The first Islamic finance Conference in the region throws up unconventional banking practices

The Islamic finance market in Africa is potentially worth close to $235 billion, hence positioning the continent as the next growth region for such finance.

Facets of Islamic banking such as the prohibition of interest and involvement in economic activities which are morally unacceptable  makes it attractive to many. Islamic banking eschews charging interest on loans, hence making it a safe alternative to the excessive greed characterised by conventional banking that led to the global financial crisis. In Kenya, Uganda and Tanzania the reality of the sizable number constituted by the Muslim community is something that cannot be ignored.

CRUNCH

Central Banks in the region are supporting and working on a structure that will eventually lead to the flotation of Shari’ah compliant bonds and Treasury bills. The sukuk bonds, which bar payment of interest, are seen as a move to tap into the enormous cash flowing into Africa from the Gulf region. Alex Nandi, Deputy Director Banking Supervision at the CBK, remarks, “We are still waiting for the structured sukuk to cover bonds and the Treasury bills market.”

CBK has been seeking amendment of the Banking Act to accommodate the Islamic banking alternative. As a regulator, CBK is more concerned with understanding the product and sitting down with banks to look at their framework.

Conventional banks enjoy the liberty of trading in bonds and Treasury bills but Islamic banks are constrained by Shari’ah law, a situation that is compounded by the lack of an enabling environment by regulators. Since the dark cloud brought about by the global credit crunch, conventional banks have been heavily adversely impacted, therefore giving their Islamic counterparts the upper hand that has seen them enjoy increasing popularity. Two years ago, CBK issued licenses to Gulf African Bank and First Community Bank. The Gulf states are eyeing African countries as incentive investment destinations and, as Mr Suleiman Shahbal, the Gulf African Bank Chairman, emphasises, there is a huge appetite among businesspeople from the Gulf region to invest in Africa.

Gulf African Bank invested KSh500 million in the sukuk portion of the government infrastructure bond issue last year, receiving a 13.5 per cent rate of return. In 2009, the bank earned KSh56.6 million from its investment in government securities. Shahbal says, “There is a huge increase in the demand for our products and services and we plan to start a micro-finance organisation soon. We are happy that the Central Bank is today very competent in understanding Islamic banking”.

RESILIENT

A new trend has been witnessed through the tapping into mutual funds and takaful co-operative insurance, where members contribute a certain sum to a common pool with the aim of bearing one another’s burden and not for profit.

According to Mr Jawad Ali, Managing Partner, King and Spalding, it is safer to deposit your money with an Islamic bank as they are less likely to fail. Moody’s Investor Service, a leading provider of independent credit ratings, research and financial information to capital markets, states that Islamic financial institutions are resilient but not immune.

“The crumbling of the US financial sector is a wake up call to all financial institutions to say Islamic banking is basic, safe, simple and sturdy.  I believe the Islamic finance industry is at a critical juncture and it’s protected by investors, banks and lawyers and doesn’t imitate conventional banking,” says an emphatic Ali.

Recent significant developments have taken place in Islamic retail banking and finance products that have seen them gain popularity with non-Muslim countries beacause of  their competitiveness and efficiency.  The history of Islamic banking took root in Egypt in the 1960’s and over 300 institutions in 75 countries with Dubai and Bahrain as undisputed leaders in Islamic finance whereas Hongkong, Kuala lumpur and Singapore to dominate in Asia.

AMENDMENT

In the region, Tanzania has only two banks; KCB and Stanbic, that have opened a window for Islamic banking. Agapiti Kobello, Director, in Banking supervision, Central Bank of Tanzania says Islamic banking is a new area in which they encourage their banks to go into.

“We admit that the banking industry is ahead of the regulator and so we are taking a pro-active approach. In line with this, we have undertaken to send some of our staff to undergo training and learn the models being applied in Egypt and Bahrain. We hope to make a comprehensive amendment of the laws in order to accommodate this kind of banking.”

On the other hand, Justine Bagyenda, Executive Director Supervision Bank of Uganda terms Islamic banking as the fastest growing industry in the World and lack of regulations are the reason East-Africa is lagging behind. “Sudan and Egypt have already done it, it’s time for practitioners and regulators in the region to come in and do it.”

Conventional banks, she says, are considered obscene profit making vehicles. Uganda is considering comprehensive training programs for stakeholders in order to create a level playing field for the EAC region that will facilitate Islamic banking

By DEA CORRESPONDENT