Kenya has achieved a significant milestone in Islamic finance by issuing the first Sukuk in East and Central Africa.
The listing of Linzi Finco Sukuk on the Nairobi Stock Exchange’s over-the-counter securities platform two weeks ago was aimed at raising funds that would be used to develop affordable housing projects for the defence forces.
President William Ruto presided over the bell ringing ceremony, symbolising its importance to the industry and the country.
However, Dr Ruto acknowledged that the absence of a central Shariah board was a major impediment to the adoption of Islamic finance. He challenged regulators to put in place a robust Shariah governance framework that would support the growth of the industry, which has huge economic potential.
The global demand for Shariah-compliant securities is evident as many countries, including Singapore, Malaysia, South Korea, the United Kingdom, South Africa, Nigeria and most of the Middle East, have actively developed Shariah-compliant products to position themselves as strategic destinations for investors and businesses.
Islamic securities, including Sukuk, contribute to the economy by facilitating the mobilization of funds and acting as an effective channel for channeling savings to finance long-term projects of the government and the private sector.
It caters to investment and financing needs based on the principles of Islamic Sharia.
There are many benefits to offering and leveraging Shariah-compliant securities, including financial inclusion, attracting foreign direct investment, financing infrastructure projects, and budget deficits and public debt.
The private sector, especially banks, is also turning to products such as sukuk to manage their liquidity and boost their Tier 1 and Tier 2 capital, etc. According to Standard & Poor’s Global Ratings, global sukuk issuance is expected to reach $160-170 billion in 2024, from $168.4 billion in 2023.
Kenya has put in place a legal framework as a basis for Shariah-compliant offering. The Public Finance Management Act defines Sukuk as certificates of equal value, representing undivided shares in the ownership of tangible or intangible assets, or the right to use the assets; or services or investment activity, which are regulated in accordance with Islamic law.
Section 205 of the Act empowers the Cabinet Secretary to make regulations for raising funds through the issuance of Sukuk bonds, which can be raised within or outside Kenya in either shillings or any other currency. However, Shariah governance framework has not been addressed as a prerequisite for Shariah compliant securities so far. This is a major gap that will significantly hinder their growth and development.
It is clear that there is a demand for Shariah-compliant capital market products, and their growth and development depends largely on regulatory intervention to ensure an effective Shariah governance framework in the market.
Shariah governance is a comprehensive scope that covers every step from issuance of Shariah rulings and Shariah-related information to auditing and periodic review, and thus plays a pivotal role in legitimizing Shariah-compliant products and enhancing investor and public confidence among other roles.
Establishing a vibrant market for Sharia-compliant products in the country is one of the calls to action in deepening the capital market and achieving Vision 2030.
This can only be achieved with a sound framework and political will to ensure its growth.
The CMA, as the regulator of capital markets products, will need to review some of its regulations and align them with Shariah principles and international standard-setting organizations. In addition, it will need to develop a separate Shariah governance regulation.
Section 12 of the Markets and Exchanges Authority Act gives powers in consultation with the Minister to formulate such rules, guidelines and regulations as may be required to achieve its objectives.
This legal mandate forms the basis for the establishment of a Shariah governance framework. It is important for the Authority to consider developing a two-tier structure in regulating Shariah-compliant products as is the case in Malaysia.
The two-tier structure means that there will be CMA registered Shariah advisors and a National Shariah Advisory Board. The National Shariah Board should be empowered as the highest authority in the CMA on Shariah matters and be tasked with interpreting Shariah issues and verifying and approving all Shariah-compliant products with the CMA. It should also issue rulings and advise the CMA on any Shariah-related issues or transactions.
The National Shariah Board will include members from the Shariah Advisory Group of the Islamic Capital Market Authority, and its membership must be subject to the Shariah Governance Standards of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board (IFSB).
In practice, when brokers or entities seek to issue Sukuk or any Shariah-compliant capital market products, they first seek advice and certification from a Shariah advisor registered with the CMA before submitting the product or concept paper to the CMA’s National Shariah Board for approval and endorsement before offering it to the public.
There is no doubt that the existence of such a structure would mitigate the risks of differences in Sharia opinion, enhance stakeholder confidence, promote market discipline, and position the country as an attractive destination in the region for Sharia-compliant products.
Dr. Aman is an AAOIFI Certified Shariah Advisor, co-author of Shariah and Legal Analysis of Sukuk Contracts and Head of Shariah Department at Premier Bank Kenya.