Shariah finance gains ground as banks​ step up offerings

Banks are driving the uptake of Shariah-compliant products in the country driven by regulatory support and digital innovation.

The trend, which is now extending to insurance firms and Saccos, reflects the rising demand among the country’s Muslim population as well as the growing interest from non-Muslim investors seeking products that follow faith-based principles.

Regulators from the financial sector, including the Central Bank of Kenya, Insurance Regulatory Authority and Capital Markets Authority, have been supporting the move through targeted legislation and policy reforms.

This has enabled customers seeking Shariah-compliant products to enjoy access to an array of alternatives while also giving investors a chance to diversify their investment portfolios into Sharia-compliant products.

Commercial banks have taken the lead in rolling out Islamic finance solutions including savings accounts, mortgages and investment products.

Once thought of as a preserve for fully fledged Shariah-compliant banks such as Premier Bank, Dubai Islamic Bank Kenya and Gulf African Bank, now lenders such as Absa Bank Kenya are embracing such solutions, even as Saccos such as Stima Sacco take a similar direction.

Recently, Absa Bank Kenya enhanced its Shariah banking offering through the launch of La Riba Sultanah, Kenya’s first women-only Shariah-compliant account designed to support women entrepreneurs. Absa also launched La Riba Timiza and Absa La Riba Card.

“In Islamic banking, money is not a commodity to be sold at a markup called interest. For the earning to be permissible, there must be an activity that impacts the real sector –buying or selling of goods or services,” said Absa.

“In the case of La Riba Timiza and Credit card, we use the Tawaruq contract. This entails buying of a fast-moving commodity and selling it to a customer at a profit. But since the client needs the money, the product can be quickly sold to raise the cash.”

Such products point to the outcomes of regulatory support and financial institutions getting deliberate about Shariah-compliant products. For instance, Absa has an independent board for Islamic banking which ensures the products are grounded on Murabaha—an Islamic principle that forbids transactions involving charging of interest.

Since money is not a commodity in Islamic banking, lenders have to be innovative. For instance, if a customer walks to a bank and wants a loan of say Sh100,000 the bank inquires about the purpose for the loan.  If the customer wants a refrigerator, the bank will buy it and sell it to him or her at a profit.

This is because while charging or paying interest is strictly forbidden in Islamic finance, generating profit through legitimate trade and investment activities is allowed. Therefore, financial transactions are structured so that risk and reward are shared between parties as is the case with contracts such as Mudarabah (profit-sharing) and Musharakah (joint venture).

Kenya last year hit a milestone with the listing of the first Shariah-compliant bond, Linzi Sukuk, on the Nairobi Securities Exchange’s unquoted Securities Platform.

The Sh3 billion Linzi Sukuk bond aims to finance affordable housing while diversifying investment channels in line with Islam religion. Shariah-compliant investments avoid businesses involved in activities considered harmful or unethical under Islam such as alcohol, gambling, pork products and manufacturing of firearms. The bond was hailed as a key step in positioning Kenya as an Islamic finance hub in Eastern Africa.

Despite the progress in Islamic finance, Kenya faces regulatory challenges stemming from the absence of a comprehensive and Shariah-compliant legal framework.  The gap has seen conventional regulatory approaches inconsistently applied to Islamic finance products, with limited judicial and dispute resolution adaptability.

Last month saw the launch of Absa-backed Association of Shariah Compliant Service Providers of Kenya aimed at supporting in streamlining regulatory gaps in the country notably, the lack of an Islamic Banking Act and improving liquidity access for Sharia institutions.