Opinion

How to Attain a Robust Islamic Financial System in Kenya?

Jun 10, 2017 By admin Leave a Comment

NAIROBI, KENYA: Although Islamic Banking is at nascent stage in the country, the faith-based lending model is becoming a fast growing trend in the Kenyan financial sector and showing indicators of exponential growth. The concomitant expansion of Islamic finance activities in the region and the huge Muslim population can be largely attributed to reforms in regulatory and taxation frameworks. These two strictures have remarkably redefined Islamic Financing in the country necessitating innovation and creativity to meet the growing and diverse needs of the customers. Acceptance of Shariah laws by the general public, has catalysed the adoption of this alternative financing option within mainstream banking
KCB Bank Kenya SAHL proposition boasts of growth in terms of breadth of products with varying degrees of sophistication. The lender institution has developed regulations anchored on safeguarding depositors’ interests while ensuring the stability of its financial systems in achieving efficiency and reliability to customers in line with Kenya’s monetary policies. This determination has greatly contributed to the indicative growth in demand of KCB SAHL Banking Shariah Compliant products. The industry has previously weathered a series of economic challenges ranging from taxation reforms, interest rate capping that have consequently resulted in implementation gaps and resources constraints in launching new products. Introduction of new products can no longer be without a definitive plan based on resources available and return on investment.

To accelerate uptake of Shariah Compliant products, robust feedback mechanisms have to be put in place to gauge the impact from all the stakeholders in the markets. There is need therefore, that consolidation of gains made are aligned with customer value created, human capital efficiencies achieved, and resources mobilized while working closely with the regulator to spur positive Islamic finance growth. The strides made so far are indicative of the growing support for Shariah Compliant products occasioned by concrete mechanisms and better value proposition. In our view, there is need to offer a rich range of products dedicated to individuals and economic institutions in Kenya emphasizing keenly on functional benefits derived by customers from using such products.
We need to invest more in IT Infrastructure and deepen the use of mobile platforms in addressing customer needs. The country requires a robust legal framework and this calls for passing into law of a variety of new laws and regulations surrounding Sharia Compliant Products. KCB Bank has developed an array of modalities and financial instruments towards market expansion and integration with existing products. There is need to accelerate Sukuk issuing to offer an opportunity for diversification.
The current Finance Act does not allow the creation of debt through direct lending yet. Islamic finance advocates for the seller or lessor should have real ownership of the asset been sold or leased before a transaction. The debt created from such sale or lease transactions cannot be sold to a third party to avoid the risk associated with it. These requirements makes the lender take responsibility for risk or debt financing, thus helping prevent excessive risk and debt accumulation. Further work is needed to ensure compliance, including a transparent and credible assessment process for evaluating compliance with standards. Kenya’s Islamic finance growth has a huge potential given the region’s demographic structure and potential for financial deepening.

If we are to realise gains from creation of new Shariah compliant financial instruments and incorporation into tax codes, all stakeholders must develop supportive tax and legal environment, which will provide the impetus to the development of Shariah-compliant products. Perhaps Parliament should allow compensation in Sukuk to be treated as interest paid on any bond offering, deductible from taxable income and exempt from withholding tax. We need to tailor Islamic finance models to the needs of Kenyans. There is need to strengthen capacity for domestic supervision, liquidity monitoring, and crisis management. It is also vital to constantly evaluate our financial stability, appropriate legal, regulatory, and supervisory frameworks.
Developing Islamic finance could complement Kenya’s efforts to deepen its conventional financial systems. In addition, Islamic financing can also contribute to the development of small and medium enterprises and microfinance activities that are key toward the realisation of vision 2030. As matters stand in Kenya, we are operating Shariah Banking under waivers from existing Acts of Parliament.
We should consider borrowing a leaf from our neighbours Uganda who are already a step ahead in implementing necessary legal reforms in Islamic finance. The country’s law makers passed the Financial Institutions Amendment Bill 2015 paving way for introduction of Islamic Banking in the country under its own statute.

Originally published on www.standardmedia.co.ke

Is Islamic Banking Ready To Embrace Fintech?

Dec 22, 2016 By admin Leave a Comment

JEDDAH: Over the past decade, financial technology — widely referred to as FinTech — has grown primarily due to growing Internet access worldwide and the emergence of smartphones and apps. According to the Ericsson Mobility Report published last year, 70 percent of the world’s population is expected to be using smartphones by 2020. As smart devices are increasingly becoming part of everyday life for most people in the digital age, it is essential for the banking sector to become more innovative to enhance its productivity as well as include more and more unbanked people into the fold.
“We’re transitioning toward a situation where growth for companies and economies will have to depend more on productivity than before,” said Jarmo Kotilaine, chief economist at the Bahrain Economic Development Board (EDB).
“To achieve that, you will need better management, better innovations, new distribution channels and new capital.”
Increasing the efficiency of digital banking will particularly serve customers in Saudi Arabia, where banks’ working hours overlap with those of most employees. Comprehensive digital banking can save them a journey to the branch.

Moreover, Saudi Arabia is a pioneer when it comes to technology penetration in the region. “The usage of technology in Saudi Arabia is advanced, whether in retail banking, cash management or corporate,” said Talat Hafiz, secretary-general of Saudi banks’ Media and Banking Awareness Committee.
“When it comes to technology, what applies in conventional banking also applies in Islamic banking.” He added: “Using financial technology improves the quality of the banking experience among clients. It influences the speed and accuracy of the experience. Technology makes products more reachable to clients.”

The change in behavior patterns among clients in the banking sector requires banks to respond to new customer needs and rethink how they deliver services to their clients, taking them to the next phase of digital banking whereby they can easily handle most of their banking related tasks online instead of physically visiting their banks to do so.
“As a matter of policy, we in SAMA (the Saudi Arabian Monetary Authority) encourage all regulated institutions to be responsive to the needs of their customers, and have always supported the development of products that meet those needs,” said SAMA Gov. Ahmed Al-Kholifey.
A report published this month by Ernst & Young (EY) said the adoption of financial technology is not an option anymore, but an essential requirement for Islamic banks to gain more market share. As customer technology penetration in the Gulf Cooperation Council (GCC) increases, users are expected to become more familiar with using digital tools in their banking transactions, retail investments and peer-to-peer (p2p) lending and crowdfunding.
According to the EY report, Saudi Arabia, the United Arab Emirates (UAE) and Malaysia are the three largest Islamic banking markets in terms of assets. Saudi Arabia takes the lead with 34 percent market share, followed by 17 percent and 13 percent in the UAE and Malaysia, respectively.
Ashar Nazim, partner in EY’s Global Islamic Banking Center, said the “FinTech revolution” — in terms of data, analytics, robotics and artificial intelligence — has the ability to bring scattered data together and help decision-makers make better decisions. “We believe the last 20 years of Islamic banking have been about innovation in Shariah contracts and Shariah-compliant products,” said Nazim.
“The next 20 years will be about combining smart technology with Islamic banking in order to grow further.”
The size of the Islamic finance industry is now close to $2 trillion. “We believe there’s an additional trillion dollars in the industry which isn’t formally captured,” Nazim added.
He further said this additional trillion dollars is primarily from endowments (waqf), high net worth and institutional investing done in a number of infrastructure projects in the conventional and Islamic markets. “Bringing the additional $1 trillion into the Islamic finance industry is where FinTech can be very important,” Nazim said.

FinTech: A threat?

As financial technology is deemed to better facilitate banking services, it can also be seen as a disruption to the banking sector.
Looking at the history of Islamic finance, it was seen as a disruption to conventional finance.
“FinTech is now disrupting the overall finance world. The big banks are slower in adopting technology because they have a legacy to protect, but start-ups are more welcoming in adopting change,” Nazim said.
The EY report showed that in FinTech space in the GCC, Islamic finance is still in “dismissive mode,” thinking it is not going to impact the industry.
Nazim said the mindset has to change: “We have to start thinking as a start-up, and that requires a complete change in behavioral economics, in terms of how organizations are run.”
He added: “Bringing smart technology by itself is of no use unless the organization’s culture changes. Islamic banks are in better positions because they’re smaller than conventional and more local. It’s easier for them to change.”
FinTech can open doors for further national and international collaboration in the banking industry.
There is a growing realization within banks that they cannot afford to do everything by themselves.
“There has to be collaboration within the industry. At the moment collaboration is at a national level, and in future it will be at cross-country level. The next 20 years will be collaborating in terms of smart technology,” said Nazim.
“FinTech shouldn’t be seen as a threat or as competition. There is tremendous potential for collaboration between the GCC and Malaysia in FinTech.”
He added: “These smart technologies increase levels of trust and the speed with which you do these transactions.”
Speaking at the recent World Islamic Banking Conference (WIBC) in Bahrain, Rasheed Mohammed Al-Maraj, governor of the Central Bank of Bahrain (CBB), said the smart use of technology is a game-changer in banking, just as in other aspects of daily life.
“Technology has made it possible to access more customers, in a more comprehensive way, at a lower cost, than in the past,” he said.
“Islamic banks must make full use of these technological enhancements and invest more in this space.”
Al-Maraj added: “The CBB believes in embracing new technology, and will soon be issuing regulations to facilitate FinTech solutions. We’d like to see Islamic banks come forward and take the lead in this area. FinTech is leading the way.”
According to SAMA’s Al-Kholifey, all the 12 banks operating in Saudi Arabia offer Shariah-compliant finance, as do several branches of foreign banks that are licensed to operate in the Kingdom.
“Saudi retail banking is overwhelmingly comprised of Shariah-compliant products, and we note significant growth of Shariah-compliant growth in the corporate sector as well, growth that we expect to see continue in the next decade,” he said.
EY says the introduction of FinTech will increase the Islamic finance customer base, which is roughly 100 million today, to 250 million by 2020.
“So more than twice the growth in customers can be achieved with the adoption of FinTech,” Nazim said.

Originally published on www.arabnews.com

Ethanol & Its Halal Status In Food Industries

Dec 3, 2016 By Jawad Alzeer AB Khaled Abou Hadeed Leave a Comment

Halal Status of Ethanol

The word Khamr (alcoholic beverage), fermented fruits, was described in Quran 6 times; Alkhamr refers to the solution, which is produced from fruits or any natural sugar source by anaerobic fermentation and potentially could be used or lead to intoxication. The main ingredient of Alkhamer is ethanol, which is the chemical substance responsible for intoxication, the physiological state induced by the ingestion of ethanol where a person usually becomes pleasantly relaxed, with an easing of tension and anxieties. The control centre in the brain becomes less active, and inhibitory centre is less efficient and may lead to mild euphoria, talkativeness, decreased attention, and impaired judgment.

Complete intoxication is achieved when blood alcohol content (BAC) is ranging between 0.08-0.10% depending on gender, weight and age. Utilizing Widmark’s formula (Widmark 1981), a female with 55 kg weight, if consumed 10% (w/v) ethanol (e.g. Wine), intoxication is achieved within 1 hour after ingestion 500 ml volume, equivalent to 50 g of absolute ethanol, this ratio may slightly decreased or increased depending on the individual sensitivity. If ethanol content is increased by physical and or chemical means to 27% (w/v), and 500 ml volume is ingested by a 55kg weight female, this is the fatal dose (BAC= 0.30%) and consumption of this large amount of alcohol, 135 g, within a short span of time may affect different systems of the body, namely respiration, heart rate that ultimately may lead to death of the person, this ratio may slightly decreased or increased depending on the individual sensitivity. Similar fatal dose (BAC= 0.30%) can be achieved after ingesting 900 ml of 15 % (w/v) ethanol. From this analysis, we may conclude that when ethanol content is 15% (maximum concentration obtained by fermentation) or less, it is treated as fermented alcohol, its status is forbidden (non-Halal) and need to be avoided; preparing, carrying and drinking it is forbidden as mentioned in the Holy Quran. If ethanol content is higher than 15%, usually it is inaccessible via fermentation, alternative method is needed to achieve the desired high concentration, it is obtained either by distillation or addition of absolute ethanol, for effective distillation toxic additives are added. The Halal status of alcohol higher than 15% (w/v) is toxic, therefore it is strongly prohibited to drink, attempts to drink toxic substance is considered suicide attempt in Islam, which is hardened sanctity than drinking fermented alcohol. On the other hand, toxic ethanol solution is allowed to prepare, hold, transfer and use for disinfection and other industrial use.

With regard to ethanol less than 1% (w/v), obtained by natural fermentation process under oxygen (air) atmosphere. The process goes through two steps: first the oxidation of sugar via fermentation into ethanol, followed by the oxidation of ethanol via acetaldehyde into acetic acid, air flow is not prevented during the process. The transformation of ethanol into acetic acid, carbon dioxide and ethyl acetate, is controlled by ethanol concentration. If ethanol is < 0.2%, acetic acid undergoes over oxidation and generate carbon dioxide (Lea 1989), whereas higher than 1%, ethyl acetate formation is observed, as a result of ethanol and acetic acid condensation (Joshi and Sharma 2009). In both transformations, acetic acid concentration is reduced, thus pH value is increased (> 4.7, acidity decreased). Acidity is the most important factor affecting microbial spoilage of fruits and vinegar (Agular et al. 2005). To reduce microbial growth rate, optimum value of pH ≤4 (increase acidity) is maintained by keeping ethanol concentration between 1.0-0.2%. Therefore, ethanol Halal status at concentration less than 1% is allowed, and called Mubah (neither forbidden nor recommended) in Islam, and essential to maintain acidic condition and prevent growth of harmful microbes. Prophet Mohammad (PBUH) said that whatever intoxicates in large quantities, a little of it is also forbidden (Tirmidhi). If a 55 kg weight female, consumed 1% ethanol within 1 hour, intoxication limit will be reached (BAC= 0.09%) after ingesting 4000 ml volume. Medically, drinking 4 litres of water within one hour will lead to rapid and severe hyponatremia (Sahay and Sahay 2014), a condition that occurs when the level of sodium ion in blood is abnormally low. Blood dilution disable kidneys to flush water out of the body fast enough thus blood becomes waterlogged, causes entry of water into brain cells and lead to brain swelling, which manifests as coma and death. As drinking 4 litres of 1% of alcohol to reach intoxication is practically impossible, therefore one may conclude that alcohol less than 1% should be treated as a preserving agents rather than forbidden for reasons described above.

With regard to vinegar’s halal status, in general it is halal and recommended by the prophet, In a hadith narrated by Ayesha, Muslim and Ibn Maja, Prophet Muhammad (PBUH) said “Allah has put blessing in vinegar, for truly it was used by the prophets before me”. When vinegar’s ethanol content reach 1% (Heikefelt 2011), which is rare with exception of wine vinegar, it is halal as long as there is no deliberate treatment to induce the conversion of ethanol into acetic acid.

In Islam, human deeds are judged on the bases of intentions (Niyyah), Prophet Mohammad PBUH said “Verily, deeds are only with intentions” (Sahih Bukhari 54). Therefore, any ethanolic beverage or vinegar made with intention to achieve partial or complete intoxication, it is prohibited, no matter if ethanol content is <1% or >15%. In case of ethanol <1%, it is lower than the limited value for reaching intoxication, but placebo effect will dominate and intoxication may easily be reached with minute amount of alcohol. With regards to spirit drinks, alcohol content is higher than 15%, usually prepared by fermentation followed by distillation, Halal status is forbidden and toxic, prohibited to drink and not to be used in industries. Ethanol prepared by fermentation and distillation to achieve concentration above than 95%, chemically it is identical to synthetic ethanol, thus 95%, absolute and denatured ethanol are considered as toxic substance and could be used for perfumes and other industrial applications as long as the initial intention was not made as beverage drink.

Since 15% is the limit where yeast is toxified and fermentation process is stopped, more detail studies are needed to determine the consequence of this concentration on our gut microbiota which play important role in digestion, immune system, production of some vitamins, combat aggressions from other microorganisms, and maintain the wholeness of intestinal mucosa.

Digitization Of Islamic Banks A Must For The Growth Of Islamic Finance

Oct 14, 2016 By admin Leave a Comment

Dubai: Digitization of Islamic banks is a must for the growth of the Islamic finance industry. Although, the industry is quite young, the fintech disruption is already changing the way Islamic banks are spending money on technology to transform the way they do business to attract Internet-savy customers. However, most of these banks are still a long way from becoming truly digital as currently, many of them offer only the basic services online.

Experts speaking at a plenary session at the Global Islamic Economy Summit 2016 said like their conventional peers, Islamic banks too have no choice but to embrace the next generation of technologies and leverage on new generation digital technologies as brand loyalties dwindle especially among younger consumers.

Research shows that there is not much of a difference between the preferences of Muslims and non-Muslims regarding digital financial services and direct banking channels. According to the World Islamic Banking Competitiveness Report 2016 by EY, Islamic banks still have a lower customer penetration in mobile banking compared to conventional banks. Their digitization efforts need to catch up fast.

Unbanked Population

The Middle East’s banking sector has been lagging behind in adopting deep and transformative digitization compared to its global peers, according to a recent survey of corporate banking customers worldwide by the Boston Consulting Group (BCG).

According to a recent World Bank statistics, more than 2 billion people around the world are unbanked and about half of them are in the Muslim world. “It is embarrassing that such large numbers of Muslims do not have any access to banking services. Fintech may the answer to more inclusive banking. The new generation of technologies break down economic and social barriers,” said Abdul Haseeb Basit, chief financial officer of Innovate Finance, UK.

High cost and low yields have kept away banks from serving some segments of the unbanked population. With the arrival of cost-effective mobile and other technologies, it is easier for Islamic banks to serve greater number of customers at lower costs.

For example, in Indonesia, only 30% of the population has a bank account. However, there is a 100% mobile penetration in the country. Similar is the case with populations in different parts of the Middle East and Pakistan etc. The Islamic finance industry should offer mobile banking services to ever-larger populations in the Islamic world.

Technology Tools

Participants at the panel discussion shared the view that the digital solutions will improve the quality of services offered by both Islamic and conventional banks. “Fintech can help customers do financial planning with the help of technology tools enabling them to forecast and plan ahead. Technology is a great enabler. Fintech can enable small businesses in making and receiving payments,” said Abdullah Al Najran, Deputy CEO of Boubyan Bank Kuwait.

Globally, a growing number of banks are expanding their digital offerings well beyond a basic web presence. A recent BCG study showed that over the next five years, corporate banks that remain digital laggards could see profits drop by as much as 15-30 per cent relative to their digitally fast-moving competitors.

Market Share

Panelists said as a number of banks in the region allocate significant resources to adapt their business models to the fintech revolution, we could see incumbent banks losing market share to early adopters, at least in some segments of business in the near future.

When it comes to fintech adoption, panelists agreed that banks’ approach to fintech innovators need not be one of the confrontational nature. “There is a huge scope for collaboration. All that is needed is a change in the conventional mind-set,” said David Martine de Lecea, Specialist Consultant — Fintech, Roland Berger.

Islamic banking and Islamic finance are expected to hugely benefit from fintech and block chain technologies that will help simplify transactions involving complex structures.

“Islamic finance is based on tangible commodity transactions involving a number of contracts. With block chain technology, the trading processes leading to financial transactions can be simplified,” said Al Najran.

Originally published on www.gulfnews.com

How Is Islamic Finance Failing The Real Test?

Aug 19, 2016 By admin Leave a Comment

Islamic Finance is booming around the globe. Currently, there are around 500 Islamic banks operating in 75 countries around the world. Islamic finance is growing at 10-15% per year with GCC Islamic banks constituting 70% of the global total. In fact, non-Muslim countries are also tapping into the growing Islamic finance market by issuing sukuk or Islamic bonds. This growing field of ours was supposed to help lift up the masses from the pangs of poverty and give them access to basic financial services. However, so far, the growing clout of Islamic financial assets around the world has failed to mitigate income inequality so widespread in the Muslim countries.

In the sixties, economists like Mehbub-ul-Haq, Simon Kunets and other proponents of Capitalism thought that “the balancing forces of growth, competition, and technological progress lead in later stages of development to reduced inequality and greater harmony among the classes” However, that has proved to be wrong in most parts of the world.

The exponential growth in Islamic financial assets in the past two decades has raised incomes for corporations, their top managers substantially in many Muslim countries. However, income levels for workers at the bottom did not grow that much.

Same is the case with the Islamic finance of today. It seems to be following the footsteps of conventional finance (or Capitalism as we know it today) in every sense of the word, from product structuring to marketing and every thing in between. Despite all the fanfare in the growing field of Islamic finance, no significant data suggests that any Muslim country was able to reduce income inequality by utilizing excess liquidity in Islamic financial assets. Islamic economists as well as practitioners, so far, have failed to suggest and implement ways to reduce income inequality among the masses in Muslims countries.

The other day, we published a story on how much assets Muslim individuals, governments, institutions and other stakeholders have while tens of millions of people are suffering from abject poverty in most of the Muslim countries. The policymakers as well as Islamic finance practitioners have to give a serious thought on how the poorest of the poor could also benefit from the growing assets of the Islamic finance industry. If it is not done so, the industry is doomed to failure and will be considered as yet another face of conventional finance which infamously takes care of the haves but utterly ignores the plight of the have-nots.

If we are to reduce income inequality among people of a country, the best way to do so might be to slow down the income growth of the highest paid workers in any firm operating in the Islamic finance industry or any other sector. Higher taxes could be levied on high income individuals in the Muslim world while transferring those resources to the middle and low income groups of the societies.

We, as Islamic finance practitioners, policy makers, researchers and other stakeholders need to think about this issue seriously as we can not just continue with the growth of Islamic finance the way we have been doing for the past several years if we have large number of masses whose lives have not been changed despite the significant inroads the Islamic finance industry has made in some of the Muslim countries during the last couple of decades.

Opinion

How to Attain a Robust Islamic Financial System in Kenya?

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