Kenya’s decade-old Islamic finance sector includes two fully-fledged Islamic banks and several Islamic windows being operated by other banks. However, Islamic banking has been operated by way of exemptions, and a lack of clear rules has led to stunted growth. Currently in Kenya, conventional banking and Shariah compliant finance are subject to the same set of laws (save for exemptions granted to institutions providing Islamic finance). It is worth noting that Shariah compliant finance is only exempt from some of the provisions of the Banking Act and other laws that regulate the conventional banking system.
Despite this, the potential of Islamic finance in Kenya remains undoubted. Under the Capital Markets Authority (CMA)’s master plan for Kenya Vision 2030, the CMA aims to create a vibrant and globally competitive financial sector by the year 2030. Kenya has ambitions of becoming the Islamic finance hub of East Africa and wants to establish itself in this niche market within the region.
Review of 2016
2016 has been a mixed bag of fortunes for the Islamic finance market in Kenya. It has recorded steady growth in the Islamic financing sector in Kenya, widely seen as an attractive alternative to the risky practices of conventional banking.
The first East Africa Islamic Finance Summit was held in Nairobi in February 2016 and was organized by, among others, the East African Business Network and GBS Africa. Participants included key regulators and influential figureheads from the local and international scene which provided participants with a platform to exchange their views and opinions on the issues affecting Islamic finance development in East Africa. The summit specifically focused on the opportunities and challenges that are shaping the Islamic banking, finance, and investment landscape in East Africa.
During the year, several banks were been placed under receivership by the Central Bank of Kenya (CBK) which is the regulator of the banking sector. One such bank which was placed under receivership had an Islamic window. A misunderstanding between the former directors and their auditors on how to classify Islamic banking assets led to a restatement of the financial reports of the bank. The former directors argued that the auditors misunderstood the principles of Islamic banking.
In a separate instance, a bank in Kenya which offers Shariah compliant financing was taken to court by one of its borrowers over the nature of the facility that the borrower was granted. The borrower alleged that the bank changed the facility that he was granted from a fixed term financing to a revolving Musharakah financing which had the effect of raising the interest rate from 18.5% to an Islamic profit-sharing equivalent of 19.5%. This increased the borrower’s payment obligations considerably. The bank argued that the borrower was aware of the nature of the facility he was granted and that the bank had explained the terms to the borrower on several occasions.
These instances show the lack of understanding of Islamic finance terminology and documentation across the board. It also highlights that in some instances Islamic financing is expensive in Kenya compared to its conventional counterpart.
An important development this year which demonstrated Kenya’s commitment to the growth of Islamic finance has been the establishment of a Project Management Office (PMO) made up of various regulators. The PMO will regulate the industry, help develop industry awareness and human capital. The government has also engaged the services of various experts in the field of Islamic finance to provide a technical and advisory role to the PMO. These are all positive steps which will contribute toward the growth of Islamic finance in Kenya.
Preview of 2017
In remarks attributed to the principal secretary in the Treasury, Kenya will in the coming year seek to join the 57-member OIC, which will allow it to tap into financing from the IDB.
Players in the Islamic finance industry have called for the establishment of a national Shariah advisory board to ensure uniformity across the industry and to provide guidance on matters of Islamic finance. The government recognizes the need for a national Shariah supervisory board and this may be established in the near future. Now that a PMO has been established and with Kenya’s National Treasury looking at the possibility of a debut Sukuk issuance, the coming year promises to be an exciting one in terms of the development of Islamic finance in the country.
Conclusion
Though the regulatory framework is still a work in progress, it is hoped that the necessary legislative amendments will be made soon to enable Kenya to experience growth in this sector and to issue its debut Sukuk, following in the footsteps of other African countries like South Africa and Senegal.
Mona Doshi is the senior partner at Anjarwalla & Khanna. She can be contacted at [email protected].