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CENTRAL BANK OF KENYA PERSPECTIVE: ISLAMIC BANKING IN KENYA

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CENTRAL BANK OF KENYA PERSPECTIVE: ISLAMIC BANKING IN KENYA ... 2009 had a Sharia Compliant Tranche(Sukuk)-Good uptake from Islamic banking niche-Approx. Kshs. ... – PowerPoint PPT presentation

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Title: CENTRAL BANK OF KENYA PERSPECTIVE: ISLAMIC BANKING IN KENYA


1
CENTRAL BANK OF KENYA PERSPECTIVE ISLAMIC
BANKING IN KENYA
  • EAST AND CENTRAL AFRICA ISLAMIC BANKING
    CONFERENCE
  • HOTEL INTERCONTINENTAL,
  • NAIROBI, 28TH TO 29TH APRIL 2009

2
AGENDA
  • Background.
  • Development of Legal and Regulatory Framework for
    Islamic Banking.
  • Challenges.
  • Opportunities.

3
KENYAS BANKING SECTOR
4
RECENT DEVELOPMENTS
  • Microfinance Act operationalised in 2008-2
    institutions granted approval to conduct
    microfinance business in 2008.
  • Deposit Taking Microfinance Institutions expected
    to commence operations in 2009.
  • Banking(Credit Reference Bureaus) Regulations
    gazetted in 2008 and became operational in
    February 2009.
  • Application for first Credit Reference Bureau
    license under consideration.

5
ISLAMIC BANKING IN KENYA-BACKGROUND
  • Various inquiries on Islamic Banking in late 90s
    and early 2000s.
  • But first serious expression of interest lodged
    with CBK in 2004.
  • CBK needed to develop capacity in this banking
    niche, so study tour to UAE and U.K. carried out
    in 2005.
  • Extensive research also carried out on legal and
    regulatory frameworks of other jurisdictions
    carrying out Islamic Banking-Malaysia, Indonesia,
    Bahrain, Kuwait.

6
ISLAMIC BANKING POLICY POSITION
  • Following study tour and research, CBK identified
    three policy options-
  • Regulate Islamic Banks within existing legal and
    regulatory framework.
  • Amendment of existing legal and regulatory
    framework to accommodate Islamic Banks.
  • Enactment of separate Islamic Banking Act.
  • After careful consideration and need for level
    playing field, CBK recommended to Ministry of
    Finance to regulate banks operating under Islamic
    Banking principles within existing legal and
    regulatory framework.
  • Policy Position approved by Treasury in late 2005.

7
TENETS OF CBKS POLICY POSITION ON ISLAMIC BANKING
  • Islamic Banks are not separately defined in
    the Banking Act-All banks including those
    operating pursuant to Islamic Banking principles
    are subject to the requirements of the Banking
    Act.
  • We should thus talk about Sharia compliant
    banking products.
  • All banks can offer Sharia compliant banking
    products subject to statutory and prudential
    requirements.

8
DEVELOPMENT OF ISLAMIC BANKING IN KENYA
  • Applications for two institutions proposing to
    operate under Islamic banking principles received
    in late 2006 and early 2007.
  • Applications reviewed and approved in 2007 and
    institutions commenced operations in December
    2007 and May 2008.
  • Up to 5 other commercial banks are also offering
    Sharia compliant banking products alongside
    conventional products.

9
FINANCIAL INDICATORS
  • Financial indicators(February 2009) for two banks
    operating fully pursuant to Sharia compliant
    banking principles-
  • Gross Assets-Kshs. 8bn-0.6 market share.
  • Deposits-Kshs. 5 bn-0.6 market share.
  • Capital-Kshs. 1.8bn-1.1 of total industry
    capital.
  • Both banks are in small peer group(Gross
    assets less than Kshs. 5bn).
  • Gulf African-Ranked 32nd out of 43 banks in terms
    of gross assets.
  • First Community-Ranked 41st out of 43 banks in
    terms of gross assets.
  • Indicators in first year of operations of the two
    institutions point to potential for Islamic
    Banking in Kenya.
  • There is still room to grow this market niche
    given tremendous expansion of Kenyas banking
    sector in last three to four years-Number of
    accounts have tripled from 2.6m in 2005 to 6.4 m
    in 2008.

10
LEGAL AND REGULATORY CHALLENGES-LENDING PRODUCTS
  • Islamic Banking prohibits interest but allows
    profit sharing.
  • Therefore Sharia compliant lending products have
    element of trading and holding of fixed
    assets as bank has to buy and sell financed
    assets.
  • But Section 12 of the Banking Act restricts
    trading and holding of fixed assets.
  • So Banking Act was amended in 2006 to enable
    exemption of innovative products such as Sharia
    compliant banking lending products from trading
    and holding of fixed assets restrictions.
  • But CBK carries out detailed due diligence on
    such products before such exemptions are granted
    to ensure adequacy of risk management.

11
LEGAL AND REGULATORY CHALLENGES-SAVINGS PRODUCTS
  • Section 16 of Banking Act requires banks to pay
    interest on savings accounts so long as the
    minimum balance is maintained.
  • But Sharia compliant banking principles prohibit
    receipt of interest.
  • So Banking Act amended effective 1st January 2009
    to incorporate concept of return for Sharia
    compliant savings products.

12
ISLAMIC BANKING IN KENYA-KEY CHALLENGES
  • Legal and regulatory framework-But CBK to
    continue responding to emerging dynamics to
    ensure robust legal and regulatory framework.
  • Public Awareness-Events such as this conference
    are important to raise awareness.
  • Limited range of money market/liquidity
    management instruments that can be invested
    in-Government securities accrue interest-which is
    prohibited under Islamic Banking principles.
  • Taxation-double taxation due to trading
    model where bank buys and sells financed
    assets-May raise cost of borrowing.

13
ISLAMIC BANKING IN KENYA-OPPORTUNITIES
  • Growing niche market for investment in new
    institutions or investment in existing
    institutions and refocus their market niche.
  • Allow banks and clients to endogenise and share
    risk.
  • Infrastructure bonds similar to Islamic
    Bonds/Sukuks and offer investment opportunity.
  • First Infrastructure Bond issued in February 2009
    had a Sharia Compliant Tranche(Sukuk)-Good uptake
    from Islamic banking niche-Approx. Kshs. 1bn.
  • CBK to continue working with other players to
    explore development of sharia compliant debt
    instruments.
  • Other sharia compliant financial
    services-Insurance(Takaful), Capital Markets.
  • Opportunities for mortgage finance that is sharia
    compliant and endogenises risk-this may well be a
    market for the future.
  • A course in Islamic Finance in Kenya( e.g. at
    KSMS) for the EAC region. There is a huge market
    and huge demand for sharia compliant products in
    EAC.
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