Islamic capital fuels Nairobi's hotel boom

It is Nairobi’s hoi polloi wisdom that the money, which has changed Nairobi’s hotel skyline is suspect, pirated or driven by huge Somali diaspora remittances for the decades of calm in Kenya rather than head to Mogadishu.

However, the reality is a different animal revealing that the source of the billions of shillings is merely friends and family supporting entrepreneurship with soft loans repaid without interest.

This form of social capital-like chamas is fuelling the boom; or at least behind the iconic Crown Plaza hotel that helped brick it and buy a franchise from America’s Six Continents Hotel to use the global brand.

However just like Wanjiku, the government seems unable to wrap around the idea of billions of shillings handed over without so much as a signed piece of paper but on the ancient contract of the word of mouth.

That is why the Kenya Revenue Authority is demanding Sh35.6 million from the owner of Crown Hotel, Nazir Ahmed Akbarali for about Sh2.2 billion loans.

Luxury brands

Crowne plaza was built in Nairobi’s Upper Hill around 2010 targeting international travellers with luxury brands that is recognised worldwide under the Intercontinental Hotels Group.

Later in 2017, Akbarali built a Sh5 billion mixed-use property offering office space and accommodation. The 15-floor Crowne Plaza Annexe is located next to the hotel targeting business travellers as well as companies seeking office space in the financial district.

As troves of clients walked through the gush of water springs into the carpeted floors, through pipe jazz for meetings, fine dining and fitness services, spa bar and lounge, the money flowed in.

First into Golden Jubilee Limited then to Mr Akbarali’s accounts which KRA investigators conducted audits to raise tax assessment on the hotel owners.

According to filings before the tax appeals tribunal, Mr Akbarali received Sh92 million in 2012, Sh71 million in 2013 and Sh48 million in 2014. In 2015 receipts tripled to Sh127 million and Sh122 million in 2016.

KRA sought to understand why the payments were made and they were told Crowne Plaza had received third party loans from foreigners and related parties to build the hotel. Apparently, some of the money in its bank accounts was also soft loans from directors including Michael John Jameson, his son Ali Akbarali and Tania Akbarali.

Related parties also offered loans including Airport Grand, a South African company.

“Golden Jubilee argues that money advanced for the construction of Crowne Plaza though deposited in its accounts were actually advanced either as a grant or interest-free loans to Mr Akbarali,” the ruling reads.

“It is of this reason that the amounts seemed to have been advanced by different persons, the repayments was only done to Mr Akbarali,” the ruling read.

But KRA said the hotel failed to provide evidence to back these claims.

The hotel said it was common for members of the Muslim community to advance funds to their kin and friends for purpose of setting up business and that such agreements are out of trust and hence not reduced in writing.

KRA refused to take the explanation at face value and raised the tax adding that the money was being repatriated to Mr Akbarali who owned 76 percent stake at the company and at the time, was not a resident of Kenya hence the hotel should have withheld the tax on the deemed interest of the loans.

Mr Akbarali was listed as a tax resident with a KRA pin but the taxman argued that he did not have permanent residence in Kenya nor had he been in the country for at least seven months.

“Golden Jubilee avers that Mr Akbarali has a lease agreement but the same has not been tabled before us. Thus, we are not able to determine if indeed there was a house, and the house was available to him at times continuously,” the tribunal said.

“The second test is whether Mr Akbarali was in Kenya for a period of at least 183 days in each year under review. Again in this regard no evidence was offered,” the tribunal said.

The tribunal said KRA was thus right in demanding the money from Crowne Plaza as foreign controlled and assessing deemed interest on funds received.

The rare tax fight has revealed the intricate funding models behind the boom in hotel sector that although unconventional has changed Nairobi’s skyline.

Islamic finance

It, however, raises the headache for the government in unpacking Islamic finance for regulation and taxation without clamping on capital that has been instrumental in building Nairobi’s vibrant economy.

One challenge that continues to hamper further growth of Islamic finance industry in Kenya is lack of harmonisation of Shariah standards that indeed form the very basis of compliance of the financial transactions. Kenya’s Islamic finance industry is over a decade old but has not grown to its potential as the lack of clarity among regulators has allowed unscrupulous managers to mask certain offerings as Islamic.

Central Bank of Kenya classified 15-year interest-free loans taken by Chase Bank directors through a special purpose vehicle, under the guise of Islamic banking as insider loans whose revelation brought down the lender.

At the global level, the Accounting and Auditing Organisations of Islamic financial Institutions), based in Bahrain is the authority that seeks to harmonise Shariah standards and practices.

In the absence of a robust regulatory system that recognises the unique requirements and practices of Islamic finance in Kenya, regulators have experience challenges in appreciating the role of Shariah scholars and how to facilitate them to bridge the gaps.

It is only recently that Financial Sector Deepening- FSD has helped the government establish a project management office that will help police Islamic banks and windows, two credit unions, one Takaful company, one Retakaful window and one Capital Market Unit Trust Fund.

Islamic Finance Advisory & Assurance Services, which specialises in Islamic finance, and Simmons & Simmons, a global law firm, have been tasked with setting up a national Sharia governance framework to guarantee standards and compliance with provisions of Islamic law.

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