Kenya Continues to Use Islamic Finance as its Regional ‘Competitive Advantage’ | Salaam Gateway
Kenya is positioning itself as a hub of Islamic finance, aiming to be a leader in the East African region and throughout Central Africa.
A predominantly Christian country with an 11% Muslim minority population, Kenya’s financial sector has been home to Islamic banks and takaful operators for over a decade.
The East African nation is currently working on a number of initiatives to further develop its national sector, including an industrial framework, sovereign sukuk issuance and financial education.
These build on what he started in FY 2017/18 when Islamic financing was highlighted in the budget statement as an area for Kenya to “maximize its comparative advantage and to stand up to it. position as a regional hub for Islamic finance products, in order to attract direct investment. “
“Islamic finance is one of the key areas that have been identified by the government of Kenya to help put the country above its peers in the region,” Luke Ombara, director of regulatory policy and strategy at the Capital Market Authority (CMA), said Salaam Gateway.
“To this end, key strategic documents, including the National Treasury Strategic Plan, have prioritized the issuance of relevant products and services to deepen this financing system in Kenya.
Map: Kenya’s Regional Center for Islamic Finance Ambition covers countries in Central Africa including Cameroon, Democratic Republic of Congo and Central African Republic.
BUILDING ON THE EXISTING FRAMEWORK
The campaign for Islamic finance dates back to the 1990s, when the Central Bank of Kenya began receiving requests from potential investors, according to Ombara.
In 2004, the first application for an Islamic bank – First Community Bank (FCB) – was received.
Today, Islamic finance is an area of development in the country’s 2014-2023 Capital Markets Master Plan (CMMP), which itself is a flagship project of Kenya’s Vision 2030.
Ombara said the government plans to:
- Issue a Sovereign Sukuk (Treasury or Eurobond) based on its analysis of the level of demand and its spending targets. Ombara said it would be done “at an appropriate time”.
- Formulate a national policy on Islamic finance,
- Determine the appropriate terminology for “Islamic finance” to be used by Kenya,
- Determine the preferred national governance framework for Kenya,
- Develop an education and awareness strategy to demystify Islamic finance in order to enable potential investors to appreciate its value proposition.
There were consultations, discussions, seminars and workshops to build consensus on some of the outstanding political issues, according to Ombara, and there were also commitments that would ultimately result in the formulation of a national policy on Islamic finance.
Ombara conceded that the main challenges facing the Islamic finance industry in Kenya are the low level of knowledge of what Islamic finance is and how it works, as well as the caution due to religious nuances such as manifest in key terminology.
He further explained that determining the preferable governance framework and the shortage of experienced Sharia scholars was also another challenge for the advancement of the industry.
“Kenya is in active consultation with international Islamic finance bodies to help develop standards for the operation of this financing system that meet the international threshold,” Ombara said.
To this end, the country’s Capital Markets Authority and the Central Bank of Kenya became members of the Malaysia-based Islamic Financial Services Board (IFSB) in 2016.
As part of the development of the Islamic finance industry, Kenya is considering issuing sovereign sukuk. It was in the 2017/18 budget speech when it was described as “an alternative source of funding” for the country’s development projects. At the time, the cabinet secretary to the National Treasury said the intention was to “amend tax laws to provide equivalent tax treatment” for sukuk.
Ombara confirmed that the changes have been made.
“The government has a plan to issue sukuk,” Ombara said. “The time / date of issuance will be determined by a number of factors, including Kenya’s debt-to-GDP ratio targets, the macroeconomic environment and its spending targets, among others.
But he said there were challenges with regards to the next potential sukuk issue, including the creation of Special Purpose Vehicles (SPVs) (offshore).
Other key challenges include asset collateral and liquidity, as well as the small number of qualified domestic academics and differing views among academics.
Ombara explained that the bad publicity regarding an Islamic bank has also added to the challenges, referring to the placement under statutory management in 2016 and the final buyout in 2019 of Chase Bank Kenya Limited.
The COVID-19 pandemic and technical terminology is also piling up on the job for the sukuk issue.
BANKS AND TAKAFUL
There are currently three full-fledged Islamic banks operating in Kenya:
- The First Community Bank (FCB), established in May 2007, was the first to offer Sharia-compliant products in January 2008.
- Gulf African Bank, which was established in September 2007 and started operating in January 2008.
- DIB Bank (DIBBKE), a subsidiary of Dubai Islamic Bank, was incorporated in 2014 and started operations in May 2017.
Conventional lenders also offer Islamic banking products through windows.
- The first was Absa Kenya which started offering Islamic banking products in 2004 under the brand “La Riba”.
- In 2007, Kenya Commercial Bank (KCB) opened an Islamic counter and started offering Islamic products under the brand “Amana”.
- In 2009, the National Bank of Kenya (NBK) opened an Islamic counter under the brand name “Al muumin” which became “National Amanah” in 2013.
- International banks operating in Kenya also offer Sharia-compliant banking solutions. In 2014, the Standard Chartered Bank of Kenya established an Islamic counter under Saadiq.
Ombara said the government “has no problem” if more Islamic financial institutions are established in the country, “as long as they meet the minimum criteria set.”
“If and when there is interest from the market and a request is indeed received by the Central Bank of Kenya (whether for a full window or for a window), that request will be considered on its own terms. own merits, ”Ombara said.
In addition to banks, Kenya has also introduced takaful services.
- There is currently the autonomous Islamic insurer Takaful Insurance of Africa.
- The other is Kenya Re which operates a re-takaful service through a window.
Ombara said the government is open to new takaful and re-takaful businesses to establish operations, but that will depend on a case-by-case basis.
“If and when there is market interest and an application is indeed received by the Insurance Regulatory Authority (IRA), that application will be considered on its own merits,” he said.
OTHER ISLAMIC FINANCIAL INSTITUTIONS
Kenya has also established Islamic capital market players, pension funds and cooperatives, Ombara noted.
Capital market players include the Sharia-compliant Collective Investment System (CIS) of Genghis Capital, investment banking services of Salaam Investment Bank, a foreign company incorporated in Kenya and licensed by the CMA.
The country has two Islamic pension funds, the first being the County Pension Fund (CPF) Sharia-compliant pension scheme, known as “Salih”. The second was the Local Government Fund (Lapfund) ‘Amal’.
In addition, there are the Islamic cooperatives Taqwa Sacco and Crescent Takaful Sacco.
Regarding a centralized national Sharia council similar to jurisdictions like Malaysia, Ombara said consensus has not been reached on which model of Islamic governance should be adopted by Kenya.
In addition to traditional Islamic banking services, the Kenyan authorities are also keen to use FinTech to advance the domestic industry.
“Kenya is one of the world leaders in promoting financial inclusion through fintech solutions such as M-PESA, Mula, PesaLink and Pesapal,” Ombara said. “Adopting such innovations facilitates transactions and stimulates commerce for businesses, small and medium-sized enterprises (SMEs) and individuals.
He said the country already has a master plan that identifies five pillars as it moves towards a fully digital economy. The goal is a nation where every citizen, business and organization has digital access and the ability to participate and thrive in the digital economy.
“Fintech will therefore most likely play an increasingly fundamental role in improving the uptake of Islamic finance products and services in Kenya,” Ombara added.
Kenya has the ambition to become a newly industrialized middle-income country providing a high quality of life for all its citizens in a clean and secure environment by 2030, Ombara said. To achieve this goal, the country has aligned a number of projects.
“[To this end], Islamic finance has been identified as one of the key areas in which Kenya has a competitive advantage at the regional level, ”he said. “Islamic finance will therefore provide a springboard for the Kenyan economy to achieve its target growth rate as a path to high quality of life. “
“Over the next three to five years, Kenya aims to establish itself as a key regional player, attracting capital from major jurisdictions (including the Gulf Cooperation Council countries) for investments that would fund its ambitious projects which would lead to the achievement of its Vision 2030.. “
(Reporting by Hassan Jivraj; editing by Emmy Abdul Alim [email protected])
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