SUKUK CONFERENCE PROVIDES NEW INSIGHTS TO STAKEHOLDERS

On 23rd November,i participated in a Sukuk Conference organised by reputable law firm, Coulson Harney Advocates here in Nairobi at Sankara Hotel. The conference attracted participants across wide spectrum of stakeholders such as Capital Market Authority, Nairobi Security Exchange, National Treasury, Nasdaq Dubai, Islamic Corporation for Development of Private Sector, Commercial Banks, Investment banks, Islamic Finance Counsulting firms, Financial and Tax Consulting firm, Legal firms among others.

Mr. Paul Muthaura, Acting CEO of Capital Markets Authority while delivering key note address titled "Where are the regulators heading?" informed participants that the CMA is positive towards creating enabling environment by designing regulatory, legal and supervisory framework that shall involve all stakeholders. In order to ensure work is done within the timeframe, CMA has established Project Management Office (PMO) which shall start its function 1st December 2015, to design the framework and advise CMA on required reforms in order for the government and corporate entities issue Sukuk in the next financial year 2016/2017.

The conference discussed important issues around Sukuk such as structuring Sukuk transactions, Tax implications of a Sukuk transactions, Process of issuing Sukuk and listing a Sukuk. Key questions were asked and responded by panelists. Some of these questions and answers are:

1. Are Sukuk qualify as Collective Investment Scheme or conventional bond? Ryona Byrne from Clifford Chance responded that what they have seen is that the issue is country specific not generic, in some jurisdictions like South Africa it was perceived to be so and exceptions were necessary to enable South Africa issue its USD 500 million Sukuk. However, in United Kingdom is of the view that provided Sukuk behaves and bear similar characteristics with a conventional bond, then it is not a collective investment scheme. Mr. Rogito Nyangeri of Nairobi Securities Exchanges was of the view that Kenya shares the same view with UK.

2. Are the underlying assets move from the obligor/issuer to Sukuk holders? The answer is no, however, sukuk holders have economic rights on the underlying assets and Sukuk documents are the one that creates such right to the assets. But at no time, the assets will be fully owned by the certificate holders since that is not the motive of parties, hence most of Sukuk we have seen are asset backed rather than asset based.

3. What is the timeline it takes to structure a Sukuk transaction? What has been observed is that it takes about 10 to 12 weeks to finalise Sukuk transaction. But the situations depend from one transaction to another.

4. What are the factors affecting Sukuk pricing? Numerous factors wer highlighted such as who is the obligor, credit rating of the obligor, collateral, currency, credit enhancement, jurisdiction, maturity and amount among others.

5. What are the additional costs in issuing Sukuk? Apart from normal costs associated with bond issuance at international market, Sukuk attracts additional costs for hiring Shari'ah scholars, specialist legal and tax advisors.

6. What are the parties involved in Sukuk Ijarah structure? Numerous parties are involved such as arrangers/managers, obligor, issuer SPV, delegate-to enforce payments on default, paying agents, transfer agents, registrar, stock exchanges/ financial regulator, clearing systems and Shari'ah advisors. However, parties may change depending on the specific situation.

7. What is the tax implication in a case of Sukuk Ijara if it were to be issued in Kenya today? Mick Murphy from Viva Africa Consulting, presented different scenarios on transfer of assets to SPV, if it involves legal transfer or transfer of interest only it will attract different tax on each scenario. On Income of the Sukuk, again there are several scenario to look at whether SPV is Kenyan or offshore, each case attract different taxes. On a final note, it was observed that Kenya tax legislation in particular VAT and Income tax are prohibitive for issuing Sukuk and needs to be reviewed to achieve tax neutrality. This requires treatment of Sukuk like conventional bond for tax purposed.

8. Is it worthy for a Kenya to issue Sukuk in the face of some challenges? Each panelist responded in positive, presenting arguments from social and moral perspective, economic perspective and political perspective. On economic perspective it was argued that Sukuk opens the country to a wide range of investors across the globe, complement financial inclusion, go hand in hand with ambitions of making Kenya 'Financial Service Center' as well as support existing Islamic financial institutions in the market to better manage liquidity. On the political side, it was argued that country like South Africa had no need to issue Sukuk as it could have raised the money via vonventional bond, but by issuing Sukuk the political message that goes with it is that South Africa is prepared for all business models or situations and focused to attract investors across the world without regional or religious bias.

That is the last and not the least. It was great half a day! Thank you Coulson Harney Advocates for organising it, keep the Sukuk ball rolling and for bringing new insights to stakeholders.