CBK targets Gulf cash with sharia compliant bonds
Posted Tuesday, May 4 2010 at 00:00
The Central Bank is working on a framework that will eventually lead to the flotation of sharia - compliant bonds and treasury bills in the local money market.
The move to entrench Sukuk bonds and bills in the law is seen as a push by CBK to tap the increasing amount of cash flowing into Africa from the Gulf region.
Sukuk — bonds that are structured to be in compliance with Shariah law which bars payment of interest — have seen rapid uptake in recent years as more and more businesses and governments have used them to raise financing.
They has a maturity that is determined in advance and is backed by an asset which makes it possible for the investor to earn a return from the profits derived from the assets.
Much of this activity has taken place in the Gulf and South East Asia so far, and analysts believe a government issue could be the key that Kenya needs to place it as the premier Islamic finance hub in the region.
“We’re are still waiting for the structured Sukuk to cover bonds and the Treasury bills market,” says Alex Nandi – deputy director banking supervision at the CBK.
Gulf African Bank and First Community Bank are still finding their footing in the Kenyan banking sector and are on course to turning profitable two years into operations.
But unlike conventional banks which are able to trade in bonds and treasury bills, Sharia law has constrained income avenues for Islamic banks.
With the flotation of Sukuk bonds, Islamic banks will have an investment avenue to generate income from the new form of government securities.
Gulf African Bank for instance invested Sh500 million in the sukuk portion of a government infrastructure bond issue last year and received a 13.5 per cent rate of return.
In 2009 the bank earned Sh56.6 million from its investment in government securities compared to no income from government securities in 2008.
The banks are also benefiting from cash flowing from the Middle East into investment projects in the country.
Sovereign funds in Gulf States, flush with cash are eyeing African countries as lucrative investment zones and most of this cash is handled by these institutions.