The government of Kenya has recently demonstrated its commitment to financial products innovation and financial inclusion when it announces that it will issue the M-Akiba bond that targets ordinary Kenyans to raise funds for infrastructure development in the country. The government of Kenya shall seek to raise Ksh 5 billion or more from individuals — including those in remote areas — through the initiative. So what is M-Akiba bond? How is expected to operate? Is there a way to structure it in a manner that complies with Islamic finance principles? This article is the first attempt that aim to shed light on the subject in order to enable the government record massive buy out of the bond without excluding segments of its population who might self-excluded due to the prohibition of interest which underpin the current structure.
WHAT IS M-AKIBA BOND?.
In Short,it is retail bond issued by the Government of Kenya via the mobile phone platform. It is a product issued by the National Treasury through the Central Bank of Kenya in collaboration with Nairobi Securities Exchange (NSE), Central Depository Settlement Corporation (CDSC), Mobile Network Operators particularly Safaricom, and the Kenya Association of Stock Brokers & Investment Banks (KASIB). The money raised from the bond aimed to fund government infrastructural development projects, both new and on-going.
The M-Akiba bond is aimed at promoting a savings and investment culture by Kenyans while at the same time enhancing financial inclusion for economic development. Some unique characteristics of the bond are:
– Purpose – Government development expenditure / Budgetary support
– Mobile Traded Bond – Registration, trading, settlement using mobile money.
– Target Amount – Kshs 5 Billion
– Minimum investment amount per account – Kshs. 3,000
– Maximum Investment per account / per day – Kshs. 140,000
– Tenure of Bond - (to be communicated)
– Coupon Rate (to be communicated) after every 6 Months.
– Price traded at secondary market – at par (factoring in the accrued interest)
– Taxation – Tax-free as provided for under the Income Tax Act.
EXISTING STRUCTURE?
Kenyan who has registered with M-Pesa dial USSD code *XYZ# to register to create M-trading account by following the instruction until M-Trade account is confirmed. There after you are good to go by placing order to buy by following steps shown below:
The bond holder has an option to sell into secondary market by dialing USSD code*XYZ# and place order to sell by following steps shown below:
Who will be buying these bonds form the first buyers to get cash/liquidity? To tackle this, it is proposed to introduce a specialty fund to ensure complete liquidity in the market at all times in the secondary market by allowing a large enough number of participants to operate in the liquidity provision (Therefore ascertaining that there are enough assets to ensure liquidity). This fund will consist of Nairobi Securities Exchange trading participants –(Investment Banks, Stock Brokers and ASDs), Commercial Banks licensed by CBK and M-Akiba Partners.
Furthermore, the structure provides an avenue for M-Pesa account holder or prospective M-Akiba clients to get loans to purchase the M-Akiba bond, this facility is dubbed as “Okoa Akiba”. The loan will be competitively priced based on the market interest rates and will be conveniently presented to the customer under M-AKIBA mobile menu. Upon requesting the loan, the client will enter a borrowing agreement with the lending entity and the sum requested will be deposited to their Mobile Money Account and the M-Akiba Security of that value purchased for them. The Purchased securities will be put under Lien – meaning that the client cannot be able to dispose them before completing to pay off the loan and the interest. Then upon repayment they are able to have the M-Akiba bond transferred to them. It is envisioned to provide the necessary convenience for those who would be willing to buy the bond but don’t have the finances immediately.
The Second feature is the ability to borrow “Kopa Akiba” (Swahili for borrow) against the M-Akiba Bond (This feature will be available during the secondary trading of M-Akiba). This feature would enable the client to hold the bond in their name but the bond will be under lien as collateral to allow the client to access funds. During the period that the M-Akiba are under Lien, the interest payment would be given to the client; however, they may not be in a position to sell off the bond. Should the borrower not repay as per the agreed timelines (including a grace period), the securities under lien will be sold (foreclosed) and the lender is able to recover the loan amount. Upon completion of the loan repayment then the lien would be lifted to allow full ownership and autonomy of the security to the client. It is expected that the proceeds of M-Akiba bond will be ring fenced or earmarked for infrastructure development project-new and existing ones.
EVALUATION FROM SHARI’A PERSPECTIVE.
Apart from the purpose from which the bond proceeds are to be used which overtly meets Shari’ah principles- earmarked infrastructure development projects, the means used to raise the funds is based on conventional principles of how financial markets operate which included payment and receipt of interest under the loan contract which is not allowed in Shari’ah. The same applies to Okoa and Kopa Akiba, two added feature of the bond.
Shari’ah principles requires that a loan be given without any return or benefit to the giver/creditor. For return to be justified, the structure has to be based on trading (Sale or Lease) or investment partnership contracts (Musharaka or Mudharaba) where profit or loss is shared as per Shari’ah rules and principles.
SHARI’AH COMPLIANT ALTERNATIVES.
1.M-AKIBA BOND.
Alternative structure is to offer the bond based on Sale and Lease Back (SLB) Shari’ah principles with unilateral undertaking to sell/buy the underlying asset to the original seller. The mode operandi requires the government to identify an asset such as hydro power plant worthy more than Ksh 5billion and sell it to the public to raise required funds (Asset based Finance).
At this stage, the prospective M-Akiba clients buys undivided share of the specified assets. Second, the buyer leases his undivided share of the asset back to the government at an agreed profit rate which shall be paid at an agreed interval. The M-Akiba clients shall provide unilateral undertaking to sell back the asset to the government on maturity or where never certain market conditions prevails after one year of lease and before maturity at par plus accrued profit arising from the lease. The government shall also provide unilateral undertaking to buy the asset back from M-Akiba client in case of non-repayment of periodic profits.
M-Akiba clients has three options, hold the bond to maturity, sell the bond to specialty fund to get cash (at par plus accrued profit) at the secondary market or using Okoa Akiba option from M-Akiba menu to get finance from participating banks using the bond as collateral.
2. OKOA AKIBA.
Islamic banks such as Gulf African bank shall be in position to finance prospective M-Akiba clients subject to:
1. M-Akiba bond being structured in Shari’ah compliant manner as briefly presented above or suing other Shari’ah compliant modes.
2. Having similar to ‘M-Shwari facility’ structured in Shari’a compliant manner. Shari’ah compliant Mobile financing facility can be provided using Tawarruq structure. Where by the client interested to get cash to buy Shari’ah compliant M-akiba bond shall place an order to buy from for example GAB and accepts conditions, the bank will buy the palm oil from Bursa suq Malaysia trading agent then generate message to offer to sell the oil to customer at a profit rate, customer buys it and appoint the bank to sell oil to Bursa Suq Malaysia and the sale proceeds credited to his M-Pesa account which shall then be used to buy M-Akiba bond.
The Purchased securities will be put under Lien – meaning that the client cannot be able to dispose them before completing to pay off the facility to the bank.
3. KOPA AKIBA.
Islamic banks can provide finance using M-Akiba bond as security though Tawarruq structure. The holder of the security shall offer to buy palm oil from say GAB and accept conditions, the bank buys palm oil from trading agent at Bursa Suq Malaysia, sells the oil to customer at a profit and customer appoint the bank to sell the oil to Bursa Suq Malaysia. The sale proceeds generated credited to customer M-pesa account.
The security will be put under lien; the profit paid depending on the credit exposure, might be held by the bank or given to the customer.
Should the borrower not repay as per the agreed timelines (including a grace period), the securities under lien will be sold (foreclosed) and the financier is able to recover the debt amount.
CONCLUSION.
Apart from Sale and Lease Back structure, other Shari’ah compliant modes can be explored in terms of their strength and weakness as well as after taking into account associated operational requirements and Shari’ah non-compliance risks versus the desired objective of the bond.
Unless, M-Akiba bond is structured in a Shari’ah compliant manner, Islamic financial institutions such as GAB will find themselves excluded to participate as trading participant or market maker due to the conventional nature of the bond. Only possible venue will be to offer KOPA Akiba facility based on Tawarruq mode of finance by accepting the security at par value excluding interest portion.
This proposed structure does not represent the views of any Shari’ah supervisory board which has the mandate to approve or disapprove any products or financial transactions offered or dealt by the bank. Hence, their inputs shall ultimately be required for the Islamic bank to take part on M-Akiba bond.