Capital Markets Authority CEO Wycliffe Shamiah (left), Chairman Ugas Sheikh Mohamed (right) and Islamic Finance professor and author Ahcene Lahsasna launch the Kenyan Version of the “Q and A in Islamic Finance” book in Nairobi on October 16.
The Capital markets Authority (CMA) and stakeholders within the Islamic finance sector have agreed to work together in coming up with shariah-compliant investment products amid liquidity challenges among lenders.
The challenges of the shariah-compliant banks stem from stringent Islamic values seen to deter them from investing in government securities and participating in the interbank market where conventional banks borrow overnight to meet liquidity shortfalls. Shariah principles bar payment or acceptance of interest or “riba”.
Salihin Shariah Advisory Kenya managing director Jaafar Abdikadir said liquidity management is among the biggest challenges facing shariah banking in Kenya.
“These banks have nowhere to invest excess liquidity and nowhere to tap liquidity,” Mr Abdikadir said during an Islamic finance banking forum in Nairobi on Wednesday. Other challenges, he said, include lack of an enabling regulatory framework, weak institutional and professional capacity and a poor understanding of shariah matters.
Kenya currently has three full-fledged shariah-compliant banks—Gulf African Bank, Dubai Islamic Bank and Premier Bank (formerly First Community Bank).
In lucrative interbank money market, banks extend loans to one another for a specified term, with most loans having maturities of one week or less. Such loans are made at the interbank rate, also called the overnight rate, if the term of the loan is overnight.
“I’m increasingly convinced that we need to focus on building more Islamic investment banks. We need to find a way to start building our own funds, to start creating sukuks. We have talked about it for a long time and the only sukuk that has come out is Ksh3 billion ($23.25 million),” said Suleiman Shahbal, founder of Gulf African Bank and a member of the East African Legislative Assembly.
Sukuk is an Islamic financial certificate, similar to a bond. The issuer of a sukuk sells an investor a certificate and uses the proceeds to purchase an asset that the investor has direct partial ownership interest in. The issuer must also make a contractual promise to buy back the bond at a future date at par value.
Tanzania launched Islamic banking in 2008, and it has since grown in popularity in owing to the fact that almost half of the population is Muslim.
In Uganda, President Yoweri Museveni in March launched Salaam Bank, the first Islamic lender in the country. The bank received an operating licence from the Bank of Uganda late last year after the Ugandan Parliament passed a Bill allowing Islamic banking in the country.
Kenya’s CMA approved the country’s first-ever sukuk bond in 2023 to raise Ksh3 billion ($23.25 million) for the development of housing projects.
