Wednesday, September 19, 2012

Islamic Banking Successful In Africa

Islamic Banking Africa
Centuries ago, the monsoon winds were credited for bringing trade ships from the Indian sub-continent and the Arab peninsula to the East African coast, carrying valuables like silk, pottery, metal goods, jewelery and medicine.

The latest offering that these trade winds have wafted down the eastern coast of Africa is Islamic finance. And as happened with the items, the first port of call was Kenya and from here Islamic finance is sweeping across the region.

According to the Islamic Banking Competitiveness Report, Islamic finance asset have grown at double-digit rates over the past five years and in 2012 exceed $1.1 trillion.

International estimates predict  that up to half of the savings of the Islamic of the Islamic world will end up being managed by Islamic financial institutions . The growth rates of Islamic banks globally have outstripped those of the conventional institutions (threefold, according to the IMF). And because of their ethical and risk-sharing approach, Islamic financial institutions shrugged off the financial crisis, making them more attractive and helping contribute to their growth beyond the traditional areas of Asia and the Middle East.

What this means is that Islamic finance can no longer be ignored. At 1.5 billion, the Muslim population is the second largest in the world. In Africa, 540 million people -50 percent of the population are Muslim. With only 38 Islamic financial  institutions operating on the continent, it is considered to be a huge untapped market.

Estimates suggest that 9 million Kenyans are Muslims, standing at 11 percent of the country’s population and the rapid uptake of Islamic products has led several conventional banks to introduce sharia-compliant products to tap the Muslim population.

Kenya is considering to be among the African countries leading in sharia- complaints services. Islamic banking started in Kenya in 2005 when Barclays, a conventional bank, offered current account products through its Islamic window, LaRiba. But it was only in early- First Community and Gulf African- opened for business. This created the first link in a chain of financial inclusion that heralded the establishment of Islamic finance in East Africa.

The launch of an Islamic insurance company, Takaful Insurance Africa, in 2011 was the second link. Six months ago, the third link in the chain was created when First Community fund Manager was licensed, an institution that will grow into an investment bank with time.

Before year end, two more links will be added: an Islamic pensions scheme and the most important cog in the wheel around which all other Islamic institutions will spin, a basket of shares at the NSE which will be screened for consistency with Islamic law. The availability of sharia-compliant investment products at the capital markets will work in a complementary manner to fund management.

In February 2009, Kenya’s pioneering Islamic lender First Community Bank participated in a $11 ,million sukuk issue from the government, which was split between itself and Gulf African Bank and raised $21billion. First Commercial Bank this year announced its intention to launch a sukuk through its newly-formed investment bank.

Sukuks are sharia-compliant and tradable asset-backed, medium-term investment certificate that have been issued internationally by the governments, quasi-sovereign agencies and corporations. They represents ownership claims in pool of investment assets or services. Their launch in Kenya allow sharia-compliant banks to participate in government debt market, which is a major source of interest income for conventional financial institutions, says Mr. Kabaki Wamwea, executive director of Dyer & Blair, an investment bank in Kenya.

The challenge with sukuks in Kenya is lack of an enabling legal framework complete with tax neutrality measures. Islamic finance industry players say Uganda and Tanzania have a better chance of issuing a sukuk than Kenya. However, the amendment of section 45 of the Central Bank of Kenya Act last year to recognize the payment of a “return” rather than “interest” on government securities was a major win, as it opened up the spectrum of sharia-compliant investments in Kenya .

Another contradiction between sharia law and Kenyan law is the treatment of zakat. Under Islamic law, 2.5 percent of the company’s liquidity has to be declared at the end of the year as zakat, an obligatory alms giving. Kenya’s taxman, Kenya Revenue Authority, considers this amount as a profit and taxes it whereas in other countries zakat is tax exempt.

The irony, however, is that while Kenya’s regularity framework is playing catch-up on sharia, Islamic institutions are operating in an over regulated environment since in addition to following prudential guidelines that are enforced by their boards, they are also evaluated by a sharia board that follows standards of equity and fairness and protects the interests of policy holders.

FCB Capital’s First Ethical Opportunities Fund (FEOF), which was licensed in March, delivers a choice of investment opportunities, in addition to sukuks, allowing sharia investors to construct balanced portfolios across a range of asset classes.

The other major financial inclusion is the creation of an Islamic cooperative of people who cooperate for their mutual social, economic and cultural benefit, and who follow the principles of Islamic law. 2012 has been identified ads the year cooperatives by the United Nations. As businesses driven by values, and not just profit, cooperatives fit naturally into the principles of Islamic law and enhance the financial opportunities offered to Islamic SMEs and micro finance institutions.

The other country in which Islamic finance is growing rapidly is Mauritius. Although it has only 200,000 Muslims in a national population of 1.8 million, and its first Islamic bank was recently licensed in October 2009, the Bank of Mauritius has been busy creating the investment banking. The small Indian Ocean Island has already attracted the Tata Indian Sharia Equity Fund, suggesting that Mauritius is positioning itself as the offshore financial centre for the Islamic banking in the same way that Caribbean nations like the British Virgin conventional funds industry.

With this full circle in place, funds from other East African countries will be attracted to Kenya, while local sharia funds that are being invested outside will be retained. Research costs and compliance concerns incurred by sharia-compliant investors in Kenya will also reduce, including oil, real estate and mega infrastructure  projects will thrive. Innovation will open up and Kenya will be positioned as the Islamic finance  gateway to East Africa. Even as the Capital Markets Authority (CMA) plans its own sharia-compliant index, it signed a Memorandum of Understanding with the sharia compliant Somalia Stock 
Exchange Investment Corporation to establish links between the bourses.

Last Year, leading financial news providers Bloomberg and Thomson Reuters set up Islamic finance platforms to provide analytical tools to maximize investment performance in the rapidly growing market for sharia-compliant products and services.

Today, Islamic institutions can be found in developing economies where financial sector is almost entirely Islamic (such as Iran and Sudan) or where Islamic and conventional financial systems co-exist (including Indonesia, Malaysia, Pakistan and the United Arab Emirates). They can also be found in the developed economies (such as Europe and the United States) where a small number of Islamic financial institutions have been established and large conventional banks have opened Islamic financing windows.

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