Budget office backs plan to regulate Islamic banks, financial institutions

Financially struggling Shariah-compliant lender First Community Bank, which was taken over by Mogadishu-based Premier Bank.  

Photo credit: File | Nation Media Group

The enactment of the Central Bank (Amendment) Bill, 2023 into law will bolster investor confidence, budget experts have told MPs.

An analysis of the proposed legislation by the Parliamentary Budget Office (PBO) indicates that a regulated Islamic financial framework will increase the confidence of investors.

The Bill, sponsored by Wajir West MP Yusuf Farah, seeks to amend the Central Bank Act, Cap 491 to empower CBK to license and supervise Islamic banks and Islamic financial institutions.

The proposed legislation that is currently before the National Assembly Budget and Appropriations Committee establishes the Sharia Advisory Council of the CBK, which shall have the responsibility of formulating and monitoring of Islamic banks and financial institutions.

“The objective of the Bill is to address the need for a regulatory framework that has become necessary based on the fact that international banks offering Islamic products are keen on breaking into the financial market in Kenya in order to exploit the full potential of Islamic banking,” reads the Bill.

According to the proposed legislation, the introduction of the Sharia Advisory Council will ensure uniform application of principles and concepts of Islamic banking from a panel of experts.

The Bill seeks to amend section 35 of the CBK Act, to provide that the bank shall act as a banker to all Islamic Banks and all Islamic institutions

The PBO said enacting the Bill will also strengthen the ongoing partnerships with foreign governments and allow for more similar partnerships to be developed.

Unlike the conventional lenders, Islamic banks operate within the tenets of Islamic law or “Shariah” which prohibits interest or “riba” on loans.

Instead, Shariah-compliant banks work within the principle of risk-sharing, where profits and losses from businesses funded are shared as per the ratio agreed with borrowers. Islamic financing further prioritises lending to ventures considered “ethical and sustainable” with social benefits and prohibits funding speculative activity or those considered “haram” or proscribed like brewing of alcohol.

Kenya has three fully fledged Shariah-compliant banks, while a number of mid and top-tier lenders operate Islamic banking departments and counters.

Fully-fledged lenders are; DIB Bank Kenya Limited, which was incorporated in 2014 as a subsidiary of UAE’s Dubai Islamic Bank; Gulf African Bank, which became operational in January 2008; and Mogadishu-headquartered Premier Bank, which acquired a controlling stake in troubled First Community Bank this year.

The International Monetary Fund (IMF) has in the past asked Kenya to refine prudential regulations to cater for Islamic banking despite the Shariah-compliant banks offering loan products which are collateralised differently from conventional bank loans.

Kenya is also yet to come up with a Shariah-compliant deposit insurance scheme and is continuing to manage deposit insurance premiums in a single pool for all banks — a situation that could complicate compensation of depositors in the event a bank offering conventional and Islamic products collapses, according to a warning by the IMF.