(Corrects date of budget release on third paragraph)
* Kenya proposes tax, legislative amendments in 2017/2018
* Paves way for debut sale of sovereign Islamic bonds
* Government to setup Islamic retirement pension scheme
By Bernardo Vizcaino
April 3 Kenya's government has unveiled a
package of initiatives under its latest budget to develop
Islamic finance in the country, as part of efforts to mobilise
local funds and set Nairobi as a regional hub for the sector.
The moves could spur Kenya's decade-old Islamic banking
sector and help the government fund infrastructure in a country
where Muslims account for about 10 percent of the population of
some 44 million.
Finance Minister Henry Rotich outlined the steps as part of
the country's 2017/2018 budget, released on Thursday, aiming to
level the playing field between Islamic and interest-based
Amendments to the Public Finance Management Act will also
allow the government to issue Islamic bonds, or sukuk, as an
alternative funding source.
This could prove useful for a government that has set aside
billions for infrastructure, with a fiscal deficit set at 524.6
billion shillings ($5.10 billion).
Implementation could be quick as most changes have already
been drafted by the Islamic Finance Project Management Office
(PMO), a body setup by the government to coordinate efforts
among its regulatory agencies.
"The primary objective is to prepare the groundwork for a
sovereign sukuk but also equally to attract corporate sukuk from
the region," said Farrukh Raza, managing director of IFAAS, an
Islamic finance consultancy which designed the PMO's framework.
The government has commissioned IFAAS to run the PMO, which
is working with law firm Simmons & Simmons to help develop
Islamic Finance in Kenya.
The Treasury has said it is considering a debut sale of
sukuk this year, although national elections in August could
delay those plans.
The amendments will benefit Kenya's two full-fledged Islamic
banks and several Islamic windows, which until now have operated
by way of exemptions.
They will be joined by Dubai Islamic Bank, which
last month received approval in principle for a banking license
from the central bank.
Changes to stamp duty would ensure their products are tax
neutral against interest-based transactions, as the asset-based
nature of Islamic finance contracts often means they can incur
multiple tax charges.
This is designed to be revenue neutral to the government and
would not compromise fiscal revenues, said Raza.
Exemptions to value added tax would allow returns from
Islamic deposits to be eligible for deductions similar to
interest-based products. This would apply to individuals,
corporates and government entities, Raza said.
The budget also calls for amendments to cooperatives and
savings societies, while new regulations will help setup an
Islamic pension scheme based on the risk-sharing concept of
This would aid the government in achieving financial
inclusion and financial diversification targets, Raza added.
(Reporting by Bernardo Vizcaino in SYDNEY; Editing by Randy