Shariah-Guided Unit Trust Set to Enter East Africa

As the stock market recovers, the first Shariah-compliant product for the equities segment is set to come into East Africa as a way of widening investment opportunities.

ApexAfrica Capital Ltd, the issuer, is undergoing approval as required by the Capital Markets Authority.
The product is a collective investment vehicle in the form of a unit trust that will require a minimum of Sh25,000 to start off.

Shariah-Guided Unit Trust Set to Enter East Africa

It is expected to ride on the popularity of unit trusts in the last few years and because of the agitation by some investors for such a product, especially when rogue players were found to break the rules leading to heavy losses.

In Kenya’s capital markets, only the government infrastructure bond floated and concluded in 2009 had a Shariah-compliant component.

Most of the products that are Shariah-compliant have been introduced by commercial banks who have used them to create a niche in the fast-paced sector.

None has been in the area of shares or equities of companies quoted at the Nairobi Stock Exchange.

The introduction of the product is in response to customer demands, said the company’s managing director Kassim Bharadia in an interview.

Foreign investors have also shown interest in the product, said Mr Bharadia.

The unit trusts therefore will not be subjected to riba (usury) which is charging of interest.

Profits in the fund will be derived from capital gains and dividends paid by companies whose shares that the unit trust has invested in.

According to Falaika Advisors, who specialise in research in Islamic funds, investment is supposed to be within companies that fit within the interpretation of Shariah.

For ApexAfrica Capital, it will invest in equities but not for firms that deal in, for example, alcohol.
It is going to target mainly the plantation shares at the bourse.

Hamilton, Harrison and Mathews is guiding the issuer in the legal process of issuing the unit trust.
Under the law, a brokerage firm seeking to offer a unit trust product must provide details including a draft unit trust, information memorandum, management and custody agreement for the monies that would be raised, and a business plan.

It will also be required to have audited reports of the past three years, custodian, and a trustee.
ApexAfrica Capital has just rebranded and changed the name from ApexAfrica Investment Bank and recruited new staff as the bourse becomes more vibrant.

It has also increased its participation at the NSE, where figures show Apex has been among the leading in terms of turnover.

In March this year, the brokerage firm was the top in terms of turnover generating Sh2.646 billion or 15.9 per cent of the total of Sh16.6 billion during the month.

Cumulatively for the year to the end of March 2010, it was the fourth largest in terms of turnover after Kestrel Capital, Dyer and Blair and CFCStanbic Financial Services.

The stock market has been in a recovery mode since late last year, sparking interest among investors after the market recorded a bear run.

For the year to date, the tracker NSE 20-share index is 29 per cent up.

The bourse sank to a five-year low in early 2009 following the global financial crisis and poor economic performance in 2008 when Kenya’s gross domestic product hit a low of 1.6 per cent in more than five years.

The economy last hit below two per cent in GDP growth in 2002 when it was at 0.6 per cent.

Major growth

Besides equities market, the bonds have seen a major growth in trading numbers realising Sh26 billion, Sh42 billion and Sh50 billion in January, February and March, respectively, this year – the highest ever achieved for those months in the bourse’s history.

Recent flotation of Government and corporate bonds have been oversubscribed.

With the success of the primary and secondary markets, key players in the capital market are keen to introduce more products.

The Central Bank of Kenya said in March that it was working on a framework for the introduction of Sukuk bonds, which are structured to be in compliance with Shariah.

“We are still waiting for the structured Sukuk to cover bonds and the Treasury bills market,” Alex Nandi, the deputy director, banking supervision at the CBK, said recently.

The move to entrench Sukuk bonds and bills in the law is seen as a push by CBK to tap the increasing amount of cash flowing into Africa from the Gulf region.

Sovereign funds in Gulf States, flush with cash are eyeing African countries as lucrative investment zones and require products that fit with their belief system.

Kenya alters bank laws for Islamic financing

Kenya has made adjustments to its banking sector to let Islamic finance institutions set up and prosper in the east African nation, the governor of the Central Bank of Kenya (CBK) said yesterday.
Njuguna Ndung’u – whose statement was read to a conference in Nairobi – said Islamic finance had the “overwhelming support” of Kenya’s Muslims and non-Muslims, but as a regulator CBK faced challenges in encouraging the niche market.
Kenya has two Islamic banks and is seen playing a role in the African expansion of Islamic finance, which caters mainly to customers who follow Islamic rules on avoiding direct payment or earning interest, which are viewed as usury under Islam.
“The Banking Act prohibits wholesale trading and restricts holding land and buildings, while Shariah-compliant lending has an element of trading and land and building,” Ndung’u said.
“This challenge has been cured through granting exemptions to institutions concerned upon request.”
Ndung’u said they had adjusted the Banking Act, which requires all banks to pay interest on savings accounts as long as they maintain a minimum balance, giving leeway for banks to pay some form of return for Sharia compliant savings products.
He said Kenya’s two Shariah-compliant banks have 1,570 loan accounts and 58,548 deposit accounts and control 0.8% of the banking sector’s net assets after being in operation for less than two years.
The Islamic finance industry wants to grow outside its main centres in the Gulf region and Southeast Asia to tap into Muslim minorities in Western and African countries. Kenya is seen as a launching pad for the movement in the region.
“There is growing interest in Shariah-compliant banking in our neighbouring countries and Kenya has the potential to be a regional Islamic finance hub,” Ndung’u said.
One of Kenya’s Islamic banks, Gulf African Bank (GAB), turned profitable in the last quarter of 2009.
GAB chairman Suleiman Shahbal told the conference the Kenyan example shown the viability of Islamic banking in Africa.
“Islamic banking has proven its mettle as we were able to break even in our second year of operation,” Shahbal said.
“This has given us the impetus to move forward and become a regional bank in the near future. GAB plans to enter into Uganda and Tanzania,” he said.