Slow Sukuk uptake halts sector boom
By Steve Umidha, March 9, 2022Kenya is yet to make public details of its policy on Islamic finance two years after plans to develop the critical National Policy on Islamic Finance plan was mooted.
This comes amid hope the development would position Kenya as a regional Islamic financial hub even as the country put in place mechanisms for a sovereign Sukuk issuance and financial education. A sukuk is an Islamic financial certificate, similar to a bond, that complies with Islamic religious law.
A new report by research firm Moody’s now puts Kenya on the spot projecting Kenya to miss out on a boom in the Islamic finance sector in 2022. This is due to expected economic acceleration, particularly in the Gulf Cooperation Council (GCC) region and other markets Africa included.
“The economic recovery in key Islamic finance markets will boost credit growth and demand for Shariah-compliant products and we expect Islamic banks’ asset growth to continue to outperform their conventional peers,” said Ashraf Madani, VP-Senior Analyst at Moody’s.
Dip in Sukuk issuance
Ashraf said higher oil prices will however lead to lower Sukuk issuance this year, largely driven by lower financing needs, as Russia and Ukraine squabbling play a key role in oil prices.
“It is highly encouraging that in recognition of efforts made so far, Kenya is now considered among the four countries with considerable potential of becoming regional hubs of Islamic finance activities,” Wyckliffe Shamiah, Chief executive of the Capital Markets Authority was quoted during a policy discussions forum for Sukuks.
The lull in actualising the National Policy on Islamic Finance as well as lack of information on the same, are however seen as main reasons why Kenya could lose out on the expected boom in the sub sector.
Despite amendments to the Public Finance Management Act which had been anticipated to allow the government to issue Islamic bonds or Sukuks, which had been considered an alternative source of funding, nothing substantive has taken place, at least not in the public domain.
The Act has already been drafted by the Islamic Finance Project Management Office (PMO), a body setup by the government to coordinate efforts, among its regulatory agencies. “The primary objective is to prepare the groundwork for a sovereign Sukuk but also equally to attract corporate Sukuk from the region,” said Farrukh Raza, managing director of IFAAS, an Islamic finance consultancy which designed the PMO’s framework.
Depositors protection
While acknowledging the rapid growth of Islamic finance in Kenya, the International Monetary Fund (IMF) also raised concerns saying the move was being implemented without adequate protection of depositors as is currentlythe case with conventional banking.
“The legal framework exhibits some gaps, prudential frameworks have not been adapted to the specificities of Islamic banking and there are also remaining gaps in the Shariah governance framework, consumer protection framework, liquidity management, resolution and safety nets,” read the IMF report in part.
Sukuk involves a direct asset ownership interest while bonds are an indirect interest-bearing debt obligation.
Trading in Sukuk involves sale of assets while bonds don’t involves any sale of assets.