Tuesday, March 29, 2011

‘Kenya's sukuk ambitions must be tempered with reality’

Kenya has ambitions of becoming the Islamic finance hub of East Africa and has the first mover advantage. But contrary to recent reports that Kenya may pass legislation to eliminate tax barriers to sukuk issuance by the end of the year, Islamic bankers in East Africa's largest economy stress that it is highly unlikely that any major developments will occur in terms of tax neutrality and other legislation that is required to facilitate products such as sukuk in the local market.

"The Central Bank of Kenya (CBK) has been talking about changing the legislation to create an enabling environment for the origination of sukuk in Kenya. We know something is going on, but we are convinced that this would not become a reality in 2011. We do not think anything will happen this year because several; key laws need to be amended and this takes political will and parliamentary time. This time has not been allocated. Similarly, the current Banking Act of Kenya is not to the advantage of Islamic finance in its current form. These changes can only be affected if the Ministry of Finance and the CBK push these legal amendments robustly," explained one senior Islamic banker in Nairobi.

He commended the support of CBK Gov. Professor Njuguna Ndung'u in facilitating Islamic finance in Kenya. The CBK in fact has already licensed two Islamic banks - Gulf African Bank (GAB), which has a huge Omani investment; and First Community Bank (FCB), which is mainly locally-owned - under CAP 488 of the Banking Act of Kenya. In terms of capital and deposits, FCB, whose CEO is the experienced Islamic banker, Nathif Adam, formerly with Qatar Islamic Bank and Sharjah Islamic Bank, is the largest Islamic bank in Kenya with a capital of 1bn Kenya Shillings (KSh).

Both banks have been talks with the Ministry of Finance, the CBK and the Capital Markets Authority of Kenya (CMA) about the possibility of the Kenyan government issuing a debut sovereign sukuk and passing the enabling legislation through amendments to the existing laws to facilitate sukuk origination out of Kenya.

Since starting operations in June 2008, FCB was last year authorized by the CBK to launch FCB Capital, which will offer Islamic asset management business and capital markets products especially sukuk. Similarly, FCB has been authorized to act as an Islamic insurance (Takaful) broker for general Takaful products the bank is structuring in conjunction with the local Cannon Insurance Company.

According to Kenyan Islamic banking sources, the Debt Management Office at the Kenyan Treasury is studying ways of introducing tax neutrality measures for the issuance of sukuk, and it is likely that some local corporates may issue local-currency sukuk before a sovereign issuance. They agree that the business case for Islamic finance in Kenya and East Africa, is proven and that sukuk could be a vital tool for local corporates to raise funds to finance local projects and for balance sheet purposes.

Islamic banks in Kenya stress that Islamic banking is not only for Kenya's 4.5 million Muslims or so. Indeed, a handful of conventional banks also provide interest-free current accounts to compete with the fully-fledged Islamic banks, and the indications are that more conventional banks will follow suit as Islamic banking continues to make inroads as an alternative system of financial management, especially in the aftermath of the global financial crisis which saw the near collapse of the global financial system based on market capitalism.

In fact, banks such as FCB stress that a number of their staff and customers are non-Muslims. Another growing constituency that is driving demand for Islamic financial products in Kenya are the thousands of émigré Somalis who now live in Kenya and who have fled the internecine civil war in Somalia.

A briefing paper titled “Somali Investment in Kenya” published last week by Chatham House, the prominent London-based political and foreign policy think tank, surprisingly failed to analyze the growing role of Somali Kenyans in the growth of Islamic finance in Kenya. The author, Farah Abdelsamed, ignored demand dynamics of Islamic finance amongst Somali Kenyans and instead chose to concentrate predominantly on the Hawala (informal money exchange) system, which some of the Somali Kenyans have favored in building a "remarkably resilient 'parallel' economy based on traditional clan relationships, a lack of bureaucracy and well-established channels for remittance payments from the diaspora."

This model successfully has traveled with Somali émigrés to Kenya, albeit the CBK and the Foreign Exchange Bureau are now regulating these hawalas and putting pressure on them to merge with mainstream institutions as such to formalize them to increase transparency and disclosure.

"Somali businesses in Kenya," explains the Chatham House Briefing, "have created thriving enterprises in the retail, finance, import-export and transport sectors. Despite the negative perceptions in the Kenyan press and wider Kenyan community, the reality is that these enterprises offer much that is of benefit to Kenya. Eastleigh acts as a central point for the distribution of goods around East Africa. Somali businesses employ many non-Somali Kenyans and provide opportunities for other Kenyan businesses. Somali business people increasingly operate at least partially within the formal economy and are a growing source of revenue for the Kenyan exchequer."

The reverse is also true. For instance, the staff of First Community Bank (FCB), the Kenyan Islamic bank, comprises a staggering 85 percent Somali Kenyan staff and its customer base similarly comprise between 40 to 50 per cent Somali Kenyans and businesses. FCB has also opened branches in areas such as Mandera, Wajir and Garissa in the border areas with Somalia and in Nairobi suburbs such as Eastleigh where there is a high number of Somali émigré residents.

FCB, in the meantime, is expanding its retail products to serve growing demand in several new asset classes. Following approval from the Capital Markets Authority in Kenya (CMA), FCB is expecting to launch its first Islamic unit trust on April 17. The unit trust is aimed at retail investors and has a minimum subscription of 5,000 Kenya shillings (about $60) and will invest primarily in Shariah-compliant equities. It also forms part of the new product suite which FCB is introducing to give its customers a wider choice in Islamic financial products which in the future would include retail sukuk, Islamic exchange-traded funds (ETFs), and real estate investment trusts (REITS).

Source: The Arab News

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