Islamic banks in Kenya have in recent past raised funds in Gulf countries. PHOTO | FILE
By ALLAN OLINGO
In Summary
- Falling oil prices, uncertainty over a US Federal Reserve interest rate increase, and the complexity of structuring a Sukuk bond among challenges Kenya could encounter.
- The International Sukuk bond issuance has been on a downward trend, with its 2015 issuance dropping to $20 billion compared with a high of $30 billion in 2014.
- However, Jaffer Abdulkadir, KCB Group head of Islamic banking, says it is still viable for Kenya to enter the Sukuk market despite the liquidity issues in the GCC countries.
- Legislative gaps on Islamic banking could also delay issuance of the bond.
Kenya’s debut entry into the Islamic bond market could prove
more difficult than initially thought as the global oil glut and
budgetary deficits within the Gulf Co-operation Council threaten uptake
of the debt.
In January, National Treasury Cabinet Secretary Henry Rotich,
while addressing delegates during the Islamic Finance and Investment
Summit in Nairobi, said the highly discounted Islamic bonds provided
Kenya with a cheaper financing option for the country’s budgetary
deficit.
“If you look at the global finance market, the sharia-compliant
assets have grown to more than $200 billion, making the Sukuk market
attract more non-Islamic countries. This means that this product is now
one of the mainstream ones of global finance,” Mr Rotich said.
Some analysts warn that falling oil prices, uncertainty over a
US Federal Reserve interest rate increase, and the complexity of
structuring a Sukuk bond are among challenges Kenya could encounter.
The International Sukuk bond issuance has been on a downward
trend, with its 2015 issuance dropping to $20 billion compared with a
high of $30 billion in 2014.
Citi Africa chief economist David Cowan said Kenya is looking at
getting into a market that is in turmoil because of the effects of low
oil prices.
“These Gulf states’ situation is changing as they are effecting
budget cuts due to a liquidity crunch. I think it would not be advisable
to rush for a Sukuk now,” Mr Cowan said.
Analysts at rating agency Standard & Poor's concur, saying
monetary policy developments in the US and Europe, coupled with the drop
in oil prices, are likely to drain liquidity from global and Gulf
markets. This will see a reduction in investment spending, resulting in
lower financing needs and potentially lower issuances (conventional and
Islamic).
Samira Mensah, the associate director of financial services ratings at Standard & Poor’s told The EastAfrican
that it is not simple to access the Sukuk market due to the tightening
of the global liquidity. Kenya also has to meet various Islamic banking
conditions before accessing this product.
“The funding within the Sukuk market is still available despite
the tightening liquidity but for Kenya, the defining factor will be what
currency it will be issued in. Kenya also needs to understand that it
should benchmark its issuance in a way that will position its as the
Islamic banking hub for the region,” Ms Mensah said.
However, Jaffer Abdulkadir, KCB Group head of Islamic banking,
says it is still viable for Kenya to enter the Sukuk market despite the
liquidity issues in the GCC countries.
“The timing is right for Kenya. The fall in oil prices will
compel the Islamic banking providers in GCC to diversify and look
outside their markets. Entering the Islamic bond market right now will
be in our favour,” he told The EastAfrican.
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