Islamic Banking Africa
Centuries ago, the monsoon winds were credited for bringing
trade ships from the Indian sub-continent and the Arab peninsula to the East
African coast, carrying valuables like silk, pottery, metal goods, jewelery and
The latest offering that these trade winds have wafted down
the eastern coast of Africa is Islamic finance. And as happened with the items,
the first port of call was Kenya and from here Islamic finance is sweeping
across the region.
According to the Islamic Banking Competitiveness Report,
Islamic finance asset have grown at double-digit rates over the past five years
and in 2012 exceed $1.1 trillion.

International estimates predict  that up to half of the
savings of the Islamic of the Islamic world will end up being managed by
Islamic financial institutions . The growth rates of Islamic banks globally
have outstripped those of the conventional institutions (threefold, according
to the IMF). And because of their ethical and risk-sharing approach, Islamic financial
institutions shrugged off the financial crisis, making them more attractive and
helping contribute to their growth beyond the traditional areas of Asia and the
Middle East.
What this means is that Islamic finance can no longer be
ignored. At 1.5 billion, the Muslim population is the second largest in the
world. In Africa, 540 million people -50 percent of the population are Muslim.
With only 38 Islamic financial  institutions operating on the continent,
it is considered to be a huge untapped market.
Estimates suggest that 9 million Kenyans are Muslims,
standing at 11 percent of the country’s population and the rapid uptake of
Islamic products has led several conventional banks to introduce
sharia-compliant products to tap the Muslim population.
Kenya is considering to be among the African countries
leading in sharia- complaints services. Islamic banking started in Kenya in
2005 when Barclays, a conventional bank, offered current account products
through its Islamic window, LaRiba. But it was only in early- First Community
and Gulf African- opened for business. This created the first link in a chain
of financial inclusion that heralded the establishment of Islamic finance in
East Africa.
The launch of an Islamic insurance company, Takaful
Insurance Africa, in 2011 was the second link. Six months ago, the third link
in the chain was created when First Community fund Manager was licensed, an
institution that will grow into an investment bank with time.
Before year end, two more links will be added: an Islamic
pensions scheme and the most important cog in the wheel around which all other
Islamic institutions will spin, a basket of shares at the NSE which will be
screened for consistency with Islamic law. The availability of sharia-compliant
investment products at the capital markets will work in a complementary manner
to fund management.
In February 2009, Kenya’s pioneering Islamic lender First
Community Bank participated in a $11 ,million sukuk issue from the government,
which was split between itself and Gulf African Bank and raised $21billion.
First Commercial Bank this year announced its intention to launch a sukuk
through its newly-formed investment bank.
Sukuks are sharia-compliant and tradable asset-backed,
medium-term investment certificate that have been issued internationally by the
governments, quasi-sovereign agencies and corporations. They represents
ownership claims in pool of investment assets or services. Their launch in
Kenya allow sharia-compliant banks to participate in government debt market,
which is a major source of interest income for conventional financial
institutions, says Mr. Kabaki Wamwea, executive director of Dyer & Blair,
an investment bank in Kenya.
The challenge with sukuks in Kenya is lack of an enabling
legal framework complete with tax neutrality measures. Islamic finance industry
players say Uganda and Tanzania have a better chance of issuing a sukuk than
Kenya. However, the amendment of section 45 of the Central Bank of Kenya Act
last year to recognize the payment of a “return” rather than “interest” on
government securities was a major win, as it opened up the spectrum of
sharia-compliant investments in Kenya .
Another contradiction between sharia law and Kenyan law is
the treatment of zakat. Under Islamic law, 2.5 percent of the company’s
liquidity has to be declared at the end of the year as zakat, an obligatory
alms giving. Kenya’s taxman, Kenya Revenue Authority, considers this amount as
a profit and taxes it whereas in other countries zakat is tax exempt.
The irony, however, is that while Kenya’s regularity
framework is playing catch-up on sharia, Islamic institutions are operating in
an over regulated environment since in addition to following prudential
guidelines that are enforced by their boards, they are also evaluated by a
sharia board that follows standards of equity and fairness and protects the
interests of policy holders.
FCB Capital’s First Ethical Opportunities Fund (FEOF), which
was licensed in March, delivers a choice of investment opportunities, in
addition to sukuks, allowing sharia investors to construct balanced portfolios
across a range of asset classes.
The other major financial inclusion is the creation of an
Islamic cooperative of people who cooperate for their mutual social, economic
and cultural benefit, and who follow the principles of Islamic law. 2012 has
been identified ads the year cooperatives by the United Nations. As businesses
driven by values, and not just profit, cooperatives fit naturally into the
principles of Islamic law and enhance the financial opportunities offered to
Islamic SMEs and micro finance institutions.
The other country in which Islamic finance is growing
rapidly is Mauritius. Although it has only 200,000 Muslims in a national
population of 1.8 million, and its first Islamic bank was recently licensed in
October 2009, the Bank of Mauritius has been busy creating the investment
banking. The small Indian Ocean Island has already attracted the Tata Indian
Sharia Equity Fund, suggesting that Mauritius is positioning itself as the offshore
financial centre for the Islamic banking in the same way that Caribbean nations
like the British Virgin conventional funds industry.
With this full circle in place, funds from other East
African countries will be attracted to Kenya, while local sharia funds that are
being invested outside will be retained. Research costs and compliance concerns
incurred by sharia-compliant investors in Kenya will also reduce, including
oil, real estate and mega infrastructure  projects will thrive. Innovation
will open up and Kenya will be positioned as the Islamic finance  gateway
to East Africa. Even as the Capital Markets Authority (CMA) plans its own
sharia-compliant index, it signed a Memorandum of Understanding with the sharia
compliant Somalia Stock 
Exchange Investment Corporation to establish links
between the bourses.
Last Year, leading financial news providers Bloomberg and
Thomson Reuters set up Islamic finance platforms to provide analytical tools to
maximize investment performance in the rapidly growing market for
sharia-compliant products and services.
Today, Islamic institutions can be found in developing
economies where financial sector is almost entirely Islamic (such as Iran and
Sudan) or where Islamic and conventional financial systems co-exist (including
Indonesia, Malaysia, Pakistan and the United Arab Emirates). They can also be
found in the developed economies (such as Europe and the United States) where a
small number of Islamic financial institutions have been established and large
conventional banks have opened Islamic financing windows.


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