Islamic funding in Kenya Banking in Kenya is regulated by the central bank under the Banking Act Chapter 488. here are several funding solutions in Kenya such as unsecured loans, secured loans and bonds. Since the commencement of Islamic banking in Kenya in June 2008, Islamic finance has grown from simple commercial banking to include equities and investment banking such as debt issuance, bonds and structured products. It has become accepted not only in Kenya but throughout East Africa.
For a country where Muslims make up 25% of the population, the late takeup of Shariah compliant financial products by the larger population is a worrying factor which should be addressed, if the country is to achieve the economic goals in its Vision 2030. Traditionally, financial services in Kenya have been dominated by commercial banks and other financial institutions devoid of religious affiliation. Christian financial institutions have existed but within the usual commercial banking principles.
There is no doubt that acceptance of Islamic banking into the law has become a major att raction for international investment within Kenya. Given this realization, Kenya has quickly adapted to the central role Islamic banking/financing plays in boosting the foreign investment climate. As such, the country is working strategically toward positioning itself as the hub for Islamic banking within East Africa, and consequently putting East Africa on the global Islamic finance landscape.
The approval and rise of Shariah compliant banks within the country, such as First Community Bank and Gulf African Bank, have prompted the country to rethink its laws on financing. Existing commercial banks such as the National Bank and KCB have also tailored Islamic compliant solutions as part of their core business.
In the 2017/2018 annual budget report for example, the focus of the country in Islamic banking was evident. In his statement, Cabinet Secretary for the National Treasury Henry K Rotich focused on various eff orts geared toward boosting Shariah compliant banking. Among the highlights was an admission that Islamic banking has become a major source of funding development expenditures globally. As such, Rotich proposed for a review of the Capital Markets Act, the Cooperative Societies Act and the Sacco Societies Act to facilitate Shariah compliant products.
A review of the law governing savings and credit cooperative organizations (Saccos) is extremely remarkable given that currently, Saccos account for about 62% of personal savings in Kenya. Rotich has also moved on to issue regulations that facilitate the development of Takaful retirement benefi ts schemes in Kenya in March 2017.
In addition, a proposal was also made for the amendment of the Public Finance Management Act to provide for the issuance of Sukuk. Despite the clearance for such Islamic bonds within the 2017/18 Finance Bill assented to by the president, certain legal challenges such as the requirement to att ach an asset to the bond have made it impractical for Sukuk to be issued for the current financial year. The government is, however, still targeting to raise billions in Sukuk, and is therefore actively working toward putting together transactional documents required for Sukuk to materialize.
The aforementioned reflects the serious commitment of the Kenyan government to make sure that the economy takes full advantage of Shariah compliant financing. How Shariah compliant financing differs from commercial financing The quick intake of Islamic finance products in Kenya is indicative of certain advantages off ered in Islamic ending over commercial lending.
Islamic funding in Kenya
Unlike in commercial banking, under Islamic law money cannot be used to generate money, which negates the principle of accounts earning interest. Therefore, banks must purchase assets for every borrowing or deposit, which then generates income. This means instead of the bank issuing an interest on deposits, it shares with the depositor its
profi ts in the purchased assets. Profit sharing is therefore fundamental in Islamic banking and the same applies to income received from assets committed as security for financings.
The exposure of people to unpredictability and uncertainty over risks is not allowed. The sale of items that do not belong to one is also prohibited in Islam. This means that in case of a financing default, the liquidated assets are shared between the fi nancier and the owner in accordance with their ownership ratio which keeps reducing on the part of the bank with every repayment made by the borrower. Due to this characteristic, this arrangement is commonly referred to as a lease rather than as a mortgage.
Given the foregoing, Shariah lending is likely to intensify within Kenya, and indeed within East Africa, stabilizing further the interest rates in financing.
