Global credit ratings agency Standard and Poor’s (S&P) has exuded confidence that Kenya’s plans to tap into Islamic financing to raise money to repay the Eurobond maturing in June this year could be successful.
Islamic finance experts at the New York-based agency said in an analysis that Kenya may this year succeed in issuing its first Sukuk bond, as it faces pressure in repaying the Sh321 billion ($2 billion) Eurobond, nearly seven years after the first attempt in 2017 which did not materialise.
“Kenya has not yet issued its debut sovereign Sukuk, which was expected in 2017-2018 after the country had finalised its regulatory framework in 2016,” said S&P’s director of financial rating services, Samira Mensah, in the analysis.
“We believe this could change in 2024 since Kenya’s $2 billion Eurobond will mature in June 2024. Sukuk could help Kenya to access hitherto untapped liquidity pools and attract foreign investors, including from the East African Community and Gulf countries.”
A Sukuk bond is a Sharia-compliant bond, which allows the government to tap into financing from the Muslim faithful.
According to S&P, a sovereign Sukuk could “help Kenya mobilise savings, diversify investment opportunities, and, ultimately, establish a sovereign benchmark for corporate Sukuk prices”.
The Treasury had last year expressed interest in issuing a Sukuk bond as part of the plans to raise finance to repay the 10-year Eurobond maturing this year.
The repayment of the Eurobond has caused jitters among investors and economists, after a failed buyback last year, which credit rating firm Moody’s said it would treat as a default.
In November, President William Ruto said the government would buy back Sh48.2 billion ($300 million) of the bond in December, but the National Treasury ended up paying only $67.8 million in interest accrued on the bond.
The President again said this week on the sidelines of the Italy-Africa summit that the government has received a green light from its debt managers to make a buyback of the Eurobond by March.
Economists say the Eurobond repayment holds high stakes for the State and the entire economy. In a report, experts at the Institute of Public Finance last week said the government is highly unlikely to default on the bond, but “it remains unclear how Kenya will ultimately resolve the issue”.
Only eight African countries have so far issued a Sukuk bond, raising a total of about $6.6 billion (Sh1 trillion) since 2014 both in their local and foreign currencies. Kenya will be the first in East Africa if it proceeds to issue one.
The amount raised by African countries from sovereign Sukuks last year more than tripled to $3 billion (Sh481.5 billion), from the $950 million (Sh152.5 billion) raised in 2022, according to S&P’s data.
According to the S&P experts, African countries, including Kenya, have generally been reluctant to issue Sukuk bonds due to the “complexities and evolving Sharia requirements related to Sukuk issuance.”
Kenya had first planned to issue a Sukuk bond in the 2017/18 financial year as an alternative source of finance, but the plan did not materialise.
