Kenya confident of leading East Africa after gov’t push for Islamic finance

Photo: Paul Muthaura, Chief Executive Officer, Capital Markets Authority giving a keynote address at the East Africa Islamic Economy Summit 2017

NAIROBI - In February last year delegates at the first East Africa Islamic Finance Summit in Nairobi said Kenya wasn’t doing anything to develop the industry. A year later East Africa’s biggest economy unveiled a raft of Islamic finance initiatives as it sets out to diversify its debt and investor portfolios.

“At that time (in February 2016) the government had established an Islamic finance project management office, but it hadn’t been publicised. On March 30 2017 when the budget was read, the policy statements clearly defined the official recognition of Islamic finance as a mode of finance,” said Farrukh Raza, Managing Director of UK-based Islamic Finance Advisory and Assurance Services (IFAAS) that has assisted the Kenyan government in designing the initiatives.

Following Kenya’s 2017/18 budget announcement, Reuters reported the Islamic finance initiatives included: 1) Amendments to the Public Finance Management Act to allow the government to issue sukuk; 2) Changes to stamp duty to make Islamic finance products tax neutral against interest-based transactions; 3) Exemptions to value added tax to allow returns from Islamic deposits to be eligible for deductions similar to conventional banking products and; 4) Amendments to cooperatives and savings societies.

A week after the initiatives were announced, Paul Muthaura, Chief Executive Officer of Kenya’s Capital Markets Authority, said at the East Africa Islamic Economy Summit, “We are currently working with the National Treasury as well as Parliament to make sure that any necessary refinement coming from further stakeholders consultations can be included in the amendments already in Parliament to make sure that a holistic bundle of laws can be passed as soon as possible.”

The changes are expected to be in place by June and will affect the Capital Markets Act, Cooperative Societies Act, and Sacco Societies Act.

SUKUK

The regulatory changes will set the path for the issuance of Kenya’s first sovereign sukuk, estimated to be a benchmark-sized $500 million, which the country will use to improve key transport infrastructure such as ports, roads and a major rail project. “This is an important effort to improve the country’s trade logistics capacity, and ease the barriers to trade, which raise the cost of manufacturing,” said Muthaura.

TAKAFUL

Takaful will also be introduced. Mary Nkoimu, head risk manager at Kenya’s Insurance Regulatory Authority, said that it was a lengthy process. “We started the takaful journey in 2010. When we were first approached, we understood nothing. We told them they have to comply with the Insurance Act. We went on a journey, understood the unique aspects, and now we appreciate it.”

“It took a while to convince policymakers to issue regulations on takaful. But it’s finally in the law, and we are now working on the regulations,” added Nkoimu.

VALUE CHAIN

Kenya’s initial hesitancy to push the Islamic finance agenda was rooted in political concerns. With the country suffering a number of terrorist attacks at the hands of the Somali Al Shabaab group the belief that Islamic finance is linked to terrorism is pervasive.

Jaffar Abdulkadir, the head of Islamic finance at the country’s largest bank by assets, Kenya Commercial Bank, said this belief needs to be constantly challenged and efforts can raise awareness of what Islam stands for: fairness, balance, and serving needs of people above profit. “Islamic finance helps to develop economic power, helps eradicate poverty, create wealth and thus combats terrorism,” said Abdulkadir.

KCB first introduced Shariah-compliant products in 2005 and scaled up over a decade to launch an Islamic unit in 2015. Standard Chartered's Saadiq also has a footprint in Kenya and the market is expanding as Dubai Islamic Bank awaits a license from the central bank to begin operating.

Beyond ideals, immediate practical reasons cited for the industry push are the need to attract international funds as Kenya chases an estimated $50 billion for infrastructure projects, and to better serve the banking and financial needs of the country’s Muslims.

"There’s a growing demand for Islamic finance products,” said George Otieno, CEO at Africa Trade Insurance. “We’re seeing a systematic development of the bond market in Kenya to tap into an international pool of money. And there are 4 million Kenyans looking for Shariah-compliant products.”

Jared Osoro, the Director of the KBA Centre for Research on Financial Markets and Policy in Kenya, said there is recognition of Islamic finance’s potential in Kenyan banking. “A number of commercial banks are offering Islamic finance windows, which speaks to the example of South Africa riding on established brands to offer new products. We’re seeing banks stretching boundaries in the capital market space.”

From the home of the successful mPesa mobile money transfer service, Osoro also said that Islamic finance can add to Kenya’s technology innovation. “We’ve seen banks leveraging tech substantially beyond payment, but for savings and credit provision. In that way, we can see Islamic finance riding that platform.”

REGIONAL INFLUENCE

There is now the belief that Kenya can lead East Africa in Islamic finance.

At the market level, KCB also has presence in neighbouring Burundi, Rwanda, South Sudan, Tanzania, and Uganda and it is now eyeing an Islamic finance push into Somalia.

At the national level, Kenya's government wants to develop Nairobi as a regional financial hub, including Islamic finance, and the recent progress made will boost the country’s and region’s economy, said Mona Doshi, a partner at law firm Anjarwalla and Khanya.

As part of these efforts, Kenya is stepping up its participation in Islamic finance infrastructure body the Islamic Financial Services Board (IFSB), especially to address capacity building.

Justice Agoti, Senior Market Development Officer at Capital Markets Authority said the country needs more qualified professionals who understand Shariah-compliant products. “We’re now an associate member of the IFSB. We have less than 20 qualified experts in Kenya. The IFSB will host training on Islamic finance to enable us to have certified experts.”

Kenya’s lead is having an impact on the region. Pierre Celestin Rwabukumba, CEO of the Rwandan Stock Exchange, said Kenya has shown Islamic finance is a viable option. “There are opportunities for Islamic banks in East Africa, and the population exists. Kenya has just passed a bill. As Rwanda, we’re looking into it. The markets are ready, and there’s a supply and demand.”

According to IFAAS’ Raza, the advances are significant for the Kenyan economy and the East Africa region. “As a consultant I’ve worked in 39 countries. I’m not saying this to flatter Kenya, but the level of commitment I’ve seen here is unsurpassed. The Kenyan model can be a beacon for other systems. “

In other sectors of the Islamic economy, Najib Balala, cabinet secretary for the ministry of tourism, said there are plans to publish guidelines for hotels and lodges that want to adapt to Muslim needs, in order to attract Muslim travellers.

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