Kenya is aiming to raise Sh129.2 billion ($1 billion) from the issuance of sustainability-linked instruments, including loans and bonds, over the next two years as the country pushes for cheaper financing options.
The National Treasury, which published the Kenya Sovereign Sustainability-Linked Financing Framework last week, is expected to issue the securities in two equal tranches, starting September, 2026, according to disclosures by the World Bank.
The framework, which was created with the support of the multilateral lender, will allow Kenya to access cheaper financing based on climate targets, including commitments to reduce natural forest cover loss and increase electricity connections among the rural population.
“The expectation is that the National Treasury will raise $500 million (Sh64.6 billion) by the end of September. The World Bank will provide $125 million (Sh16.1 billion) in credit enhancement, while $75 million (Sh9.6 billion) will come from the OPEC Fund,” said Isfandyar Khan, Lead Financial Sector Specialist at the World Bank, who was a key architect of the sustainability financing framework.
The National Treasury is currently finalising requests for proposals (RFPs) from parties seeking to participate in the issuance of the first-tranche loan before shortlisting candidates, including commercial banks.
The first tranche of the financing will be a sustainability-linked loan (SLL), but the follow-up issuance in the 2027/28 financial year could be a sustainability-linked bond (SLB).
The World Bank reckons that Kenya could secure financing at rates up to two percentage points below the market rate through the climate-linked window and notes growing interest from potential financiers likely to participate in the second tranche.
“The conservative expectation is that there will be a 200-basis-point (two-percentage-point) reduction compared with a conventional Kenya issuance, depending on the timing and market conditions,” added Mr Khan.
“A second issuance would also amount to half a billion dollars ($500 million/Sh64.6 billion), but it would likely be a sustainability-linked bond (SLB) instead of a sustainability-linked loan (SLL).”
The coupon, or interest rate, paid by the government to investors will remain unchanged if climate targets are met, but the financing cost will fall if they are exceeded.
However, failure to meet the targets will trigger higher borrowing costs.
Kenya, for instance, will see the interest rate on the instruments remain unchanged if it limits the loss of accumulated natural forest cover to less than 44,000 hectares by 2030.
The debt will, however, be cheaper to service if the target is exceeded, with forest cover loss kept below 38,000 hectares over the same period.
At the same time, the country must increase access to electricity in rural areas to 81.8 percent by 2030 from a 2023 baseline of 67.9 percent. It will have outperformed this KPI if rural electrification surpasses 94.4 percent over the same period.
Kenya will face a penalty in the form of a higher coupon, or interest rate, on sustainability-linked facilities if it fails to meet the targets, which will be assessed every two years.
The published framework, which was a precondition for the World Bank disbursing Sh97 billion ($750 million) to Kenya at the end of June, broadens the country’s borrowing instruments, which already include Sharia-compliant products, Samurai bonds and debt-for-nature swaps.
The World Bank will help underwrite the issuance by providing a Sh16.1 billion ($125 million) guarantee.
The first-tranche sustainability-linked loan will take the form of a syndicated commercial loan.
The National Treasury expects the climate-linked loans to unlock more flexible financing for the Exchequer.
Unlike traditional green, social or sustainability bonds and loans, which restrict the use of proceeds to specific projects, sustainability-linked instruments provide Kenya with greater flexibility while ensuring accountability through robust key performance indicators and sustainability performance targets.
