With key regulatory frameworks, it will be easy to make more product innovations and create a clear distinction between the Islamic banking products and the other conventional banking.
By Edwin Macharia
Banks are quickly embracing Islamic finance with the moral component of the product
design driving its appeal to more consumers across Africa.
The trend is set to boost Africa’s efforts to fill the existing gap in financial inclusion. Favoured by the developing regulatory guidelines in the countries and a growing Muslim population in the continent, banks are keen to tap into the virgin market with products tailored to satisfy this new demand. In Kenya, Barclays bank which pioneered the offering of the Islamic window with its La-Riba 2005 has kept the lead in this front.
Other banks have followed suit with another four conventional banks offering Sharia compliant products. In addition, another two fully fledged Sharia compliant banks have already established in the country, while a third one is in formation stage.
Barclays bank’s Head of Islamic Banking Molu Halkano notes that the principles which emphasize moral and ethical values in all dealings have avwide universal appeal, which is the reason why Islamic finance though still a small proportion of Global financial assets, is one of the fastest growing segments of international financial system.
“The basic fundamental principles of Islamic financial system are premised on the principle of providing for the welfare of the population by prohibiting practices considered unfair or exploitative. A key characteristic of the Islamic financial system is the strict prohibition on giving or receiving of any fixed or predetermined rate (riba/interest) of return on financial transactions,” said Halkano. “In conventional banking, the bank in providing funding to the customer acts as creditor with a guaranteed/predetermined rate of return while in Islamic banking the bank-customer relationship is a partnership in which the rewards as well as risks associated with their investment are shared). All financial transactions must be linked, either directly or indirectly, to a real economic activity; they must be backed by assets, and investments may be made only in real, durable assets”, Halkano added.
Activities such as those relating to consumption of alcohol or pork, gambling and the development of weapons of mass destruction cannot be financed. The Sharia banking product is quickly becoming attractive to many clients defying religious bounds as many people begin to realise the morality associated with the products being offered in mainstream financial services providers in Kenya.
However, experts argue that the lack of firm regulatory framework has been a key impediment to the expansion of Islamic Finance. This has hindered rapid product innovation which in many instances are left to replicate conventional banking products.
“I believe Kenya is on track to lay down necessary frameworks for the strengthening Islamic banking and finance.
“One of the challenges we have is that there is no central regulatory body although Islamic banking has been operational for quite some time now. We still don’t have central sharia board or a clear framework by which Islamic banking contracts are regulated. A positive development however is that, an Islamic Finance Project Management Office has been formed to deliver key milestones necessary for successful Islamic Finance Market in Kenya”, Mr Halkano said.
With key regulatory frameworks, it will be easy to make more product innovations and create a clear distinction between Islamic banking products and other conventional banking. Mr Halkano sees a huge potential for Islamic banking and finance in Africa given that it is home to about a quarter of the World Muslim population. Currently, South Africa, Kenya, Nigeria, Gambia, Senegal and Tanzania have operational Islamic banks/windows.
The Central Bank of West Africa is in the process of developing a framework for staring Islamic banking across the member states. Nigeria and South Africa already offer Sharia compliant funds while microfinance is being offered in Sudan, Mali and Somalia. Uganda recently established legal framework to guide the setting up of the product.
The Financial Institutions (Amendment) Act 2016 of Uganda provides for the creation of key governance structures such as Sharia board for roll out of Islamic banking. In 2014, African countries ventured into the sovereign Sukkuk market with Senegal issuing her first Sukuk valued at USD208 million. South Africa followed issuing an USD500 million Sukkuk with a 5.75 year term in the international markets. Both were oversubscribed.