Parliamentary Budget Office backs bid to enact Sharia banking laws

Islamic financial institutions are only recognized through regulations under the Banking Act. [iStockphoto]

The Parliamentary Budget Office (PBO) has supported the proposal to amend the Central Bank of Kenya Act to allow implementation of Sharia banking principles within Islamic banks.

The office that advises members of parliament on budget planning yesterday released a Financial and Economic impact report on the proposed Central Bank (Amendment) Bill 2023, saying that its passage by the August House and subsequent implementation would attract foreign direct investment and develop overseas partnerships.

“A regulated Islamic financial framework not only supports investment flows from overseas through Foreign Direct Investments but also bolsters investor protection and confidence. It further strengthens the ongoing partnerships with foreign governments and allows for more, similar, partnerships to be developed,” reads the report in part.

The Bill currently before Parliament seeks to amend the Act to empower the Central Bank of Kenya to make regulations on licensing and supervising Islamic banks and Islamic financial institutions.

Currently, the Islamic financial institutions are only recognized through regulations under the Banking Act. The effect of such a change would see Islamic banks regulated distinctly from conventional banks.

The Bill by Wajir West Member of Parliament Yusuf Farah further proposes that Central Bank provides for the establishment of the Shariah Advisory Council which shall be responsible for formulating and monitoring policy to regulate licensing and supervising of Islamic banks and Islamic financial institutions.

The Sharia Council will be chaired by the CBK Governor and will comprise their governors, two members appointed from the CBK staff, four members with knowledge of Sharia banking and the Treasury Principal Secretary or a representative.

The Bill says this will occasion an expenditure to cater for remuneration for the Members of the Council to perform their duties.

The council will also be required to submit a report to the Cabinet Secretary with respect to its activities every six months and the CS shall present a copy of each report before the National Assembly

“The Bill will enable the council to validate all Islamic banking and products to ensure their compatibility with the Shariah principles. In addition, the council may offer inherent principles that will catalyze real economic development,” further reads the report by PBO.

A financial analysis of the Bill by the Budget office brought to the fore that the Shariah Council shall consist of seven board members which shall in addition to its meetings with the Board of Directors meet at least every quarter and each member of the Shariah Board shall attend at least two-thirds of the meetings held during a calendar year.

The Shariah Board, will hold an average of three sittings per year at the rate of Sh10,000 per sitting for members, Sh12,000 for Vice Chairperson and Sh15,000 for the chairperson.

The Board of Secretariat will comprise 20 staff, with the average cost of an administration being Sh100,000 per month. This is the average pay for the Registrar and other staff of the Board.

Annual increment is also averaged at 5 per cent, which is the average yearly inflation rate. Other administrative costs such as office rent, utilities, training, inspections, have been pegged at an average monthly cost of Sh3.5 million.

“Upon enactment of the Bill, the Council will require Sh297 million in the first year, Sh311 million in the second year, and Sh327 million in the third year,” added the report.

The Parliamentary Budget Office noted that should Kenya adopt the Bill it would join Nigeria and Kuwait which have introduced Shariah council and warned that failure to do so would see Islamic banks and Islamic financial Institutions not be regulated.

“The Finance Committee may introduce any amendment it deems appropriate, including presenting a provision that the Council shall be autonomous and self-sustaining and shall therefore not receive funding from the exchequer but from Shariah Institutions that may be regulated at a cost,” observes the report.