Kenya is positioning itself as a hub
for Islamic finance, aiming to lead in the region of East Africa and across
Middle Africa.
A predominantly Christian country with
a minority 11% Muslim population, Kenya’s financial sector has been home to
Islamic banks and takaful operators for more than a decade.
The East African nation is now working
on a number of initiatives to further develop its domestic sector, including an
industry framework, a sovereign sukuk issuance, and financial education.
These build on what it started in the
financial year 2017/18 when Islamic financing was highlighted in the Budget Statement as an area for Kenya
to “maximize its comparative advantage and position itself as a regional hub
for Islamic finance products, in order to attract foreign direct investment.”
“Islamic finance is one of the key
areas that have been identified by the Kenya Government to help put the country
head-and-shoulder above its peers within the region,” Luke Ombara, director of
regulatory policy and strategy at the Capital Market Authority (CMA), told
Salaam Gateway.
“To this end, key strategic documents
including the National Treasury’s Strategic Plan have prioritized the issuance
of relevant products and services to deepen this system of finance in Kenya.”
BUILDING ON EXISTING FRAMEWORK
The drive for Islamic finance dates back to
the 1990s when the Central Bank of Kenya started receiving enquiries from
prospective investors, according to Ombara.
By 2004, the first application for an Islamic
Bank—First Community Bank (FCB)—was received.
Today, Islamic finance is an area of
development in the country’s Capital Markets 2014-2023 Masterplan (CMMP), which
is itself a flagship project in Kenya’s Vision 2030.
Ombara said the government plans to:
- Issue a Sovereign Sukuk (Treasury
or Eurobond) depending on its analysis of the level of demand and its
expenditure targets. Ombara said this will be done “at an opportune time”.
- Formulate a national policy on
Islamic finance,
- Determine the appropriate
terminology for ‘Islamic finance’ to be used by Kenya,
- Determine the preferred
national governance framework for Kenya,
- Develop an education and
awareness strategy to demystify Islamic finance to enable potential
investors appreciate its value proposition.
There have been consultations, discussions,
seminars, and workshops to establish consensus on some of the outstanding
policy issues, according to Ombara, and there have also been engagements that
would ultimately lead to the formulation of a national policy on Islamic
finance.
Ombara conceded that the main challenges
facing Kenya’s Islamic finance industry are low levels of awareness on what
Islamic finance is and how it works, as well as caution due to religious
undertones as manifested by key terminology.
He further explained that the determination
of the preferable governance framework and a shortage of experienced Shariah
scholars was also another challenge to the industry’s advancement.
“Kenya is in active consultation with
international Islamic finance bodies to help develop standards for the
operation of this system of finance that meet the international threshold,”
said Ombara.
To this end, the country’s Capital Markets
Authority and the Central Bank of Kenya became members of the Malaysia-based
Islamic Financial Services Board (IFSB) in 2016.
SOVEREIGN SUKUK
As part of the development of the Islamic
finance industry, Kenya plans to issue sovereign sukuk. This was in the Budget
speech of 2017/18 when it was described as “an alternative source of financing”
for the country’s development projects. At the time, the cabinet secretary for
the National Treasury said the intention was to “amend the tax statutes to
provide for equivalent tax treatment” for sukuk.
Ombara confirmed that the amendments have
been made.
“The Government has a plan to issue sukuk,”
said Ombara. “The time/date of issuance will be determined by a number of
factors including Kenya’s Debt to GDP targets, the macro-economic environment
and its expenditure targets, among others.”
But he said there are challenges with regards
to the upcoming potential sukuk issuance including the special purpose vehicle
(SPV) establishment (offshore).
Other key challenges include asset backing
and liquidity as well as few qualified domestic scholars and differing scholar
opinions.
Ombara explained that bad publicity with
regards one Islamic bank also added to the challenges, referring to the
placement under statutory management in 2016 and ultimate buy-out in 2019 of
Chase Bank Kenya Limited.
The COVID-19 pandemic and technical
terminology also pile on the work for the sukuk issuance.
BANKS AND TAKAFUL
There are currently three full-fledged
Islamic banks operating in Kenya:
- First Community Bank (FCB),
which was established in May 2007, was the first to offer
Shariah-compliant products in January 2008.
- Gulf African Bank, which was
established in September 2007 and began operating in January 2008.
- DIB Bank (DIBBKE), a subsidiary
of Dubai Islamic Bank, was incorporated in 2014 and began activities in
May 2017.
Conventional lenders also offer Islamic
banking products via windows.
- The first was Absa Kenya which
started offering Islamic banking products in 2004, under the brand name of
“La Riba.”
- In 2007, Kenya Commercial Bank
(KCB) opened an Islamic window and began offering Islamic products under
the brand name “Amana”.
- In 2009, the National Bank of
Kenya (NBK) opened an Islamic window under the brand name “Al muumin”
which became “National Amanah” in 2013.
- International banks operating
in Kenya also offer Shariah-compliant banking solutions. In 2014, Standard
Chartered Bank of Kenya established an Islamic window under Saadiq .
Ombara said the government “has no problem”
if more Islamic financial institutions were set up in the country, “as long as
they meet the set minimum criteria”.
“If and when there is interest from the
market and an application is actually received by the Central Bank of Kenya
(either for a fully-fledged or window) that application will be considered on
its own merit,” said Ombara.
In addition to banks, Kenya has also introduced
takaful services.
- At present there is the
standalone Islamic insurer Takaful Insurance of Africa.
- The other is Kenya Re which
operates a re-takaful service via a window.
Ombara said the government is open to new
takaful and re-takaful companies to establish operations but that it will
depend on a case-by-case basis.
“If and when there is interest from the
market and an application is actually received by the Insurance Regulatory
Authority (IRA), that application will be considered on its own merit,” he
said.
OTHER ISLAMIC FINANCIAL INSTITUTIONS
Kenya has also established Islamic capital
market players, pension funds and cooperatives, noted Ombara.
Among the capital market players are the
Shariah-compliant Collective Investment Scheme (CIS) by Genghis Capital,
investment banking services by Salaam Investment Bank, a foreign company
incorporated in Kenya and licensed by the CMA.
The country has two Islamic pension funds,
the first being County Pension Fund’s (CPF) Shariah-compliant pension scheme
known as ‘Salih’. The second was the Local Authorities Fund (Lapfund) ‘Amal’.
Adding to these, there are also Islamic
cooperatives Taqwa Sacco and Crescent Takaful Sacco.
With regards a centralised national
Shariah-board similar to jurisdictions like Malaysia, Ombara said that
consensus has not been reached on the Islamic governance model that should be
adopted by Kenya.
FINTECH
In addition to traditional Islamic banking
services, Kenyan authorities are also keen to utilise fintech to advance the
domestic industry.
“Kenya is one of the world leaders in driving
financial inclusion through the fintech solutions such as M-PESA, Mula,
PesaLink and Pesapal,” said Ombara. “The adoption of such innovations is
facilitating transactions and spurring trade for corporations, small and medium
enterprises (SMEs) and individuals.”
He said the country already has a Blueprint
that identifies five pillars as it moves towards a full digital economy. The
aim is a nation where every citizen, enterprise and organization has digital
access and the capability to participate and thrive in the digital economy.
“Fintech will therefore most likely play an
increasingly fundamental role in improving uptake of Islamic finance products
and services in Kenya,” Ombara added.
FUTURE
Kenya has ambitions of becoming a newly
industrializing, middle-income country providing a high quality of life to all
its citizens in a clean and secure environment by 2030, said Ombara. To achieve
this goal, the country has lined up a number of projects.
“[To this end], Islamic finance has been
identified as one of the key areas that Kenya has a competitive advantage
regionally,” he said. “Islamic finance will therefore provide a springboard for
Kenya’s economy to achieve its targeted growth rate as an avenue towards a high
quality of life.”
“Over the next three to five years, Kenya
aims to establish itself as a key regional player, attracting capital from
major jurisdictions (including Gulf Cooperation Council countries) for
investment that would fund its ambitious projects that would lead to the
attainment of its Vision 2030.”