Lack of relevant laws constrains growth in Islamic finance sector
Posted Saturday, April 16 2011 at 18:11
- Sharia-compliant banking, insurance have gained ground but need legislation that responds to the industry’s needs
With Islamic banking and insurance gaining ground in the country, there are calls for new legislation by banking and insurance regulators to enable the companies to invest in Sharia-compliant securities.
Two banks – Gulf African and First Community – are operating fully pursuant to Sharia-compliant banking principles, although up to five other commercial banks are also offering Sharia-compliant banking products alongside conventional products.
And three weeks ago, Kenya’s first Islamic insurance firm, Takaful Insurance, was launched. The company opened its first branch in Eastleigh, Nairobi last week.
With these developments, a comprehensive change is needed in Kenyan banking laws to implement interest-free economic systems, according to Islamic banking scholar Ali Mohamed.
Mr Mohamed said the Insurance Regulatory Authority should limit the number of licences of takaful (Islamic insurance) companies and focus on the development of standards and regulations for this industry.
IRA chief executive Sammy Makove said that by licensing the first Islamic insurance firm in East, Central and Southern Africa outside Sudan, Kenya had shown leadership. He asked the management of the firm to turn the expectations of the market into reality.
Mr Mohamed said that although IRA supports Islamic insurance, challenges abound.
“Lack of a regulatory framework, sound corporate governance, skilled human capital and Sharia-compliant investment strategy are some of the main challenges for this new industry,” Mr Mohamed, who also heads a Qatari Islamic investment firm’s audit, told Sunday Business.
Islamic bonds and bills
He said the Central Bank of Kenya should to pass relevant legislation to allow Sharia-compliant debt instruments such as Islamic bonds and bills so that Islamic insurance companies can invest.
The absence of these instruments, he said, also prevented Islamic banks from investing in long-term and short-term government instruments.
Takaful funds cannot be invested in conventional interest-based bonds or in equities of companies involved in activities prohibited by Islamic law, such as the sale of alcohol, tobacco, weapons, pork or gambling.
Islamic banking prohibits interest but allows profit-sharing. Therefore, Sharia-compliant lending products have an element of “trading” and “holding of fixed assets” as a bank has to buy and sell financed assets.
Mr Mohamed said one of the alternatives for Islamic banks and insurers would be issuance of sukuk bonds, which are structured to be in compliance with Sharia, or Islamic law.
They have a maturity that is determined in advance and are backed by assets, which makes it possible for the investor to earn a return from the profits derived from the assets.
Tsavo Securities chief executive Fred Mweni said that Kenya’s capital market is deep enough to accommodate Sharia-compliant instruments if Islamic financial institutions come up with new ideas and products.
“Players have not been innovative enough because they are supposed to come up with a product and take it to the regulators for approval,” he said.