A capital market is a medium for the buying and selling of equity securities (shares) and debt securities (bonds), in order to raise medium to long-term financing. A company may issue securities either through shares or bonds to raise money. Bonds may also be issued by entities who are in need of long-term cash such as national governments. Securities are issued at a primary market and traded in a secondary market. In a primary market, a company would have face-to-face meetings with investors in order to place its securities. Alternatively, a company may work with an investment bank which would act as an intermediary and underwrite the offering. In a secondary market the original investors may sell the securities they have purchased to third parties. The trading of securities in a secondary market is opened up to all participants in the market. One of the main functions of a capital market is to spur economic growth by providing a medium where the demand for funds may be matched with the supply of funds. Capital markets should be supervised and controlled by regulatory bodies to ensure that the highest levels of professionalism and ethics are maintained by all participants.
Islamic Capital Markets
Islamic capital markets (ICMs) refer to capital markets where sharia’h complaint financial assets are transacted. ICMs function as a parallel market to the conventional capital market by helping investors find sharia’h compliant investments. ICMs also play a complementary role to the Islamic banking system in broadening and deepening the Islamic financial markets. There are presently no Islamic–only securities exchanges. ICM instruments are traded on many of the world’s leading securities exchanges (where conventional market instruments are traded). ICMs do not have an organised regulatory authority because they are in the infant stage so the conventional capital market authority in any given country or region ordinarily supervises the ICM as well. An example of this is Malaysia, where the Securities Commission of Malaysia has a sharia’h council that is specifically responsible for sharia’h related matters of ICM activities. Regulatory agencies in other nations with active ICMs have followed suit, including Kenya In a typical ICM, transactions are carried out in ways that do not conflict with the teachings and tenets of Islam. There is certainly an assertion of Islamic law that ICMs are free from activities prohibited in Islam such as usury/interest (riba), gambling (maisir), ambiguity (gharar) and speculation (qimar).
There are various factors that have led to the increased demand for ICM products, including the increase of wealth among Muslim investors (especially from nations that are part of the Gulf Cooperation Council i.e. Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates); the growth of the Muslim population in regions such as Africa, Asia, Middle East and South America, especially in Asia and Africa, which currently account for over ninety five per cent (95%) of the world’s Islamic population and which are projected to grow by a further thirty five per cent (35%) by the year 2030. These regions also contain large ‘unbanked’ populations, which can be harnessed by Islamic banking models. Growth in the retirement population is also creating demand for Islamic pension and asset management products whilst there is also an increased awareness about Islamic banking and finance and a rise in per capita income and wealth held by Muslims in line with the trends in other faith-based groups. Africa is currently ranked as the third fastest growing Islamic finance region in the world after Asia and Middle East according to the African Development Bank. This growth signifies an increased demand for sharia’h compliant products and services.
The Global Islamic Finance Report (GIFR) 2010, was the first publication to report that the Islamic financial assets had exceeded USD 1 trillion by the end of 2009. GIFR 2017 reports that the global Islamic financial services industry stood at USD 2.293 trillion at the end of December 2016 which is USD 150.01 billion more than 2015 when the industry stood at USD 2.143 trillion. GIFR 2017 states that the assets under management of the banks offering Islamic financial services was USD 1.719 billion which is seventy five per cent (75%) of the total Islamic financial assets. There are expectations of the market size growing to USD 3.4 trillion by end of 2018, an eighty one per cent (81%) growth according to the Islamic Financial Services Industry Stability Report 2016. The second largest sector in terms of assets under management is Islamic bonds (sukuk), which comprises fifteen per cent (15%) of the global Islamic financial services industry. In the first half of 2015, the global sukuk amount outstanding stood at USD 291 billion, while Islamic funds assets figure was USD 71.3 billion. Islamic investment funds have not yet seen any significant growth and so is the case for takaful ( insurance) and the emerging business of Islamic microfinance.
The Kenyan Approach
Kenya is positioning itself as a hub for sharia’h financial services in East and Central Africa. The country’s Muslim population is estimated to be about eleven per cent (11%) of the total population while the non-Muslim population may also be keen on taking up Islamic finance products. This outstrips the two percent (2%) penetration of Islamic finance in the global economy hence the reason why Kenya has potential for Islamic finance products and services. Currently, the Capital Markets Authority (CMA) has registered two (2) Islamic Collective Investment Schemes and one (1) Islamic Fund Manager.
The strategy to accelerate Islamic finance uptake is underpinned by the ambition to transform Kenya into an International Finance Centre as part of the implementation of the Capital Market Master Plan, which is a Vision 2020 flagship project. As part of this strategy, the CMA was admitted by the Council of the Islamic Financial Services Board (IFSB) as an associate member of the IFSB based in Kuala Lumpur, Malaysia. The decision to admit the CMA was made at the 29th IFSB Council meeting held in Cairo, Egypt on 14th December, 2016. The role of the IFSB which is a global standard setting body is to promote the development of a prudent and transparent Islamic financial services industry.
In line with the Government’s aspiration to position Kenya as an Islamic finance hub in the region and deepen the application of Islamic finance within the economy, the CMA has achieved various milestones, including:-
- Hosting the joint financial sector regulators Project Management Office (PMO) on Islamic Finance which was launched in October 2017. The PMO is overseen by the National Treasury with the technical and financial assistance of Financial Sector Deepening Africa, and under the mandate delegated to it by Kenya’s Financial Sector Regulators Forum. The PMO is led by Islamic Finance Advisory & Assurance Services, an international consultancy firm specialised in Islamic finance, in collaboration with Simmons & Simmons - an international law firm.
- Driving a raft of targeted measures which were included in the Finance Act, 2017 designed to support the growth of Islamic finance in Kenya. The measures included amendment to the Capital Markets Act, 2000 to provide for sharia’h compliant capital market products; amendment of the Income Tax Act (Cap. 470) to provide for equivalent tax treatment of sharia’h compliant products with conventional financial products; exemption from payment of stamp duty on transfers of title relating to sukuk and amendment to the Public Finance Management Act, 2012 to allow for Government to raise capital through issuance of sukuk.
Another significant development in Islamic finance in Kenya is the appointment of members of the Islamic Finance Consultative Committee (IFCC) by the National Treasury. The IFCC is an industry stakeholder committee whose main objective is to provide support and feedback on the proposed Islamic finance policies and regulatory changes to facilitate operations in this complementary form of finance. The IFCC is a key governance committee that shall be next in line to the apex committee – the Islamic Finance Steering Committee (IFSC). The IFCC may refer issues that require urgent resolution to the IFSC for expeditious guidance.
In the long term, CMA intends to integrate sukuk issuance within the national public debt management framework so that it is used to raise funds by Government (issuer) on condition that the underlying transaction is structured based on various sharia’h principles or contracts. In addition, CMA should allow for the following products
to investors who are interested in investing in ICMs:
Sharia’h compliant derivatives products which are either exchange-traded such as Futures and Single Stock Futures (provided the underlying shares are sharia’h-compliant) or Over the Counter which can either be Islamic profit rate swap; foreign exchange swap and cross currency swap.
Sharia’h compliant securities, Islamic indexes, Islamic unit trusts, Islamic venture capital/private equity, Islamic exchange traded fund, Islamic fund management, Islamic real estate investment trusts, Islamic structured products and Islamic stock broking.