IFN Country Feature: Kenya Emerging landscape of Islamic finance in Kenya

Kenya is the latest African country to join the bandwagon of countries wishing to issue a Sukuk and create a regional hub for Islamic financial services. With this in mind an Islamic Finance Project Management Office (PMO) has been set-up, which encompasses the Capital Markets Authority and other financial services regulators in December 2015. The PMO is overseen by the National Treasury with the technical and financial assistance of Financial Sector Deepening Africa (FSDA), and under the mandate delegated to it by Kenya’s Financial Sector Regulators Forum (FSRF). The PMO is led by Islamic Finance Advisory and Assurance Services (IFAAS), an international consultancy firm specialized in Islamic finance, in collaboration with international law firm Simmons & Simmons. This is due to Kenya’s thrust to become an International Financial Services hub, by setting up the Nairobi International Financial Centre.
Furthermore, Nairobi Securities Exchange and NASDAQ Dubai have signed an MoU to collaborate in establishing a Sukuk market in Kenya. Through a MoU, both parties will work together to assist Kenyan entities including the government, private businesses and government-related firms in issuing and listing Sukuk. According to a joint statement, the two exchanges will also jointly promote Islamic capital markets products and exchange information and experiences.

Review of Changes in Finance Act 2017
The Capital Markets Authority of Kenya has been admitted by the Council of the Islamic Financial Services Board (IFSB) as an associate member of the board. This will give the capital markets regulator the capacity and capability to regulate the growing Islamic finance market, which has great potential due to a significant Muslim population in certain area’s of the country.
Currently, Kenya has three (3) full Islamic banks – First Community Bank, Gulf African Bank and DIB Kenya, a subsidiary of Dubai Islamic Bank , plus five conventional banks offering Islamic windows, one full insurance company — Takaful of Africa, two credit unions/Saccos, one Takaful company, one re-Takaful window, one Capital Market Unit Trust Fund, as of June 2017 and one non-deposit taking Micro-Finance Institution – Hazina Development Trust. This is still very small compared to the potential.
In terms of the broader Islamic financial services market, the Central Bank of Kenya (CBK) has to date licensed two Islamic banks: Gulf African Bank and First Community Bank (FCB), while various other banks are offering Shariah compliant services and products through “Islamic Windows”. Similarly, FCB has been authorised to act as an Islamic insurance (Takaful) broker for general Takaful products. In addition, Takaful Insurance of Africa, the first fully Sharia-compliant insurance company in Kenya, was launched in January 2011. In 2014, the launch of the first Re-Takaful Insurance (Islamic re-insurance) is expected as the Kenya Reinsurance Corporation ventures into Sharia-compliant business. The local reinsurer already has presence in West Africa and Middle East markets and hence has the potential to provide a regional platform for this product.
Amendments to Finance Act No 15 of 2017
The Finance Act No 15 2017, paves way for the taxation and regulatory harmonization of Islamic finance, with conventional finance, by levelling the playing field that is expected to spur the issuance of a Sovereign Sukuk by the Government of Kenya, the pricing of which is important, that it shall be the benchmark (risk-free) cost of finance, for the issuance of Sukuk by County Governments and Corporates. This involved amendments to the Income Tax Act, Value Added Tax Act, Public Financial Management Act (paving way to issue Sovereign and Sub-Sovereign Sukuk), and Stamp Duty Act.
Preview of 2018
With the vision “The heart of African Capital Markets”, the Capital Markets Master Plan envisions that the Kenyan capital markets will become sufficiently deep and dynamic to stimulate domestic development, while simultaneously providing a gateway to Middle Africa for regional and international capital flows. By 2023, it is expected that Kenya will have been transformed into the choice market for domestic, regional and international issuers and investors looking to invest in and realize their investments in Kenya, within East Africa and across Middle Africa. The market will be the centre of excellence for the real sectors of the economy in which Kenya already has significant capacity and potential including: agriculture, infrastructure (including real estate), and technology, while also leveraging the strength of Kenya’s financial sector to develop innovative products and services, including derivatives, asset management and Islamic finance.

In the capital markets, CMA has also licensed FCB Capital, which offers Islamic asset management
services. In addition, Genghis Capital has been approved to operate an Islamic CIS. CMA has also
introduced new regulations relating to REITs and these regulations provide for the creation of Sharia compliant REITs. These developments have enabled the formerly unbanked Kenyans and
specifically the Muslim communities in the country to have access to financial services adding to the
wealth creation in the economy.

However, to develop a centre of excellence in Islamic financial products underpinned by a formal
framework, a concerted program of regulatory reform and recognition as well as broader capacity
building will have to be undertaken so that Islamic financial services become a sector in their own
right capable of attracting international business. To achieve this outcome, the following actions
should be taken:
• Create a regulatory framework for Islamic capital markets.
• Develop a separate policy, legislative and regulatory framework for Islamic products and services
• Leverage existing relationships to develop Islamic finance expertise
• Identify and make policy proposals to facilitate development of Islamic finance in the annual Memorandum of Policy Proposals to the National Treasury and implement programmes through industry coordination and relevant partnerships.

Conclusion
These changes have significantly changed the landscape for Islamic Financial Services in Kenya and it is our desire, that the Kenyan public will benefit from them and be implemented well by the professional service provider’s.

Mohamed Ebrahim is a partner at Ace Associates, a member firm of McMillan Woods Global. He can be contacted at mebrahim@acegroup.co.ke .

NB: The article was published for Islamic Finance News.

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