Kenya has made a significant milestone in the Islamic finance space by issuing the first sukuk in East and Central Africa.
The listing of Linzi Finco Sukuk on an unquoted securities platform at the Nairobi Stock Exchange two weeks ago was meant to raise funds that would be utilised to develop affordable housing projects for defence forces.
The bell-ringing ceremony was presided over by President William Ruto, symbolising its importance to the industry and the country.
However, Dr Ruto acknowledged the absence of a centralised Shariah board as a significant barrier to adopting Islamic finance. He challenged the regulators to develop a robust Shariah governance framework that would support the growth of the industry with tremendous economic potential.
The global demand for Shariah-compliant securities is evident as several jurisdictions, including Singapore, Malaysia, South Korea, the UK, South Africa, Nigeria and the majority of Middle Eastern countries, have actively developed Shariah-compliant products to position themselves as strategic countries to attract investors and businesses.
Islamic securities, including sukuk, contribute to the economy by facilitating the mobilisation of funds and act as an efficient conduit to channel savings for financing long-term projects for government and private sector.
They meet both investment and financing needs based on Shariah-compliant principles.
There are several benefits in offering and tapping into Shari’ah-compliant securities, including financial inclusion, attracting foreign direct investment, funding infrastructure projects, budgetary deficit and public debt.
Private sector players, especially the banks, also resort to products such as sukuk to manage their liquidity and boost their tier-I and II capital, among others. According to S&P global ratings, the global sukuk issuance is expected to reach $160 to 170 billion in 2024, from $168.4 billion in 2023.
Kenya has laid down a legal framework as the basis of the Shariah-compliant offering. The Public Finance Management Act defines sukuk to mean certificates of equal value, representing undivided shares in ownership of tangible or intangible assets, usufruct of assets; services or an investment activity, structured in conformity with Islamic law.
Section 205 of the Act gives the Cabinet Secretary powers to make regulations for raising money by issuing a sukuk bond, which may be raised within or outside Kenya in either shillings or any other currency. However, the Shariah governance framework being a prerequisite of Shariah-compliant securities has not been addressed yet. This is the major gap that would significantly obstruct its growth and development.
It is obvious that there is demand for Shariah-compliant capital market products and its growth and development would largely depend on the regulatory intervention in ensuring that the market has an effective Shariah governance framework.
Shariah governance is a comprehensive scope that covers every step from issuance of Shariah rulings, and Shariah-related information to a periodic audit and review. It, therefore, plays a pivotal role in giving legitimacy to Shariah-compliant products and enhances both investor’s and public confidence among other roles.
Establishing a vibrant market for Shariah-compliant products in the country is one of the calls to action as far as the deepening of the capital market and realisation of Vision 2030 is concerned.
The above cannot be achieved without having a sound framework in place and political will to ensure its growth.
The Capital Markets Authority (CMA) as the regulator for capital market products would need to review some of its regulations and align them with Shariah principles and international standards-setting organisations. In addition to this, they would need to develop a standalone Shariah governance regulation.
Section 12 of the CMA Act gives it powers in consultation with the minister to formulate rules, guidelines and regulations as may be required for carrying out its objectives.
This legal mandate forms the basis of establishing Shariah governance regulation. Importantly, the authority should consider developing a two-tier structure in regulating Shariah-compliant products as practised in Malaysia.
The two-tier structure would imply having registered CMA Shariah advisers and national Shariah advisory board. The national Shari’ah board as the CMA’s highest authority on Shariah matters should be empowered and entrusted to interpret Shariah matters and ascertain and endorse all CMA Shariah-compliant products. It shall be issuing rulings and advising CMA on any Shari’ah-related issues or transactions.
The national Shari’ah board will have its members from the pool of CMA Shari’ah advisers and its membership should be governed by AAOIFI and IFSB Shari’ah governance standards.
In practice, when intermediaries or entities are seeking to issue sukuk or any Shari’ah-compliant capital market products, they would first seek the advice and certification of a registered CMA Shari’ah adviser before submitting the product or concept paper to the CMA national Shari’ah board for approval and endorsement before going public.
Having such a structure would certainly mitigate divergence of Shariah opinion risk, enhance stakeholders’ confidence and trust, promote market discipline and position the country as an attractive destination in the region for Shariah-compliant products.
Dr Aman is an AAOIFI Certified Shariah Adviser, co-author of Shariah and Legal Analysis of Sukuk Contracts and Head of Shariah Department at Premier Bank Kenya
