Interest-free Islamic banks gain currency

By Ally Jamah

One year after opening doors in the country, Islamic banks are now sitting pretty and cutting a niche for their products and services.

Two Islamic banks — First Community Bank and Gulf African Bank — launched operations last year, joining a host of conventional banks, which offer interest-free banking services, among them Barclays and National Bank of Kenya.

The two institutions are rapidly expanding across the country to tap mainly the muslim community estimated to be about 10 million, and other potential customers.

But some financial analysts have expressed doubt on the viability of Islamic banking model because interest forms is the main source of income for most banks.

Islamic banks are not allowed under Shariah law to lend money on interest because it is considered to be exploitative, but conventional banks rake in billions of shillings in interest income.

"Islamic banking is about providing useful goods and services to the society and not trading money as conventional banks do," says Mr Najmul Hassan Gulf African Bank chief executive officer. However, judging by their performance, Islamic banks in Kenya appear to be proving pessimists wrong and are gaining influence and credibility in the financial market. First Coummunity Bank (FCB), for instance, has recorded impressive results in its first half of the year at a time when some banks recorded reduced profitability due to a tough business environment.

Asset base

The bank’s deposits grew by more than 24 per cent from Sh2 billion in December last year to Sh2.6 billion in June, while total asset base saw an eight per cent growth from Sh3.1 billion to Sh3.4 billion. Gulf African Bank (GAB) is yet to publish half-year results. FCB has opened more than ten branches across the country and planning to open more in the coming months.

Gulf African Bank has also opened 10 branches, in major towns, as well as muslim-dominated regions - Coast and North Eastern provinces.

Some muslim customers are switching from conventional banks to abide by the requirements of their faith. Many others are new depositors who were previously unbanked. The two banks have at least 40,000 customers and billions of shillings under their watch.

The institutions are set to cast their nets wider in the region, where there are large populations of muslims, a fact that will boost their bottom lines. Kenya is the only country in Eastern Africa where interest-free islamic banks operate.

"We are negotiating with authorities in neigbouring countries and soon we will open branches in Uganda, Tanzania and other countries in the region," said FCB CEO Nathif Adam in a recent interview.

According to Nathif, who strived for decades to introduce interest-free financing in Kenya, Islamic banking is shedding the initial perception that it is only meant for Muslims and is attracting a large following from non-muslim Kenyans.

He cites the banks’ strict policy of not investing clients’ money in businesses linked with alcohol, pornography, gambling and tobacco as a competitive advantage. "We are filling a gap in the market because conventional banks do not seem to be providing services for morally-sensitive clients concerned about where their money is invested," he says.

heavy weights

The banks are also benefiting from cash flowing from the Middle East that is being channeled to investment projects in the country.

Business heavy weights in the Gulf countries, flush with cash are eyeing African countries as lucrative investment zones and most of this cash is handled by these institutions. Globally, Islamic banks and financial institutions are seeing a rapid rise in their profiles and profitability, especially after the financial meltdown that shook confidence in interest-based banks in Western countries. Islamic finance has become one of the fastest growing niche markets in international finance.

Islamic banks were largely immune to the crisis because ideological foundations discourage investments based on excessive speculations or debt trading. This fact has attracted endorsement from the Vatican when Pope Benedict XVI criticised Western banks for causing the global financial crisis by excessive greed and speculation.

The profile of Islamic banks in Kenya is set to receive a further boost when they up trading in the money market. Early this year, GAB invested Sh500 millio n in the Government’s Sh18billion infrastructure bond, while FCB was recently licensed to operate an Islamic investment bank and insurance subsidiary.

FCB is also handling billions of shillings belonging to Youth Enterprise Development Fund (YEDF), set up by the Government to lend to Kenyan youth. The bank was selected to advance interest-free loans to muslim youth who were previously locked out from the financing.

Among major project financed by FCB include, a modern residential housing development in Nairobi and a fleet of cars to one of the Kenya’s largest driving schools.

Last year, it was reported that the Islamic banks had posted millions of shillings of losses but analysts said initial start-up investment cannot be considered as losses since they stand to be recouped.