East Africa’s biggest economy is positioning itself to become a regional hub for Islamic banking. Kenyan finance minister Henry Rotich said on March 30 that the government would propose amendments to the financial laws and issue new regulations to facilitate a Sharia-compliant retirement scheme. It will also amend the public finance management act to provide for the issuance of sukuk. In the past, Kenyan regulators found it hard to issue new regulations, as the government was battling the jihadist fundamentalist group al-Shabaab. Regulatory agencies say Kenya is now ready to allow Islamic finance and banking to thrive. In fact, Kenya is already a regional leader in Islamic banking. The country has two fully-operating Islamic banks. There’s also one takaful Islamic insurance company, a sharia-compliant mutual fund and two cooperatives. In December, Kenya joined the Islamic Financial Services Board based in Malaysia.
Katharine Budd, the chief executive and co-founder of Now Money, a Dubai-based fintech start-up, explains how fintech works.
This is a new financial services phenomenon. While nowadays you might be able to operate your bank account from a website or mobile app, but the systems behind these online user interfaces have barely changed since they were implemented in the 1970s. The international payment transfer system Swift still runs on the telephone systems. This means that no matter how nice the front-end website your account is on, the transactions displayed are still run off legacy systems, which can lead to legacy issues such as delays in processing transactions and potentially losing the transaction in the system altogether.
New start-ups are innovating where banks are stagnating and are cooperating with regulators and cybersecurity experts and developing new technology. These organisations have become know as “fintechs” and their purpose can range from offering customers alternative ways to bank, usually through mobile, to using advanced analytics to provide investment recommendations.
The Kenyan Treasury will push through the country’s first Sukuk bond in the coming year. The changes will see the Public Finance Management Act amended to allow the issuance of the bond, which has been in the works since 2014.
Treasury CS Henry Rotich said that the Capital Markets Act, the Co-operatives Societies Act and Sacco Societies Act are also lined up for ammendment.
The government plans to borrow up to Sh256 billion from external sources in the next fiscal year, to plug a budget deficit of Sh524 billion. The State has in the recent past taken up foreign loans in form of the Eurobond and syndicated loans from commercial lenders. Kenya has been mulling over a Sukuk bond for the past two fiscal years, given its highly discounted nature, which would provide cheaper financing compared to commercial loans. The lack of the necessary regulatory framework has, however, delayed this option. In the current fiscal year, Kenya has turned to syndicated loans to finance part of her budget deficit. These loans include the just signed $800 million loan from four international banks, and a similar $500 million facility taken from the African Export-Import bank.
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% 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 transactions. 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).
A #Kenyan college yesterday signed a three-year memorandum of Understanding (MoU) with Malaysian training university to develop curriculum on Islamic Finance. Coast International College (CIC) also signed a letter of collaboration with the Inceif, the global University for Islamic Finance owned by the Central Bank of Malaysia. The MoU was signed by college principal Loise Gichuki, Inceif president and chief executive Daud Vicary Abdullah. The programme will offer Diploma in Islamic finance. The Malaysia University will provide curriculum, course materials and lectures related to Islamic jurisprudence, Islamic Law of contract, financial accounting and fundamentals of Islamic Banking.
#Kenyan financial regulators expect new guidelines in 2017 for the supervision of the entire sector. Insurance Regulatory Authority (IRA) supervisor Mary Nkiomu said the Islamic Finance Project Management Office established in December 2015 has submitted policy proposals to the National Treasury. The guidelines will enable the financial sector regulators to incorporate Islamic finance regulatory frameworks. Islamic finance institutions are largely operating in a self-regulatory environment governed by religious principles, backed with regulations for conventional operations. The guidelines, drafted in 2015, are set be rolled out to the public for consultations this year. The delay in the roll out has been attributed to terrorist attacks over the years.
The Central Bank of #Kenya (CBK) announced it was in final stages of licensing two banks, DIB Bank Kenya, which is owned by Dubai Islamic Bank, and Mayfair Bank which is owned by Kenyan investors. The two firms had received an "approval in principle" before the indefinite suspension of new banks. CBK suspended the licensing of new banks on November 17, 2015 saying it needed to strengthen oversight. The moratorium stalled entry of international banks into the country, where commercial banks have come under closer scrutiny from the regulator because of increasing bad debts. CBK governor Patrick Njoroge said the local banking sector has made huge improvements over the past year, adding that CBK’s supervision department has improved its monitoring capacity.
The Kenyan capital markets regulatory authority and the Nairobi Securities Exchange today visited the Qatar Stock Exchange (QSE) and signed a memorandum of understanding (MOU) for cooperation between the two exchanges. The two sides will share information and technical assistance in respect of processes and procedures relating to listing, trading, depository operations, clearing and settlement. Mr. Samuel Kimani, Chairman of the Nairobi Stock Exchange, said that his is a young exchange looking for further development and cooperation opportunities. Rashid bin Ali Al-Mansoori, CEO of Qatar Stock Exchange, expressed his happiness and hope that the MOU will help enhance the economic cooperation between the two countries.
The Insurance (Amendment) Act 2016 signed into law by President Uhuru Kenyatta is set to enhance Kenya's position as the premier Islamic financial hub in Africa. The move came a week after the Capital Markets Authority (CMA) was admitted by the Council of the Islamic Financial Services Board (IFSB) as an associate member of the board. The new law provides for the licensing and regulation of Takaful insurance business in Kenya in order to encourage international investment in this sector. The decision to admit CMA was made at the 29th IFSB Council meeting held in Cairo, Egypt on December 14. In October, the government launched the Islamic Finance Project Management Office (PMO). CMA's Chief Executive Paul Muthaura said the authority membership in IFSB is a key step towards the development of Kenya as an Islamic finance hub. The Insurance (Amendment) Act 2016 now enables the operationalisation of risk-based solvency requirements for insurers that were introduced in the Finance Act 2013. Among those proposals is a requirement that an insurer should maintain a 100% capital adequacy ratio at all times.
Funding Africa’s huge development needs has long represented a big challenge. This has spawned all kinds of innovative financing mechanisms in the past and could spell an opportunity for Islamic finance, notably haria-compliant bonds, or Sukuk. Still in an embryonic state in Africa – but growing nonetheless – these instruments could play a potential role in delivering large infrastructure projects, from building new airports to constructing power plants and building roads. While it is early days for Africa, on a global scale Islamic finance is not a new concept.
A longstanding feature of the financial markets of Malaysia – a world leader in the field – and across the Middle Eastern Gulf, its spread now encompasses non Muslim-centric territories worldwide. This is a pattern that is catching on, albeit slowly, in Africa. While northern Africa has provided a natural entry point for Islamic products, current activity now focuses on sub-Saharan markets, notably in West Africa.
In #Kenya the Sharia-compliant lender First Community Bank (FCB) has laid off a third of its workforce as effects of the recent capping of interest rates continue to shake the banking industry. The lender’s staff costs stood at Sh241.4 million as at June 2016 which rose to Sh365.2 million at the end of September, prompting action by the bank’s management. The bank, which received a regulatory approval in May 2007 to start Sharia-compliant banking, last week reported a 16.2% jump in quarter-three net profit to Sh74.4 million. FCB is one of four banks that recently announced staff cuts as a reaction to the biting interest regulations on loans and deposits. The other three banks are Sidian Bank, Family Bank and Ecobank.
A Shariah-compliant Sacco that promises to cushion pastoralists from incurring losses during droughts has opened a second branch in Wajir town. Crescent Takaful Sacco (CTS), the first Shariah-compliant Sacco in Kenya, seeks to engage and provide financial inclusion to the poor in northern Kenya. The Wajir branch is the first outside Nairobi. CTS has various products tailor-made for the arid and semi-arid region such as the Mifugo Kash-Kash product that links pastoral traders to potential markets. According to the Sacco’s Chairman Hassan Bashir, livestock traders are eligible for up to 70% financing through the product. The product is mainly delivered using the Islamic contracts of Mudharaba and Musharaka. In both contracts, the profit share is pre-agreed upfront and a distinct profit margin is charged on each delivered transaction.
Kenya plans to develop Islamic finance through a wide-ranging taxation review and the establishment of a national sharia board. The country wants to build up the industry as part of a long-term plan to turn Nairobi into an international financial centre. The initiatives are being led by the Islamic Finance Project Management Office (PMO), a body setup recently to coordinate efforts among Kenya's regulatory agencies. According to finance consultant Farrukh Raza, the PMO has submitted an initial set of policy amendments focused on taxation of sharia-compliant products. A second batch of policy amendments will be presented by the end of this year, covering banking, insurance, pensions and capital market products. Kenya's National Treasury has said it is looking at the possibility of a debut sale of sukuk, although it has yet to finalize details for such an issuance.
Despite the efforts of the #Kenyan regulators, some toxic products have been allowed into the market under the banner of Islamic finance. The lack of clarity among regulators has allowed unscrupulous managers to mask certain offerings as Islamic, which has tainted the sub-sector’s reputation in recent months. Chase Bank was placed under receivership in April after special purpose investment vehicles it had classified as Islamic products were contested. Juma Makomba, the Sharia compliance manager at Takaful Insurance of Africa, said Chase Bank was not brought down by Islamic banking products because the facility would have qualified as a Qard-Hassan. He added that Qard-Hassan is given to somebody who is in distress, but the product they were calling a Qard-Hassan was in fact Musharakah.
Kenya launched an office dedicated to oversee its Islamic finance industry and help prepare for the issue a debut sovereign shariah-compliant bond. With 11% of Muslim population, Kenya has seen the emergence of Islamic institutions in recent years, including two banks, five Islamic banking windows offered by commercial lenders, insurance firms and a unit trust fund. The government wants to build up the industry as part of a long-term plan to turn Nairobi into an International Financial Centre. Kenya, which has applied to become a member of the Islamic Financial Services board, is carrying out legal and policy reforms to facilitate the growth of the industry. According to Kamau Thugge, the principal secretary at the Treasury, the government will consider issuing a sovereign Sukuk as soon as the legal and policy reforms are implemented.
In #Kenya the Higher Education Loans Board (HELB) is set to introduce Shariah compliant products. The proposal to make the students loan provider Shariah compliant is currently being reviewed by the Attorney-General, prof Githu Muigai. Once approved, the law will improve access for Muslim students to educational financial support helping them to obtain loans which do not infringe on their religious beliefs. The number of Muslim students at universities has been on a gradual rise and the move will be of great benefit. HELB Chief Executive Charles Ringera said the board was with Islamic finance experts in the implementation of the policy.
The high transaction costs involved in Islamic financing are likely to limit its use in funding infrastructure projects in Kenya. According to a new study commissioned by the Kenya Bankers Association (KBA) Islamic financing is deemed to be expensive. This fact is corroborated by the case study of Lekki project which utilised a loan financing scheme that attracts huge transaction costs paid by the special purpose company in terms of 1.5-4.0% one-off administration fees and notary fees. The working paper also recommended that a national Sharia board be set up so as to set standards for Islamic finance.
In #Kenya a National Bank customer has asked the High Court to shut down the lender’s Islamic banking wing while demanding Sh3.7 billion compensation over a loan repayment dispute. Tulla Reserve Supplies claims National Bank illegally changed his facility from a fixed term loan to a revolving musharaka loan, effectively raising the interest rate from 18.5% to an Islamic profit-sharing equivalent of 19.5%. Director Diba Hussein Dado holds that the alleged switch to a revolving musharaka loan left his firm owing Sh922 million to National Bank. His firm supplied grains to Kenya Prisons, Unga Limited and World Food Programme (WFP). But National Bank insists that the contracts it signed with Tulla were for revolving facilities and Mr Diba has opted to feign ignorance in the hope of building a case against National Bank.
In #Kenya the Higher Education Loans Board (Helb) has announced plans to introduce a Sharia-compliant product as a growing number of Muslim students join local universities. Helb CEO Charles Ringera said the proposal is contained in a Bill that is currently with the Attorney-General Githu Muigai for review. The new product will most likely assume the structure of Takaful finance. To roll out such a product, Helb will have to come up with special loan forms that require beneficiaries to commit that they will repay a Takaful contribution for the benefit of future students.
The Capital Markets Authority (CMA) of #Kenya is banking on introduction of non-conventional financing options. According to CEO Paul Muthaura the move aims to absorb anticipated economic shocks arising from capping of interest rates. Last week, President Uhuru Kenyatta assented to the Banking Act 2015, which will cap interest rates to not more than 4% above the Central Bank of Kenya rate. The CMA plans to introduce Sharia financing where interest rates don’t feature but have an element of risk management. The CMA is also working on establishment of a Sharia Board that would screen all the products being offered so that it can determine their suitability to be treated as Sharia products.