Going Green: Introduction of Green Bonds as a Means of Sustainable Development

Posted on May 31st, 2019

By Patricia Mutiso

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Green bonds may be defined as regular bonds with a distinctively unique feature – the proceeds of the bonds are applied exclusively to projects with environmental benefits, for example, climate change mitigation, conservation of natural resources, promotion of biodiversity and reduction of air, water and soil pollution. In light of their specific utility function, there are several sectors on which the proceeds of green bonds can be utilised in, such as; energy, agriculture, waste management, water, transport and urban planning. Green bonds are therefore very useful in supporting the notion of sustainable development duly espoused as a national value in Article 10 (2) (d) of the Constitution of Kenya, 2010.

Green Bond Principles
The Green Bond Principles (GBP) were initially released in January 2014 and a revised version was published in June 2016. GBP provide guidelines for the issuance of green bonds, including providing guidance to issuers on the key components involved in launching a credible green bond and providing investors with available information that is necessary to evaluate the environmental impact of their green bond investments. GBP also assist underwriters by moving the market towards standard disclosures which facilitate transactions. GBP have four (4) main core components, namely, use of proceeds, process for project evaluation and selection, management of proceeds and reporting.

Types of Green Bonds
The following are the types of green bonds that are widely recognised:-

  • Use of proceeds bonds - where the proceeds from these bonds are earmarked for green projects but are backed by the issuer’s entire balance sheet. It entails a standard recourse- to- the- issuer debt obligation.
  • Use of proceeds revenue bonds - where the proceeds are assigned to eligible green projects, and bondholders have recourse to a specified revenue stream (which may be unrelated to the eligible green projects) but not to the issuer.
  • Project bonds - where the proceeds are invested in a specific green project and the investors have direct exposure to the green project itself. Debt recourse under a project bond is to the project’s assets and balance sheet.
  • Securitised bonds - where the relevant revenue stream is generated by a group of green projects or assets. Debt recourse
    under this type of bond is to a group of projects which have been grouped together (e.g. solar leases or green mortgages).

Supranational development banks have historically dominated the global green bond market, but now issuers are more diverse. Financial corporates led the market in 2018 and issuance by sovereign-related entities, like various water authorities, has also increased. The European Investment Bank issued its first green bond, named the Climate Awareness Bond, in 2017, with the proceeds of this bond dedicated to renewable energy and energy efficiency projects. In 2008, the World Bank issued its first green bond, a SEK 2.3 billion (USD 248 million) six (6) year issue that was sold to Scandinavian pension funds. The first corporate green
bonds were issued in 2012 and after that, the issuance of green bonds has been exponential. The green bond market grew from USD 10 billion in 2013 to over USD 40 billion in 2015 and Moody’s estimate that by 2019, the green bond market would have reached an annual value of over USD 200 billion.

In terms of “country appetite” for green bonds, China, France and the United States of America, lead the way accounting for fifty six per cent (56%) of global issuance in 2017, while Canada, Germany, Mexico, Netherlands Spain and Sweden fill out the remaining top ten (10) positions. Other countries participated minimally in the issuance of green bonds.

The exponential growth of the green bond market may be attributed mainly to two (2) factors. Firstly, governments globally are racing to mitigate the devastating effects of global warming in line with the Paris Agreement on Climate Change of December 2015. Secondly, in order to attract new investors, issuers of green bonds have developed innovative products such as green covered bonds and green residential mortgage backed securities amongst others, with the wider choice of investments products tending to attract a wider pool of investors.

The Kenyan Market

The Green Bonds Programme Kenya was launched in March 2017 with the aim of catalysing the market for green bonds. Subsequently, on 20th February 2019, the Capital Markets Authority (CMA) launched the green bonds market which was duly entrenched in law through the publication of a Policy Guidance Note on Issuance of Green Bonds and making amendments to the Nairobi Securities Exchange Listing Rules to allow for the listing of green bonds.

With CMA having approved the legal framework to issue both listed and unlisted green bonds, there is likely to be an increase in the issuance of green bonds and the funding for green projects in the country as well as the regional market.

Kenya is the third sub-Saharan African country to introduce a local green bond market after South Africa and Nigeria. In June 2017, the City of Cape Town issued a USD 74 million ten (10) year note maturing in 2027, with proceeds dedicated to projects that will mitigate and adapt to climate change, in particular, refinancing and financing water, sanitation and transportation projects. This was followed closely by Nigeria which, in December 2017, issued a USD 29.7 million green bond with proceeds reserved for renewable energy and afforestation projects.

Currently, Kenyan banks mainly rely on deposits with maturities of less than one (1) year and, to a lesser degree, development finance institutions for funding. Bond issuance by commercial banks is limited and the introduction of green bonds is expected to spur new environmentally friendly projects for banks to finance, creating opportunities for banks to grow and diversify their loan books. Banks will also be able to diversify their funding and investor profiles, increase available financing and raise funding with maturities beyond five (5) years to finance these projects.

Over the next few years and beyond, green instruments will play an important and niche role in driving the growth of Kenya’s capital markets, in line with the Marrakech Pledge for fostering green capital markets in Africa which calls for an increase in the volume, flow and access to finance for climate projects, alongside improved capacity and technology from developed to developing countries.

According to the Green Bonds Kenya Annual Report 2018, fifty percent (50%) of Kenya’s gross domestic product is attributable to sectors that are directly or indirectly reliant on natural resources. This dependence highly exposes Kenya to the risk of climate change, adverse weather conditions and related environmental risks and the country would thus do well in taking advantage of the opportunities for sustainable development that green bonds offer.

Research by Strategic Business Advisory in partnership with the Kenya Bankers Association, among others, shows that Kenya has a demand for climate-friendly bonds amounting to KES 91 billion (USD 910 million) in the next five (5) to ten (10) years. There are three critical sectors which the research selected as demanding green bond financing, namely, agriculture, transport and manufacturing. In addition, this report recommends that for green bonds to be competitive the pricing needs to competitive and simplified while incentives such as tax exemptions should be given.

Henceforward, sovereigns and sovereign-related issuers are likely to leverage investor interest to advance their environmental policies. According to Moody’s, multinational development banks will in the future support inter-regional issuance. It is worth noting that multinational development banks have moved away from being primarily green bond issuers in emerging markets to being facilitators of green bond issuance by providing technical assistance, credit enhancements and anchor investments in green bonds. Greener times, both financially and environmentally, lie ahead.

Onward Forward: Growth of Islamic Capital Markets in Kenya

Posted on June 27th, 2018

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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).

Market Trends

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.

Banking & Finance

Posted on June 12th, 2018

With increased oversight in the banking sector and the advent of Islamic finance and fintech in Kenya, we leverage on the trusted legal advice we provide to regulators to help clients make sense of what may be complex transactions in an increasingly competitive market.

Our Banking & Finance practise area is well regarded for its expertise in advising in both contentious and non-contentious matters. The practice area has vast experience advising on asset finance, structuring and drafting lending and security documentation for corporate and retail lending including cross border and syndicated loans, structured finance, SME financing and trade finance. With a good reputation in handling complex banking disputes, debt recovery and asset tracing, the practice area has also represented clients at the Court of Appeal and the Supreme Court. The team has advised and represented local and regional banks, international financial institutions and regulators. In addition, our firm is the principal legal advisor to the Central Bank of Kenya.


Recently, we have been involved in:

  • Advised a leading private bank in Kenya in the purchase of shares worth USD 92, 000 from a target company that provides insurance financing products.
  • Advising a lender on a suitable structure for the upstamping of the existing securities as well as advising the lender on the additional security documentation to secure the lender’s interest.
  • Acting in the preparation and perfection of security documentation (debenture, charges, corporate guarantees and the relevant board resolutions) for a Kenyan commercial bank in respect to their lending to a horticultural firm to facilitate acquisition of a horticultural farm worth USD 4 million.
  • Representing the Kenyan and Nigerian subsidiaries of a Pan Africa bank in a claim worth USD 52 million arising from a facility of USD 300 million advanced to a Lebanese engineering firm to fund the construction of the Nairobi-Mombasa oil pipeline.
  • Successfully represented a Pan-African bank in a claim of USD 25 million brought by a Zambian borrower who claims he never authorised the bank to disburse funds to the borrower.

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Amendments to the Central Bank of Kenya Act, 1966

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Corporate & Commercial, Dispute Resolution, Restructuring & Insolvency

For more information about our Banking & Finance practice, please contact George Oraro SC (Founding Partner) or Pamella Ager (Managing Partner).  Alternatively click here to download our Banking & Finance profile.

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About Us

Oraro & Company Advocates is a full-service market-leading African law firm established in 1977 with a strong focus on dispute resolution and corporate & commercial law. With a dedicated team of 10 partners, 4 senior associates, 10 associates, 1 lawyer and 36 support staff, the Firm has been consistently ranked by leading legal directories such as Chambers Global, IFLR 1000 and Legal 500 as a top-tier firm in Kenya.

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