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Islamic banking takes Kenya by storm

By | August 23rd 2011

The impact of Islamic banking is slowly being felt in the country’s financial system. It is sweeping banks it its wake, with Gulf African Bank, a fully fledged Islamic finance institution, breaking even exactly two years after launching. It took First Community Bank, the only other Shari’ah compliant bank in Kenya, three years to break even.

Gulf African Bank Chief Executive Najmul Hassan says firm’s results show that Islamic banking is a profitable venture.

Meanwhile, other banks like the United Bank for Africa Group that started operations at almost the same time are yet to record their first profit. And as at December 31, the two Islamic finance banks collectively commanded 0.9 per cent of the banking sector net loans and advances of $115 million and deposits of $171 million. The Central Bank of Kenya further said the two banks had 58, 101 deposit accounts and 2,609 loan accounts in the same period.


Law review

Najmul Hassan, the chief executive officer of the Gulf African Bank said the company’s results have shown that “Islamic banking is a profitable business in Africa.”

“More African governments are therefore reviewing their laws to accommodate Islamic banking,” he said at a recent conference.

In the last three years, the country licensed two fully Islamic commercial banks, one fully Islamic insurance company, Takaful Insurance of Africa, and the country is planning its first Islamic bond known as Sukuk.

Islamic scholar Dr. Hassan Anandwa attributes the growth of Islamic finance to raising awareness in Sub-Sahara Africa because of the growing trade interactions with the Middle East.

Anandwa, who is also a lecturer of Law and Shari’ah at Zanzibar University, says the growth of Islamic finance has been brought about by Muslims, who are now becoming more concerned with what is compliant with their faith.

One analyst said the growth of Islamic finance is linked to emerging type of investors in the green economy who are attracted to Islam financial products and who do not invest in areas destructive to the economy.

Another analyst Khalid Howladar of the Islamic Financial Institutions at the Moody’s Middle East Limited said Muslim customers in Africa have shown a strong preference for the Islamic ‘brand’ even paying a premium for the products offered by Islamic banks. 

“The industry has shown double digit growth rates although from a relative low absolute base,” he said.

The sector is bound to grow further as the ongoing shift by Africans from depending on aid to trade increases business interactions with the Middle East.

Moreover, business reforms and growth of democratic space in some parts of the continent has made Africa the third fastest-growing region in the world, after the Middle East and Asia. The number of middle-class Africans has tripled over the last 30 years to 313 million people, or more than 34 per cent of the continent’s population, according to a recent report from the African Development Bank (AfDB).

These classes of people are more informed, willing to try new financial models and take advantage of exploited business opportunities and this is also seen as fueling growth of Islamic finance.


Reformist nature

Analysts say the growth of Islamic finance in Kenya is linked to the reformist nature of the Central Bank of Kenya that reviewed its banking laws more than four years ago, and has influenced similar review in the insurance industry and now the capital markets.

Kenya’s experience with Shari’ah compliant banking is already being shared by Tanzania and Uganda as they seek to enact similar laws. Two Kenyan banks are waiting for banking laws to be reviewed in Uganda and Tanzania to expand there.

“The Tanzania insurance regulators visited recently to learn about our insurance model and we should be getting the license in the next three months,” said Hassan Bashir, the CEO of Takaful Insurance of Africa, which is also eyeing Uganda.

And in Uganda, local banks Global Trust Bank and KCB Uganda, a subsidiary of Kenya-based KCB Bank Group, have applied to roll out Islamic banking products.


Growing interest

Reports say three other banks from the Middle East have also applied to offer Islamic banking solutions. Tanzania does not have fully fledged Islamic finance regulations but it has allowed KCB Tanzania and Stanbic Bank, both conventional banks, to sell Shari’ah compliant financial products.

And as Kenyan banks expand to other countries, Islamic Bank of Khartoum from Sudan is eyeing Kenya. It recently announced plans to expand into the country.

“Kenya expansion is being planned in the medium term,” said Fadi Salim Al Faqih, the general manager of the Bank of Khartoum (BOK).  The only remaining major bottleneck to the growth of Islamic finance in Kenya is the delay in the release the guidelines that will make it legal to trade Islamic bond known as Sukuk.

The Sukuk offers a platform for the Islamic financial institutions to invest their money locally rather than taking it out of the country. The Islamic bond will also give Kenya an opportunity to tap funds from Islamic investors in particular those from the Middle East and Asia, helping to further balance its economic relations between the East and the West.



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