How to Attain a Robust Islamic Financial System in Kenya?

NAIROBI, KENYA – Although Islamic Banking is at an early stage, the faith-based lending model is becoming a growing trend in the Kenyan financial sector. It is showing indicators of exponential growth. The joint 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 checks have remarkably redefined Islamic Financing in the country requiring innovation and creativity to meet the growing and diverse needs of the customers. Acceptance of Shariah laws (In Islamic Financial System) by the general public has catalyzed the adoption of this alternative financing option within mainstream banking.

KCB Bank Kenya SAHL’s statement claims growth in products with varying degrees of sophistication. The lender institution has developed regulations anchored on safeguarding depositors’ interests while ensuring the stability of its Islamic 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 for KCB SAHL Banking Shariah Compliant products.

The industry has previously weathered a series of economic challenges ranging from taxation reforms, interest rate capping that has consequently resulted in implementation gaps and resource constraints in launching new products. The introduction of new products can no longer be without a definitive plan based on resources available and return on investment.

To accelerate the 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 a 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 a better value proposition. In our view, there is a 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 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 a 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 financial system 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 make 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 system growth has a huge potential given the region’s demographic structure and potential for financial deepening.

If we are to realize gains from the creation of new Shariah-compliant financial instruments and incorporation into tax codes, all stakeholders must develop a 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 a 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 realization 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 neighbors Uganda who are already a step ahead in implementing necessary legal reforms in Islamic finance. The country’s lawmakers passed the Financial Institutions Amendment Bill 2015 paving way for the introduction of Islamic Banking in the country under its own statute.

Originally published on www.standardmedia.co.ke