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The play to deepening the adoption of Islamic Finance in East Africa

Nairobi Summit urges region to speed up roll out of Sharia-compliant banking products, challenge common misconceptions, to spur regional development

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By Ben Oduor

Islamic finance has already been mainstreamed within the global financial system, with the potential to help address the challenges of ending extreme poverty and boosting shared prosperity, according to the World Bank.

The global lender estimates Islamic finance’s annual growth to between 10 and 20 per cent, with the financing assets at roughly US$2 trillion. This covers bank and non-bank financial institutions, capital markets, money markets and insurance (Takaful).

Despite the promising numbers, uptake in East Africa has been rather slow. Mona Doshi, local partner at Anjarwalla& Khanna, East Africa’s largest corporate law firm says there is need for regional partner states to adopt stand-alone Islamic finance laws to regulate Sharia-compliant banking.

This will enable banks have a streamlined platform where they can easily sell both Islamic finance products and conventional products without contradicting governing legislation.

“Currently we don’t have a country with a stand-alone Islamic Finance Act in the region, a move that has pushed (sharia-compliant) products to operate within conventional laws. Thus, when there’s contradiction between conventional laws and Islamic sharia principles, exceptions are granted to Islamic Finance from certain conventional laws.”

It’s against this backdrop that her firm, together with the associate Anjarwalla Collins & Haidermota (UAE), embarked on drafting Islamic Finance Act for Somaliland.

The East Africa Islamic Economy Summit 2018 held in Nairobi, Kenya highlighted some of these issues under the theme, Financial Inclusion & fin-tech to unlock East Africa potential.

In Kenya, Doshi says, stakeholders have taken strides to implement legislations that have paved the way for the adoption of Islamic Finance, amending the Income Tax Act, the VAT Tax Act and the Stamp Duty Act to put Sharia-compliant products at a level playing field with the conventional products. The relevant legislation has also been successfully amended to facilitate the issuance of a sovereign Sukkuk, a sharia-compliant bond.

“We’re just waiting for the (Kenyan) government to issue the first sovereign Sukkuk,” she says, echoing sentiments of former Attorney General Githu Muigai, who, in 2016, told Reuters that government could issue the debut Islamic bond under current laws as the sector awaits parliament to address changes regarding consolidation of financial regulations.

Kenya has two Islamic banks, established a decade ago, and other commercial lenders offering Islamic banking windows to clients.Cognizant of the surging fin-tech advancements in Kenya in the last decade, the Islamic economy is at the moment exploring ways of adopting Sharia-compliant products through financial technology solutions in an effort to be at par with conventional services.

Uganda, on the other hand, recently amended its banking legislation to accommodate Islamic Finance. The banking sector is currently waiting for certain legislations to be passed to allow for full roll out of products.

Shellomith Iringu, Director and head of Banking and Finance Department at MMAKS Advocates in Uganda, says the country amended the Financial Institutions Act in 2016 to introduce Islamic Finance. However, the regulations that specifically govern Islamic banking, she says, were just passed in February this year, rating their adoption at an infant stage.

“No bank in Uganda has been issued a license to operate sharia-compliant products nor has the Bank of Uganda received any application to that effect. However, more is expected in the sector especially following the opening that the legislation has created,” she says.

Iringu attributes the slow uptake to the wide knowledge gap in the country. She says there’s common misconception of the concept and many don’t understand the offers. Thus, she advises, conventional banks will need to build strong capacity and extensively create awareness to the public before the products are accepted.

“The bank of Uganda is, despite not having set up a Central Sharia Advisory Board to built capacity, tried to bridge the knowledge gap through facilitating partnerships between local law firms with the international ones to share knowledge on the concept and organized workshops for such forums as well as sent some officers to the bank of Indonesia to benchmark on Islamic Finance,” she says.

The country’s banking sector, which currently struggles with high interest rates and low turnout of borrower, is also a bit skeptical. Iringu says most banks in Uganda are shying away from scaring their customers with the new products at the nascent stages before full regulatory approval. They are, thus, on a ‘wait and see’ mode, she says.

The Rwandan banking sector is taking steps to adopt Islamic Finance. According to Julien Kavaruganda,Managing Partner at K-Solutions and Board member at the Bank of Kigali,a larger population is not only struggling with lack of knowledge in the concept, but also misconceptions regarding its products. The banking sector, he adds, has also made baby-steps in introducing the new concept.

“We’re not prepared at the moment for Islamic Finance. If you dangle the issue, most people would generally ask you, ‘what is Islamic Finance and what is it all about?’ For those that have heard about it, they believe it’s a thing for the Muslims.

“We have had substantive negotiations between the Central Bank and KCB Bank Kigali in trying to look into the opportunities for Islamic Banking in Rwanda.,” Kavaruganda says.

Late January 2016, a delegation from Malaysia had a two-day state visit to Rwanda to explore opportunities for Islamic finance and financial system.

The four-member delegation, led by Saiffudin Khalid, the country’s trade commissioner, held discussions with bankers, insurers and government institutions in what would ‘make Rwanda, especially Kigali, the pilot ground to start Islamic banking  financial system activities in the region’, the Commissioner reportedly said.

But two years later, Kavaruganda tells the Nairobi Summit: “There’s still no Islamic finance in Rwanda. However, the Central Bank is ready for such investments.”

In Tanzania, Islamic Banking has gradually taken root in recent times. According to an overview of Islamic Finance education in Tanzania by Khalfan Abdala, Manager at Gulf African Bank, there are not less than six financial institutions offering Islamic Finance services as well as three academic institutions offering related courses from certificate to post-graduate levels.

He says while Bank of Tanzania has been offering short term training courses at times, professional associations like Tanzania Bankers’ Association are yet to integrate Islamic Finance subjects in their professional courses.

World Bank strategy

In cognizance of its contribution to various economies, World Bank says its involvement in Islamic Finance is directly linked to the work on reducing poverty, expanding access to finance, developing the financial sector and building financial sector stability and resilience in client countries.

“Despite its recent years of rapid growth, Islamic Finance is still in its early stages of development, and it will need to address several challenges. We’re supporting our client countries to strengthen the legal, regulatory and institutional foundations of Islamic Finance,” a statement from the global lender says in part.

 

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