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CPF mulls Islamic bond issue to grow its fund value by Sh35.4b

By Steve Umidha
Wednesday, February 3rd, 2021
CPF mulls Islamic bond issue.
In summary
    • The world has seen steady growth of the global Sukuk market, an instrument for raising capital, usually referred to as an Islamic bond, tradeable on the securities exchange over the years.
    • The fundamental difference between a Sukuk and a conventional bond is that the latter represents a debt obligation owed by the issuer to the bondholder while Sukuk represents beneficial ownership in the underlying asset.
    • Islamic finance is a method of financing based on the principles of Islamic law (Shariah). Capable of being issued by corporates or governments, Sukuk can be used as an innovative instrument, especially for infrastructure development.
    • Raising funds through Sukuk has become an integral part of Islamic finance and has been used to finance infrastructure development plans, particularly around the Gulf Cooperation Council and Malaysia.

Steve Umidha @UmidhaSteve

County Pension Fund (CPF), a contributory retirement benefit scheme for County employees, may tap the Islamic bond market for the first time as it looks to grow the fund value to Sh55 billion by 2025.

The scheme is today valued at Sh19.6 billion, and will be eyeing the global demand for Shariah-compliant financing model popular in Asia, the Middle East and parts of Europe to grow its fund value by Sh35.4 billion in the next five years.

Without giving timelines, CPF Group Chief executive Hosea Kili said the company will ride on the successes of its Sharia’h-Compliant pension scheme, Salih.

The scheme launched in 2018 is tailored for the Muslim faithful who work in the counties.

“We are considering that and we will do it if no one will do it soon. We have had lengthy discussions with Islamic scholars on this subject, as well as visited mature markets like Malaysia where the concept is in practice,” Kili said in an interview.

Kenya is yet to have a Sukuk issuance in the capital markets despite the amendments through the Finance Act of 2017 that sought to include various definitions and Shariah-compliant products.

CPF’s Salih gained over 6,600 membership across the 10 Muslim-dominated counties with a fund value of Sh850 million a month before its formal launch in November 2018. The Sharia’h compliant scheme was valued at Sh2.4 billion as of December 2020.

Critical roadmap

CPF, whose membership is 54,000 mostly counties’ staff, believes the familiarities gained in the last two years has provided a critical roadmap in the issuance of Sukuk (Islamic bonds) – which will be a first in the Kenyan market.

“The trajectory has been very impressive since we launched Salih, and this will provide vital lessons for the team involved in the development of Sukuk – a financial product that will also go along in financing some of the infrastructural projects our country needs,” said Kili.

The firm sees Sukuk as one of the more convenient ways to bridge financial deficits and address infrastructure challenges in the nation that on June 11, 2020, presented a Sh2.79 trillion (around $26 billion) budget for fiscal year 2020–2021, which runs through to June 30, 2021.

A Sukuk is an Islamic financial certificate that strictly follows Islamic law commonly known as Sharia, in which the issuer is obligated to make a contractual promise to buy back the bond at a future date at par value.

The fundamental difference between a Sukuk and a conventional bond is that the latter represents a debt obligation owed by the issuer to the bondholder while Sukuk represents beneficial ownership in the underlying asset. Sukuk can also be issued by corporates or governments.

Financial sector

The Islamic finance industry in Kenya is considered relatively well developed but a lack of education and well-understood industry framework have been blamed for its complete take-off – even though the local financial sector has been home to Islamic banks and takaful operators for more than a decade.

Kenyan market is yet to have a Sukuk issuance in the capital markets despite the amendments through the Finance Act of 2017 that sought to include various definitions and Shariah-compliant products.

There have been consultations, discussions, seminars, and ongoing workshops to establish consensus on some of the outstanding policy issues, according to Luke Ombara, director of regulatory policy and strategy at the Capital Markets Authority (CMA).

Such engagements, Ombara said will ultimately lead to the formulation of a national policy on Islamic finance in the country.

Already, significant strategic documents including the National Treasury’s Strategic Plan have prioritised the issuance of relevant products and services to deepen the Sukuk system of finance in Kenya.

Globally, market conditions for such financial vehicles are expected to remain buoyant throughout 2021, with record-low interest rates and abundant liquidity.

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