CMA Banks on Islamic financing to address interest rates law shocks

The Capital Markets Authority (CMA) is banking on introduction of non-conventional financing options to absorb anticipated economic shocks arising from capping of interest rates, chief executive officer Paul Muthaura has said.

Last week, President Uhuru Kenyatta assented to the Banking (Amendment) Act 2015, which will cap interest rates to not more than four per cent above the Central Bank of Kenya rate.

Currently, the CBK rate is at 10.5 per cent, meaning that all loans should not be priced at more than 14.5pc, a development expected to eat into banks’ profits.

ANTICIPATED LOSS

Immediately the President signed into law the Act, listed banking institutions lost Sh45 billion worth of shares on Friday as panicky investors rushed to dispose-off their shares.

But Mr Muthaura said the loss following the announcement was anticipated and that it was “normal” and that “a lot of work needs to be done to understand the ramifications of the interest rates in the economy.”

“That was a natural course of reaction to news coming into the markets and with time we are going to fully understand the implications of the law,” he said in Mombasa.

“We are working closely with the Kenya Bankers Association and Central Bank and are keenly watching the markets,” he added.

Mr Muthaura spoke at the Serena Beach Resort on Friday, when the CMA made a presentation to counties and State agencies on available alternatives of raising funds at the capital markets.

One of the strategies the CMA was pursuing, the CMA boss said, was to introduce Sharia financing where interest rates don’t feature but have an element of risk management.

OVER RELIANCE

Mr Muthaura noted that CMA has a challenge in introducing new financing options to reduce over reliance on bank credit in the financing of various projects in the economy, adding that the cost of credit is a very crucial aspect of growth of the economy.

“We are highlighting the opportunities that come with Sharia banking with a non-interest regime in the event that we start experiencing constraints where high risk participants are unable to get credit because of the perceived high risks.

“By using non-conventional financing, we can still ensure there is an effective flow of finance going into the economy to support long term economic growth,” he said.

According to Luke Ombara, CMA acting director regulatory policy and strategy, Sharia financing addresses the element of uncertainty and speculation which prominently features in conventional financing.

In Sharia banking for instance, there is no interest charged on finances borrowed with the creditor and the borrower contributing to a pool after which the money is invested and the profits shared.

The contribution may be in cash or in form of expertise with the value being measured to establish the level of investment.

“We are working on a regulatory framework and we will look at our conventional capital markets Act to see whether there are amendments we can make to allow Islamic products to be treated like any other conventional finance instruments,” Mr Ombara said.

The CMA is also working on establishment of a Sharia Board that would screen all the products being offered so that it can determine their suitability to be treated as Sharia products, he added.