Banking on faith and ethics

By Jackson Okoth

Competition for clients in the local insurance business is expected to intensify in the coming months. This follows the entry of Gulf African and First Community Bank (FCB) into the industry, effectively expanding the portfolio of Islamic finance products available in the Kenyan market.

Islamic banking is the fastest growing segment in the global financial industry with an ability to withstand international shocks such as the global financial crisis. Photo: Boniface Thuku/Standard

While First Community Bank is already marketing its insurance products through Takaful Insurance Agency, Gulf African Bank is expected to enter the market in the next six months. Gulf African bank has already received a licence from the Insurance Regulatory Authority (IRA) to establish an insurance firm. This company is to be formed in the next six months.

These new Shariah-compliant products and services are expected to cater for the Muslim community, which has hitherto been left out by an industry offering conventional products that do not conform to their religious beliefs.

“There is a substantial segment in the market, true Islamic finance users, who will never use or want to touch conventional finance,” said Suleiman Shahbai, Chairman of GulfCap Investments LLC, a Dubai-based investment firm sponsoring Gulf African in the insurance venture. GulfCap Investments LLC is putting in an initial Sh1 billion into the rollout.

Residual cash

The entry of Shariah-compliant insurance products, also known as Takaful, into this market is expected to stir competition as clients go for available choices in the market.

Under the Takaful model, those seeking insurance cover will pay premiums into a collective fund from which payments will be made to members who suffer from the risks covered.

Unlike conventional insurance practice, any residual cash after all payments have been made in the financial year is paid out to members as profit.

“Muslims feel alienated from the insurance sector as products offered go against the Islamic beliefs, including excessive uncertainty and investment in non-compliant businesses such as gambling or alcohol,” said Shahbal.

First Community Bank is planning to initially market motor and home insurance designed to meet the needs of customers looking for Shariah-compliant insurance solutions.

FCB Takaful Insurance Agency will be offering these products in partnership with insurance companies, which will underwrite them, in line with the Sharia law under the supervision of FCB Sharia board.

“We are planning to introduce more socially responsible financial solutions in future,” said Nathif Adam, First Community Bank Managing Director.

Players in the local Islamic finance are seeking for more opportunities as demand for Shariah-compliant products and services soar.

Demand for sukuk

On the list are Treasury bills and bonds, micro-finance and the property market.

“We need to grow wealth in society by getting into all investment avenues that do not attract interest”, said Namjul Hassan, Gulf African Bank managing director. Gulf African invested Sh500 million in the Sukuk portion of the government infrastructure bond last year and got a 13.5 per cent return. But it has been urging for the introduction of a sovereign Sukuk, owing to a huge appetite for it, especially in the Middle East market.

“There is a huge demand for Sukuk. While the local bond market is vibrant there, the pricing of Sukuk may be slightly more competitive,” said Hassan.

The entry of Shariah-compliant banks into the insurance business is happening as they position to venture into the capital markets. In June this year, CMA disclosed that a team of financial experts has been commissioned to Mauritius to study the feasibility of introducing Sharia products in the local capital markets.

“We have Shariah products in the banking arena while in the capital markets we don’t have them yet. We will work with you to facilitate such products,” Stella Kilonzo, chief executive Capital Markets Authority (CMA) said earlier this year.

While there exists a huge potential in Shariah-compliant products, the market has largely remained untapped. Among the investment products under consideration include Shariah-compliant bonds and equities in publicly quoted companies on the Nairobi Stock Exchange (NSE). Introduction of these products are expected to create new avenues for growth and development of the local capital markets.

Fastest growth

Already on the blocks is Apex Africa Capital Ltd, which plans to introduce the first Shariah-compliant product for the equities segment into East Africa.

Islamic finance is so far the fastest growing segment in the global financial industry with an ability to withstand international shocks such as the global financial crisis.

“We need to understand this business model that will support our relative comparative advantage in the EAC region,” Njuguna told the second Gulf African Bank Annual East & Central Africa Islamic conference in Nairobi in May.

The concept of Shariah-complaint banking has emerged as an alternative vehicle for mobilisation and supply of finance.