Outdated laws hold back growth in Islamic banking
By Morris Aron Available at: http://www.standardmedia.co.ke/InsidePage.php?id=2000032068&cid=14&j=&m=&d=
The slow rate of reforms on laws governing Islamic banking is holding back the sector’s growth potential in the region and its contribution to the economy, a leading Islamic banking specialist has said.
And as a result, Kenya risks losing investment to Uganda that has fully revised its banking rules and regulations to cater for Islamic financial institution needs.
The country has attracted the attention of investors from as far as the Middle East who are now eyeing establishing banks in the neighbouring country.
Gulf African Bank building in Nairobi. Key among challenges that Islamic banks face include the inability to invest in Government bonds.
Mr Mohamed Haris, head of corporate banking at Gulf Bank — the pioneer fully Islamic bank in the region — is now calling for a wholesome review of the laws to allow for growth of the Islamic banking model just as their conventional counterparts in the industry.
“Kenya is a regional financial hub and should take the lead in financial reforms after having taken the lead in introducing the banking model in the region,” said Haris.
Key among the challenges that Islamic banks face include the inability to invest in Government bonds as they are currently structured.
Instead, Islamic banks deposit 20 per cent of their liquidity through other commercial banks — a move that is cumbersome and blocks them from reaping returns from their investment.
Islamic banks also do not have a ready pool of bankers who understand their operation mode and have to use a lot of resources in re-training staff.
Islamic banking specialists are now calling on the Central Bank of Kenya (CBK) and other players to review laws to allow such institutions to issue Shariah compliant bonds among other investment instruments.
There is also the need for universities and colleges to review their curriculum to allow for the teaching of Islamic banking principles.
Islamic banks also have to put in extra effort in marketing their products. Though it has been slowly coming, CBK has in the past undertaken a number of reforms to allow Islamic banks to operate.
Key among them include an exception in the regulatory framework where the Prudential Guidelines were relaxed to allow Islamic banks undertake financing transactions without charging interest rates.
“There is need for a much more enabling environment to allow us compete on equal footing,” said Haris.
“While establishing ourselves in the Kenyan market, sceptics argued that financial systems based on religious tenets were unlikely to succeed, yet, three years down the line, our continued growing strength is a clear indication that there has been a shift in perception as more Kenyans embrace Islamic finance,” said Gulf African Bank CEO Najmul Hassan.