Kenya: Lenders want new law for Islamic financing

Experts want Central Bank of Kenya to set separate regulations for Islamic banks to avoid operation and auditing challenges.

Prof Abdullatif Essajee, currently the CEO and Islamic Finance lecturer at Vision Institute of Professionals, has said Islamic banking has key differences from conventional banks and the two cannot be effectively regulated using the same framework.

 Former Managing Director at First Community Bank (FCB) and now a director at the same bank, Essajee said that most of the time, the external auditors differ with Islamic banks on presentation of several transactions in financial books.

 “We have reporting standards for Islamic banks but because the regime does not allow that, we have not fully embraced the substance of Islamic banking. 

The Islamic standards cannot change the fundamentals of reporting but could have enhanced the quality of reporting,” said Essajee. For instance, Islamic banks, where charging interest is prohibited, avoid terminologies such as interest income and instead go for financing income yet in their books, they are forced to use the term. 

The matter has been complicated by absence of CBK Sharia Supervisory Board that is supposed to keep in check the activities of Islamic banks. Essajee pointed out countries like Malaysia, where each bank has its own Sharia-compliant board that is answerable to a similar board by central bank.

In Kenya, despite the first Islamic product coming to the market a decade ago, the audit practice leans to the practices of conventional banks. 

According to Essajee, most of the high non-performing loans displayed on the financial statements of banks offering more Sharia-based loans, are due to differences in the practice of Islamic products and conventional products. 

“For example, in conventional banking, when financing a construction, banks can demand for payment even before construction is up. That cannot happen in Islamic banks yet when auditors come, they say ‘You issued a facility at this time and it is now almost 90 days and there is no payment so we need to downgrade it,” he explained. 

During his helm at FCB, he added, not so many auditors who came for the auditing process could succeed in borrowing from both conventional and Islamic practices. Under Islamic banking law, most lending is directed to a specific project and is premised on utmost good faith.

 Therefore, where the borrower delays paying yet he invested in a project he or she pre-agreed with the bank and is yet to be paid, Islamic banking laws cannot move to penalise the borrower.

 “It is not a matter of being soft, it is being ethical. If I (Islamic bank) gave you money to build road and the payer is another person and you haven’t been paid, how do I come to touch your property yet we need to work together to get paid?”

 he asked. This may shed light on the increased gross non-performing loans (NPLs) in some lenders that have embraced Islamic products. Half-year results released by NBK, which is one of the lenders with Islamic products, show that gross NPLs moved from Sh16.9 billion to Sh27.3 billion in just three months.

(Standard Digital / 12 August 2016)

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Kenyan government to institute Islamic Finance

Kenya is preparing to allow the use of Islamic finance, and is even preparing to launch its first sukuk. 

Kenya is a Christian-majority country. Until now, when Muslims do business in Kenya, they have not been able to apply Islamic Sharia law as most Kenyan institutions are not accustomed to it. 

But the government is now taking steps to bridge this gap. 

Speaking at the International Islamic Finance conference of Africa, the first ever summit of its kind ever to be held on African soil, in Nairobi on Monday, Treasury Secretary Henry Rotich said that the Kenyan government would adopt legislation that would make Islamic finance possible – previous financial legislation did not permit the use of the alternate forms of banking and insurance which is based on the principle of not collecting interest. 

“Kenya will be issuing Sharia-compliant sukuk bonds in the coming year, and these will be used to finance infrastructure, Kenya will also join the organization of Islamic countries and adjust rules and regulations in the financial sector to support shari’a-compliant products in the market,” Rotich said. 

The conference is intended to aid developing countries in Africa to tap into the $2.1 trillion market of Islamic finance, using it as a catalyst of economic growth. Kenya can learn about the application of Islamic finance by taking advice from Muslim countries, Rotich said.

Policymakers’ business leaders and government officials spent Monday and Tuesday speaking on how Islamic financial principles can help combat poverty and alleviate poverty in Africa. 

Developing countries were given a chance to learn from actors in more mature markets on how to use Islamic microfinance as a tool for promoting economic growth for low-income workers and business owners. 

It is hoped that the development of Islamic Finance in Africa will help woo investors from Muslim countries to come and invest in developing countries in the region, conference participants said.

(Anadolu Agency / 28 January 2016)

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Dubai Islamic Bank eyes Kenya, Indonesia for expansion

Dubai Islamic Bank plans to expand its operations into Indonesia, Kenya and other African countries as it emerges from a period of consolidation, the bank's chief executive said.

The emirate's largest sharia-compliant lender, which currently makes some 95 percent of its revenue within the United Arab Emirates, says it is entering a growth phase domestically and internationally.

"We are exploring opportunities in Indonesia, Kenya and surrounding countries in Africa, the Indian subcontinent and the GCC (Gulf Cooperation Council)," Adnan Chilwan said in an interview late on Wednesday.

"We could acquire, set up a JV, establish a finance company or start a greenfield operation as long as we keep management control and operate under our brand."

Like many other banks in the UAE, the sharia-compliant lender saw its profits nosedive after Dubai's financial crisis erupted in 2009 and it was forced to set aside billions of dirhams (hundreds of millions of dollars) to cover bad loans.

The bank focused over the last few years on strengthening its balance sheet and reducing costs, and says it has now dealt with most of its bad loans. Last year DIB completed the takeover of Dubai-based mortgage lender Tamweel, in which it already held a majority stake, through a share swap.

DIB posted a 66 percent jump in fourth-quarter net profit to AED518m ($141m), beating analysts' forecasts, on the back of lower financing costs and impairment charges. Net profit for the full year increased 42 percent to AED1.72bn.

Chilwan, who was promoted to CEO in July last year, described Africa as virgin territory for Islamic finance. In Kenya, most estimates put the number of Muslims at only about 15 percent of the population of 40 million, but the financial regulator is preparing a ten-year capital markets development strategy that includes Islamic finance.

"Both consumer and wholesale opportunities are there, especially in the countries we are targeting and while the initial investments are not too intensive, the returns are extremely decent and more than acceptable in our line of work," Chilwan said, without giving details of his plans for Africa.

He added, however, that entry into one country would ease expansion into other countries around the region.

"Given a five-year scenario, we expect a decent franchise spread across these countries with stable and solid yields across all sectors."

However, Chilwan said the bank also expected strong growth in its domestic market, so the balance between local and international business would not change radically.

"We are pretty much skewed towards the domestic franchise with nearly 95 percent of the contribution coming from the UAE.

"With all the plans in place, we do not expect a dramatic change in the medium term, with international business perhaps getting at best 10 percent to 15 percent of the overall group numbers in about six to eight years."

The bank's liquidity position is strong so "there appears to be no current requirement to enter capital markets at this time," Chilwan added.

(Arabian Business.Com / 13 March 2014)

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Kenya plans framework for Islamic finance

NAIROBI — Kenya’s financial regulator has proposed a separate regulatory framework for Islamic financial institutions as part of a broad 10-year strategy designed to boost capital markets in east Africa’s biggest economy.

A draft of the strategy was circulated earlier this year and the plan is now in its final stages of preparation. It aims to promote more sophisticated financial services in Kenya such as asset management, venture capital, private placements and Islamic finance.

"It will be launched in coming weeks," a spokesman for Kenya’s Capital Markets Authority (CMA) told Reuters.

Sharia-compliant structures are seen as important to support funding of Kenya’s infrastructure projects, with the CMA dubbing Islamic finance a "priority". Most estimates put the number of Muslims in Kenya at only about 15% of the population of 40-million. But Islamic finance, which is also being developed by several other sub-Saharan countries in Africa such as Nigeria, could help Kenya attract investment from cash-rich Islamic funds in the Gulf and southeast Asia.

Islamic finance, which follows religious principles such as bans on interest and gambling, is offered by two full-fledged Islamic lenders in Kenya — Gulf African Bank and First Community Bank (FCB) — as well as the Islamic windows of several conventional banks. They will be joined this year by the country’s first retakaful (Islamic reinsurance) firm, as Kenya Reinsurance Corporation ventures into the sector, the CMA said in its draft plan. Takaful Insurance of Africa, the first full-fledged takaful company in the country, was launched in 2011.

The CMA has also approved Genghis Capital to operate an Islamic collective investment scheme, joining FCB Capital; the regulator has introduced rules allowing the creation of sharia-compliant real estate investment trusts.

In the short term, the CMA plans to create a regulatory framework of its own for Islamic capital markets, focusing on corporate governance, information disclosure, a policyholder compensation fund and responsible pricing.

In the long term, however, the CMA would engage the central bank and the national Treasury to develop a separate policy, legislative and regulatory framework for Islamic finance.

This would include creating and giving legal recognition to a single national sharia advisory board to set rules and policies for the entire industry — a centralised approach which mirrors regulation in countries such as Malaysia and Oman. The plan would also create an industry lobby group and work with standard-setting bodies such as the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions and the Malaysia-based Islamic Financial Services Board.

The CMA would seek help in developing Islamic finance from industry hubs in Malaysia and London. It has existing agreements with Malaysia’s regulator and a working relationship with the London Stock Exchange.

Last month, the central bank-owned Kenya School of Monetary Studies started offering courses related to Islamic finance. The central bank has been working with its Malaysian counterpart in an effort to offer sharia-compliant instruments such as Treasury bills.

(Business Day BDLive / 05 March 2014)

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