Kenya is witnessing a transformative moment in its financial landscape, with two significant developments poised to significantly impact the economy: the listing of the country's first Islamic bond on the July 31, 2024, Linzi Sukuk, and President William Ruto's call for a comprehensive regulatory framework to support the growth of Islamic finance. These developments are particularly timely as Kenya seeks investment opportunities to bolster its economy. The Islamic finance industry presents excellent potential for economic development in Kenya.

The Significance of Linzi Sukuk, the First Shariah-Compliant Product to be Listed on NSE

The listing of Linzi Sukuk on the Nairobi Securities Exchange (NSE) marks a historic milestone for Kenya. This 3-billion-shilling ($23 million) Islamic bond is the first Shariah-compliant product to be admitted to the NSE's Unquoted Securities Platform (USP). With a maturity period of 15 years and an internal rate of return of 11.13%, Linzi Sukuk aims to provide affordable housing solutions while offering attractive investment returns.

President Ruto highlighted the importance of this listing, emphasizing that it promotes financial inclusion and broadens market access. He enthusiastically announced:

Today, we are launching a product in Islamic finance, put together by the Nairobi Stock Exchange to facilitate public housing. That is the essence of public-private partnership. We are using private funds to deliver public housing. It is the model that will leverage more resources beyond what the government can do. That private money can facilitate public housing. In this particular aspect, our security forces will benefit from the housing that is going to be constructed using the resources that we are raising using this Sukuk bond.

The Sukuk's structure not only facilitates homeownership for Kenyans by allowing monthly payments as low as Sh7,700 over 15 years but also represents a scalable model for investment in affordable housing. This initiative aligns with the global shift towards stable and robust economic growth, unlocking Islamic financial assets valued at approximately $5 trillion.

A Call for Regulatory Framework

During the listing of Linzi Sukuk, President Ruto directed financial regulators to collaborate with the Treasury and Islamic finance stakeholders to develop a regulatory framework that supports the growth of Islamic finance in Kenya:

I asked our financial regulators to collaborate with the national treasury and Islamic finance stakeholders to develop a robust regulatory framework that will support the growth of Islamic finance in Kenya.

This move underscores the government's commitment to integrating Islamic finance into the country's economic development strategy.

President Ruto emphasized that Islamic finance has the potential to unlock investment resources and boost economic growth. He noted that a flexible regulatory framework is crucial for supporting Small and Medium Enterprises (SMEs) in raising funds through capital markets. The Unquoted Securities Platform at the NSE now includes an SME capital-raising platform, which is expected to facilitate this process.

The Potential of Islamic Finance in Kenya

Islamic finance offers several particularly relevant benefits for Kenya's current economic situation. Firstly, it provides an alternative funding source that adheres to ethical and socially responsible principles. This is appealing not only to Muslim consumers but also to non-Muslims who prioritize ethical investments.

Secondly, the principles of Islamic finance, which prohibit interest payments and emphasize risk-sharing, can lead to more stable and resilient financial systems.

Moreover, including Shariah-compliant financial products can attract a broader range of investors, including those from Muslim-majority countries. This can enhance foreign direct investment and provide much-needed capital for infrastructure projects and other developmental initiatives.

Understandably, President Ruto stressed that Islamic finance has "tremendous potential to unlock our investment resources and boost our economy."

Challenges and Solutions

Despite its potential, the growth of Islamic finance in Kenya faces several challenges. One of the main challenges is ensuring the integrity and authenticity of Shariah-compliant products. This requires robust regulatory frameworks and constant monitoring to ensure compliance with Islamic principles. Hence, President Ruto called on stakeholders saddled with the responsibility to develop the Islamic finance industry in the country to: "fashion a framework that will provide accountability and stability and a framework that will support this endeavour."

Additionally, there is a need for greater awareness and education about Islamic finance among both consumers and businesses. The government, financial institutions, and other stakeholders must work together to provide information and resources to help the public understand the benefits and mechanisms of Islamic finance.

Regional Developments in Islamic Finance

Kenya's advancements in Islamic finance are part of a broader trend in the Horn of Africa. The region has seen significant developments, including the opening of the first Islamic bank (Salaam Bank) in Uganda (March 2024), the fourth edition of the Islamic Finance Tour Africa in Djibouti - IFT Djibouti (June 2024), and the annual meeting of the Islamic Financial Services Board (IFSB) in Djibouti (July 2024). These events highlight the increasing traction of Islamic finance in East Africa, supported by regulatory advancements and government initiatives.

The Islamic finance industry has been gaining momentum in East Africa, just like in the rest of the continent. Neighbouring countries have recognized its potential to drive economic growth and financial inclusion. Therefore, creating favourable environments for Islamic finance to thrive will ultimately attract both local and international investors.

Undoubtedly, the listing of Kenya's first Islamic bond and the government's commitment to developing a supportive regulatory framework are significant steps towards integrating Islamic finance into the country's economic development strategy. These developments, coupled with regional advancements in East Africa, highlight the growing importance of Islamic finance in promoting financial inclusion, attracting investment, and driving economic growth. As Kenya navigates its economic challenges, Islamic finance offers a promising avenue for sustainable and ethical financial solutions.

IFMAG