The Capital Markets Authority has approved the issuance of Kenya's first ever Islamic bonds to raise Sh3 billion for affordable housing.

The instruments also known as Sukuk Bonds will be issued by Linzi Finco Trust with an internal return of 11.13 percent.

According to CMA the bonds will raise Sh3 billion with the primary aim of developing 3,069 institutional housing units, in alignment with the government's housing agenda.

Sukuk are financial instruments that comply with the Shari’ah principles, making them a unique and inclusive investment avenue.

Over the years, there has been a steady growth of the global Sukuk market. 

It is an instrument for raising capital, usually referred to as an Islamic bond, tradeable on the securities exchange.

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.

The approval by the CMA marks a significant milestone in Kenya's capital market diversification, providing both investors with an alternative, socially responsible investment opportunity.

"We are thrilled to embark on this pioneering journey with the issuance of the first Sukuk bond," said CMA chief executive Wyckliffe Shamiah.

He said this not only represents a new investment opportunity but also a significant step towards addressing the housing deficit in Kenya and supporting the government's transformative agenda. 

CMA said the bond is anticipated to set a precedent for further innovative capital

“This innovative financing mechanism is expected to attract both domestic and international investors seeking ethical and socially responsible investment options,” added Shamiah.

Kenya's housing demand is estimated at 250,000 units annually. With a supply of only 50,000 new houses annually, there is an 80 per cent annual housing deficit. 

Sukuk bonds can either be issued by state or by organisations.

In July, Kenya initiated talks with potential investors in London over the issuance of a Sukuk bond, as the country also explored options to aid the state in raising funds to pay its debt.

The trip to London was intended to signal to the financial markets that Kenya is committed to paying off the $2 billion (equivalent to 295 billion shillings) Eurobond, which is set to mature in the current financial year.

As part of its strategy, the government was to appoint a lead arranger by the end of July, who was to provide guidance on the most suitable liability management approach.

In the plans Kenya will also be looking to emulate Egypt's approach, after it successfully raised $1.5 billion through a three-year Sukuk issuance in February 2023, with book orders totalling $5.4 billion.

Kenya intends to issue a Shariah-compliant Sukuk to assist in repaying the Eurobond maturing in June 2024.

The government also intends to issue a Samurai bond as part of its liability management strategy. A Samurai bond is a debt instrument denominated in Japanese Yen and subject to Japanese regulations.