Over the past year, Kenya has witnessed considerable growth in Shariah compliant banking, a testimony of the vast potential of Islamic finance in Kenya.
Kenya remains a potentially lucrative market for Islamic banking and a vast array of Islamic financial products continue to be offered by fully-fledged Islamic banks and other conventional banks. The government and regulatory bodies have expressed support of Islamic finance. In fact, Kenya recently signed an MoU with the State of Qatar to strengthen Islamic finance opportunities as well as enhance cooperation in the development of the Nairobi International Financial Center (NIFC).
Upon completion and establishment of the NIFC, Kenya is set to become a hub for Shariah compliant financing. Without a doubt, Kenya is positioning itself as a financial and investment hub to tap the growing capital inflows into Africa. However, despite the sustained demand for Islamic banking services, Shariah compliant lenders are yet to make significant inroads into the country’s competitive banking sector.
Review of 2015
2015 has been a year of steady growth in the Islamic financing sector in Kenya. Already, Kenya is home to two fully-fledged Islamic banks offering a wide range of Shariah compliant financial products. Six other conventional banks offer Shariah compliant products on a window basis. Several other commercial banks are also in the process of opening Islamic banking windows to capture their market share in the Islamic finance sector.
The Takaful Insurance Regulations were drafted by the Insurance Regulatory Authority. Their purpose was to permit insurance companies to open Takaful windows, provide guidance for Takaful operators and establish the duties and responsibilities of Takaful operators. It was widely expected that the guidelines would come into effect on the 1st June, 2015. However to date, the guidelines are still awaiting parliamentary approval. Hopefully once operationalized, this will mark the entry of more players into the Islamic insurance market.
Kenya also nominated members of the Capital Markets Master Plan Implementation Steering Committee which is tasked with the overall responsibility of oversight in the implementation of the Kenya Capital Markets Master Plan. Its duties among others include facilitating the alignment and establishment of Kenya as the heart of capital markets financing and investment in Africa and the supervision of the establishment of a platform within the capital markets for Islamic compliant financial products.
The East African Business Network is organizing the East Africa Islamic Finance Summit in Kenya in February 2016 to focus on the potential of Islamic finance and investment. The summit comes at a critical point when Kenya is considering issuing its debut Sukuk, following other African countries like South Africa and Senegal.
The summit’s discussion areas include a regulatory framework, opportunities for financing and financial inclusion, Sukuk, corporate governance, challenges faced and potential solutions, how to steer growth and much more. The National Treasury, regulators, key industry players and stakeholders are expected to attend the summit for fruitful discussions. If solutions are implemented, it will go a long way in positioning Kenya as Africa’s financial capital.
Preview of 2016
Kenya may be ready to issue its eagerly awaited debut Sukuk in the financial year 2016/2017 following the successful issue of the US$2 million sovereign bond by the government of Kenya in June 2014 .Without a doubt, Sukuk bonds offer more favorable repayment terms than conventional bonds as they are an attractive product for infrastructure financing. However, Kenya is not out of the woods yet; the lack of a proper regulatory framework remains the biggest challenge to the issuance of a Sukuk.
Regulators remain alive to the fact that changes need to be made to current legislation to provide an enabling environment for Shariah compliant products. The cabinet secretary for the National Treasury, Henry Rotich, admitted as much when in an interview he maintained that although the government is still keen on the issuance of a Sukuk, a number of legislation need to be reviewed and where necessary amended. He also pointed to the fact that Kenya will have to adjust its tax regime in order to encourage the issuance of the Sukuk.
The government also intends to establish a National Shariah Supervisory Council which shall advise on the development of products that are compliant with Shariah law. By and large, Islamic financial institutions have relied on Shariah advisory councils constituted within the respective institutions. This has led to an overlap of functions and a lack of harmonization of the products offered in the market. Market players agree that a National Shariah Supervisory Council will set the stage for standardization and convergence of products, with a great positive impact on Islamic financial markets.
Though regulatory hurdles abound, it is hoped that legislative amendments are made soon so that Kenya is able to issue its debut Sukuk in the financial year 2016/2017. It is also hoped that deliberations at the summit to be held next February will go a long way in helping to promote the Islamic finance industry not only in Kenya but in the greater East Africa region too. Kenya is on its way to cement itself as a leading Islamic financial and investment hub in Africa in days to come.
Mona K Doshi is a partner at Anjarwalla & Khanna Advocates. She can be contacted at [email protected].