East Africa’s biggest economy is positioning itself to become a regional hub for Islamic banking. Kenyan finance minister Henry Rotich said on March 30 that the government would propose amendments to the financial laws and issue new regulations to facilitate a Sharia-compliant retirement scheme. It will also amend the public finance management act to provide for the issuance of sukuk. In the past, Kenyan regulators found it hard to issue new regulations, as the government was battling the jihadist fundamentalist group al-Shabaab. Regulatory agencies say Kenya is now ready to allow Islamic finance and banking to thrive. In fact, Kenya is already a regional leader in Islamic banking. The country has two fully-operating Islamic banks. There’s also one takaful Islamic insurance company, a sharia-compliant mutual fund and two cooperatives. In December, Kenya joined the Islamic Financial Services Board based in Malaysia.
The Kenyan Treasury will push through the country’s first Sukuk bond in the coming year. The changes will see the Public Finance Management Act amended to allow the issuance of the bond, which has been in the works since 2014.
Treasury CS Henry Rotich said that the Capital Markets Act, the Co-operatives Societies Act and Sacco Societies Act are also lined up for ammendment.
The government plans to borrow up to Sh256 billion from external sources in the next fiscal year, to plug a budget deficit of Sh524 billion. The State has in the recent past taken up foreign loans in form of the Eurobond and syndicated loans from commercial lenders. Kenya has been mulling over a Sukuk bond for the past two fiscal years, given its highly discounted nature, which would provide cheaper financing compared to commercial loans. The lack of the necessary regulatory framework has, however, delayed this option. In the current fiscal year, Kenya has turned to syndicated loans to finance part of her budget deficit. These loans include the just signed $800 million loan from four international banks, and a similar $500 million facility taken from the African Export-Import bank.
Kenya's government has unveiled a package of initiatives under its latest budget to develop Islamic finance in the country, as part of efforts to mobilise local funds and set Nairobi as a regional hub for the sector. The moves could spur Kenya's decade-old Islamic banking sector and help the government fund infrastructure in a country where Muslims account for about 10% of the population of some 44 million.
Finance Minister Henry Rotich outlined the steps as part of the country's 2017/2018 budget, released on Thursday, aiming to level the playing field between Islamic and interest-based transactions. Amendments to the Public Finance Management Act will also allow the government to issue Islamic bonds, or sukuk, as an alternative funding source. This could prove useful for a government that has set aside billions for infrastructure, with a fiscal deficit set at 524.6 billion shillings ($5.10 billion).