Skip to main content
November 20, 2018

Kenyans warming up to Shariah compliant banking

PRESIDENT Uhuru Kenyatta last November skipped the 23rd Commonwealth conference in Sri Lanka and instead chose to attend the third Arab-Africa Summit in Kuwait.

State House said the November 18 to 20 visit was to bolster the Jubilee administration's “economic transformation agenda” and the “Kuwait (meeting) offered more in terms of deliverables”.

The visit and subsequent bilateral discussions were largely geared at establishing and strengthening joint financing mechanisms for capital intensive infrastructural projects through strong economic ties.

While in the oil rich land, the President held talks with leaders of Kuwait, Qatar, United Arab Emirates, Saudi Arabia, Bahrain and Palestine, all aimed at strengthening trade and investment ties.

National Treasury Cabinet Secretary Henry Rotich said in an interview on the sideline of a press conference in Nairobi on January 17 that the visit to Kuwait was an eye opener for the cash-hunting government.

Rotich said it was during the visit that the Treasury realised Kenya was a member of the Islamic Development Bank. This, he said, presents an opportunity for the country to tap more funds for flagship projects that will catapult her to becoming a highly industrializing, middle-income economy in the next 16 years.

“We are now looking at preparing a cabinet memo for Kenya to access larger funding from the (Islamic) bank,” he said. “We realised the bank operates like any other (development) bank like the World Bank or African Development Bank.”

While over short term the country is focused on tapping into conventional financing streams from the dominantly Islamic Arab countries, it is angling herself to become the East and Central African hub for Islamic finance and banking over medium to long term period.

Uhuru administration's strategic decision to foray into Gulf Region rather than the Commonwealth bloc, where Kenya already has deep roots, could not have come at a better time.

The appetite for Shariah compliant products is growing stronger not only among the expanding Islamic community around the world but also non-Muslims.

The value of assets managed through Islamic investment principles globally was estimated at Sh146 trillion($1.7 trillion) in 2013, according to World Islamic banking competitiveness report 2013-14 by financial services and audit firm, Ernst & Young.

The Ernst & Young report has projected the value to double to Sh291.8 trillion ($3.4 trillion) in 2018. Unlike conventional models, Islamic finance and banking strictly adheres to investment principles based on risk-sharing and not risk-transfer, as guided by the Shariah law.

Islamic finance and banking products are nonetheless not religiously discriminating. The principles emphasises sharing of profits between banks and customers, safekeeping of savings, joint ventures, leasing, among other ethically acceptable concepts.

“The time for Islamic bonds is coming and it's a matter of time before we see it as a normal issue in our market,” said Joel Warutere, an investment manager with Pinebridge Investments.

“There are a lot of funds coming from it but the milestone will be issuance of the sovereign bond. With that we can get local institutions issuing bonds in the international markets.”

Rotich reckons that the country cannot afford to be left behind. “We have already seen the potential (for Islamic finance and banking) is big,” he said. The government is preparing to float a Sh129 billion to Sh172 billion ($1.5bn to $2 billion) debut eurobond, sometimes later this year.

The Treasury chief said attempts have unsuccessfully been made to have part of the proposed sovereign bond floated as sukuk —shariah compliant bonds. Structuring it to meet sukuk principles was however much complex in the forthcoming eurobond issue, he said.

At a time when the government has to inevitably tap into debt market to support her demanding, capital-intensive socio-economic and infrastructural projects; sukuk may nonetheless come in handy.

“In our debut, we would first do a traditional bond and as we access international capital markets, we will learn about its (sukuk’s) structuring,” he said “We shall consider how structuring of Sukuk will work especially in asset-financing in future access (of the international capital markets).”

Sukuk basically differ from conventional bonds because they are an asset-based securities not debt instruments. This means Sukuk holders partially own tangible assets until their money is fully repaid. The return comes from a share of profits generated from the underlying asset.

Another contrast is that while a bond holder regularly gets the usually fixed interest rate during the life of the debt instrument until it matures in addition to a guaranteed principal, the holder of Sakk pockets a share of profits from the underlying asset and may incur a loss depending on its performance.

A study by Capital Markets Authority made public in October 2011 recommended formation of a National Shariah Advisory Board to draw framework on structure of Islamic products in the capital and interpretation of the Shariah law.

A robust accounting framework, a facilitative tax environment and an appropriate Shariah compliance process were cited in the study as necessities for a successful, efficient and transparent Islamic capital market.

“We continue to get a lot of interested parties locally and internationally looking at how they can participate in a Shariah compliant capital market segment,” acting CMA chief excutive Paul Muthaura said on November 5, 2013. ““There will be substantial stakeholder engagement and public consultations before we finalise policies and rules governing trade in sukuk.”

On the banking front, First Community Bank became the first fully fledged Islamic bank with a licence issued on May 29, 2007. Gulf African Bank obtained a licence, a year later in 2008, to operate as the country’s second commercial Shariah compliant lender.

In March 2013, International Finance Corporation pumped US$5 million (Sh430 million) into Gulf bank for a 15 per cent equity stake. The IFC further channelled an additional US$3 million (Sh258 million) trade loan towards corporate finance and lending to small and medium businesses. “We have operated well under the existing regulations in our jurisdiction,” said Meshak

Ndegwa, a finance manager at Gulf bank. “It would (however) be appropriate if there was an all inclusive review of the regulatory environment to fully integrate Islamic banking.”

The Kenya Bankers Association said while the policy guiding operational environment was facilitative, the biggest challenge lies in the taxation regime.

“From regulatory point of view, there should be a fine-tuning in the taxation regime to make the Shariah compliant products more amenable for the benefit of the industry and customers,” director of research and policy at KBA Jared Osoro said.

Dubai Bank, KCB, Barclays and National banks are some of the lenders with windows tailored for Islamic banking. Takaful Africa licensed in 2011 is the sole Shariah compliant insurer while Crescent Takaful Sacco Society launched on December 16, 2013 is the first compliant sacco. 


Glance box

How Shariah compliant banking works

For trade finance, the loan may be issued with a floating interest rate based on the company's rate of return. This ensures the rate of profit paid on the loan is similar to the profit margins of the borrowing company until the loan is fully cleared.

Such a loan may also take a joint venture form where the entrepreneur pays for labour costs while the bank concentrates on capital financing. The lender will recover its loan from resulting income which is equally distributed.

This ensures the risks are shared and that the lender does take advantage of economic risks at expense of the borrower as is mostly the case with conventional banking.

The real estate loan may take a form of leasing where the lender sells it at a higher than market rate and retain ownership until full payment is made. This arrangement is however common when it comes to loans for buying vehicles.

Poll of the day