State mulls issuing Islamic bond to fund budget

Kenya is set to join the Islamic Development Bank ahead of the planned Sukuk or Islamic bond. Treasury Cabinet Secretary Henry Rotich, however, says that the government is yet to come up with the exact amount it plans to raise from the Sukuk Bond it hopes to float in the new financial year.

Rotich says the amount will depend on the financing gap the Government will find itself in in the Sh1.2 trillion-budget coming up in June.

“I do not have a figure yet. But we will have a clear picture after we finish with the arrangements. Depending on the budget shortfall, we will see how much we can raise domestically through the T-Bills and so forth and what remains is what shall be considered,” Rotich told The Standard on the sidelines of the inaugural East Africa Islamic Finance Summit held in Nairobi yesterday. “Should we raise the entire amount domestically then there will be no need for the bond.”

Rotich (pictured) also said the Government is considering being a member of the Islamic Development Bank to allow it easier access to the emerging Islamic financing market.

The bank now has 56 member countries. To be a member, the basic condition is that the prospective country becomes a member of the Organisation of Islamic Cooperation (OIC) and pay its contribution to the capital of the Bank and be willing to accept such terms and conditions as may be decided upon by the IDB board of governors.

Samurai bond Kenya is drafting a law as it moves to tap into Islamic finance that is being marketed as an alternative and cheaper funding window. The Islamic Finance Act, which is being looked at by players in the industry, including the Capital Markets Authority (CMA), is expected to put in place the infrastructure necessary to unlock the billions in the sector.

The Kenya Bankers Association (KBA) says the industry is keen to create the foundation for Islamic Finance to thrive. “Our role is to work in collaboration through strategic engagement with various stakeholders, including the financial sector regulators, to identify the conditions necessary in terms of an analysis of the current practice,” KBA Director, Centre for Research on Financial Markets and Policy Jared Osoro said at the summit.

This meeting comes at a time when the Government has announced plans to float a new sovereign bond in Japan and the Middle East that is expected to raise the biggest chunk of the Sh310 billion that will be borrowed from the external markets in the next financial year. A sovereign bond is a debt security issued by a national government within a given country and denominated in a foreign currency.

Treasury is also looking at the possibility of floating a ‘diaspora bond’ for Kenyans in the diaspora and an Islamic bond, known as Sukuk, which is a sharia-compliant bond. It also plans to float a Samurai bond, a yen-denominated bond, which also has low interest and a possibility of having concessionary terms.

“The Government could venture into either the Sukuk bond, which is a Sharia-compliant bond or Samurai bond from the Japanese market as well as the diaspora bond targeting Kenyans in the diaspora,” the draft Budget Policy Statement reads.

The new loans are expected to help Rotich and the mandarins at the Treasury to keep an eye on the deficit financing, manage the stability of the shilling and the keep domestic interest rates low.

The Government has been turning to bonds to plug budget shortfalls. It has however come under pressure over the accountability of Sh250 billion Eurobond issued in the 2014/15 financial year. Rotich said he is still waiting for the President’s calendar to allow him launch the M-Akiba bond targeting retail borrowers that will use their mobile phones to lend money to the Government.