset, given that Islamic law prohibits interest.
A Sukukuk is, therefore, a certificate granting partial ownership of an asset, which grants the holder a proportionate share of the return generated by that asset.
It declares that the capital should be returned to the holder at a future date, similar to the return of the principal upon maturity of conventional bonds.
Pricing differs from price, as prices differ from brand to brand. Sukukuk is paid based on the real market value of the underlying assets, while conventional bond prices are determined by the credit or risk rating of the issuer.
While Sukuk has been used to represent financial commitments from as early as the 7th century, the instruments as we know them today have only been issued in the last 30 years, with Malaysia developing the first sovereign Sukuk from 1983.
The Sukuk's obligation to be Shariah-compliant determines the type of projects that can be funded.
In contrast, these are suitable for financing housing, energy, healthcare, transport, water and sanitation projects, which can provide an underlying asset and also provide profits to be shared with bondholders.
These projects must be beneficial and not be harmful to society, for example that one cannot float a Sukuk to invest in ventures touching gambling or alcohol, or for speculative purposes.
At every stage, Sukuk must bear the strict Shariah's strict rules and requirements, including structure, issuance, and trading.
Has any such thing been issued in Kenya so far and are they backed by law?
The Linzi Finco Trust Sukuk will be the first of its kind in Kenya, six years after the government made changes to the law to accommodate such Islamic financial products.
The National Treasury said earlier this year that a sovereign Sukuk is among the options being considered for refinance the $2 billion Eurobond that matures next June.
The introduction of Sukuk bonds was made possible by various Act amendments introduced in 2017 that enabled the issuance of the nation's Sukuk bonds.
The Act made changes to the Income Tax and VAT Act to extend the definition of interest to include Islamic finance return, which was previously not provided for.
The Stamp Duty Act was also reformed to acknowledge Islamic property finance, while under the Public Finance Management Act, the definition of national government securities was expanded to include Sukuk.
The Co-operative Societies and the Sacco Societies Acts were also updated to recognize Islamic financing and saccos in the country.
Where have Sukuk bonds been issued in Africa?
In recent times, a number of African nations have issued Sukuk bonds, demonstrating that there's a need for the product.
In 2018, Morocco and Nigeria issued Sukuk securities of $105 million and $327 million, respectively. The Moroccan issuance was oversubscribed 3.6 times.
In February this year, Egypt raised $1.5 billion via three-year Sukuk bonds, which attracted bids worth $5.4 billion.