BY DAVID WANJALA
Islamic finance is increasingly making major inroads into mainstream banking in Kenya, giving customers a range of products and effectively deepening financial inclusion. This growth is causing major realignments in the financial services sector, bringing with it regulatory changes and huge investments as banks scramble for a slice of the lucrative niche segment. To demystify this banking model, NBM spoke to Jaafar Abdul, head of Islamic Banking at KCB Bank Kenya and chair of the Kenya Bankers Association sub-committee of Islamic Finance.
NBM: What is Islamic Finance
Jaafar: Islamic finance is a financing model that operates on the tenets of the Islamic Shariah principles that are primarily sourced from the Holy Quran and the teachings of the Prophet Mohamed, Peace and Blessings of Allah be upon him.
These principles have well defined prohibitions and guidelines that regulate the economic system and financial activities. For instance, the Shariah strictly prohibits the provisions of interest and undertaking investments in what is considered non permissible investments like alcohol production, arms trade , human trafficking among others . The Shariah also forbids gambling or engagements in highly speculative ventures as well as running commercial transactions without clearly stipulated contractual obligations and expectations.
The whole essence of the Shariah principles that regulate the Islamic finance industry is to promote sound partnership between the parties in transactions with a view to share both gains and losses on the basis of transparency, ethics, accountability, justice and fair play.
The essence of the Shariah principles helps to promote co-operation and harmony by safeguarding the dignity, property rights and inculcating a sense of responsibility in mankind. This indeed confirms that Islamic finance caters for the needs of all people, Muslims and non-Muslims
All the Islamic financial transactions have underlying assets.
What are the common areas under which Islamic Finance has been misconstrued?
Jaafar: Many have wondered how Islamic banking operates and makes returns without charging interest for instance. A good number of people that include conventional bankers find it hard to believe that a bank cannot operate without the institution of interest.
The Islamic banks can facilitate trading activities and engage in businesses that have a material impact on the economy. These banks make gains by sharing in the profits from actual trade activities, can earn agency fees or commissions from services like foreign currency exchanges, and wire transfers. All that these banks are not allowed is to lend money and earn interest on the same. In Islamic finance, loans are taken as benevolent arrangements that should not burden the recipient with interest payments.
For the bank to gain a return in any financing deal, it has to share in the risk that may stem from the financing deal. This essentially means the Islamic banks shall have to exercise due diligence as partners in financing deals to safeguard their investment and leave nothing to chance .
Islamic banking indeed integrates finance with the social fabric and seeks to strengthen the focus on sound environmental conservation for the benefit of all human beings. All applications for Islamic financing are assessed on social, economic and environmental perspectives to ensure a proper linkage between finance and the real economy.
The other common misconception about Islamic banking is that it is a charitable banking model since Islam is well known for charity, compassion and promotion of universal brotherhood. In fact the Islamic faith strongly encourages people to work diligently and earn from their effort in a just and responsible manner without infringing on the property rights of others. The Prophet Mohamed (P.B.U.H) was himself a trader who earned income from his own effort and so were most of his companions.
Working hard to earn honest living amounts to an act of worship and is considered nobler before the Almighty Allah.
The other misconception may stem from the non-Muslims thinking that Islamic banking is only for Muslims. This misconception could be coming from the use of the Arabic terms like Musharakah , Murabahah , Ijara , Isti’sna or even the use of the tag ‘Islamic’ in describing this innovative financing model .The Islamic finance principles of fairness, ethics, transparency and operating as partners in business transactions are universal and serves the interest of both Muslims and non-Muslims .
There could also be some apprehension on how the Islamic finance transactions are handled given that the intrepretations of the Shariah tenets in the Holy Quran and the teachings of the Prophet Mohamed (P.B.U.H) must be undertaken by Shariah Scholars. We have diversity of Shariah opinions, which should not be considered a challenge as long as these opinions do not conflict with the primary source of the Islamic Shariah that is the Holy Quran and the Prophet’s teachings. In fact, Islam encourages sound intellectual interactions that help develop the Islamic jurisprudence that meets the dynamic needs of the mankind.
The concept of Islamic finance should be appreciated as a well-designed alternative financing model that derives its principles from the Islamic Shariah and works for all people irrespective of their faith.
When exactly did the concept start taking root in Kenya?
Barclays Bank and KCB LTD first introduced Islamic banking through Shariah compliant products offered in 2005/6. The uptake of these products has been quite good to the extent that two full-fledged banks, the First Community Bank (FCB) and Gulf African Bank got licensed to commence business in 2008/9 to meet growing demand of the Shariah-compliant products.
How is the performance now especially for KCB?
Our performance as KCB is quite impressive following the re-launch of our products dubbed ‘SAHL’ in 2015. Sahl is an Arabic term that means easy and it symbolizes our commitment to make it easier for people to interact with us and get financial solutions offered with a purpose of fulfilling their needs in a responsible, ethical and competitive manner under the guidance of a team of Shariah scholars that oversee our processes and transactions to ensure adherence to the Shariah standards.
We are continuously scaling up our operations and strengthening our human capacity as well as technology to overcome barriers to the growth of Islamic finance industry both within our internal environment and partnering with other stakeholders to manage the external environment as well.
What specific products do you offer under this concept at KCB?
We offer a wide range of products that meet the needs of the retail segment, the Small and Medium Enterprises, the institutional customers as well as corporate entities. We have a basketful of both asset and liability products. We have a bouquet of deposit/investment account options and we offer working capital, consumer financing, project finance and mortgage, assets, and can facilitate trade finance in Kenya and outside Kenya.
What are your statistics on the number of people you are serving and out of this how many are Muslims?
We could say 30% of the consumers of the Islamic finance products are non- Muslims and this reflects the global trend where between 30-40% who are not Muslims procure the Shariah compliant products purely because of ethical, moral and transparency considerations.
What is the future like, are we seeing more growth?
Certainly. Considering the demographic patterns in Africa and Kenya, we are witnessing a growing demand for financial services and a good number of the population is exercising the choice to procure products that are structured and developed with social, economic and environmental considerations .
The Kenyan government is also doing much in terms of developing the financial markets with a view to enhancing financial inclusion and attracting foreign direct investment .The further development of the financial market in Kenya will definitely mean a stronger focus on developing the Islamic finance industry to spur growth in trade and investment by enhancing access to savings and credit especially for the SMEs.
The financial service providers are keen on diversifying their sources of revenue by developing innovative and alternative financing models like Islamic finance that helps widen their market space and meeting the needs of the growing economy and population .
Is the CBK supportive?
Generally if you look at the development of Islamic Finance worldwide, there are two versions to it. There’s where it is top driven, sustained from the top. This happens only in limited jurisdictions for instance, in Malaysia where it is a political commitment and national agenda. In other parts of the world including Kenya, it is driven by the market, and regulators come on board thereafter to see that the market is stable, consumers are protected, and there is fairness and a level playground for all the competitors.
CBK is actually moving in the right direction in addressing consumer protection, ensuring fairness for all players and ensuring there is stability in the market. CBK alone cannot achieve much without the support of other stakeholders doing their part.
For us to fully benefit from Islamic Finance as a country or region, there is need to have deliberate focus in promoting the development of quality human capital to address the growth of the concept. We would like to see a situation where the learning institutions develop appropriate curriculum to address the industry needs.
