islamic finance makes a big sale in new markets
TRANSCRIPT
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| Nairobi Business Monthly September
EMERGING NICHES
BY AAMERA JIWAJI
Centuries ago, the monsoon winds were
credited for bringing trade ships from
the Indian sub-continent and the Arab
peninsula to the East African coast, carrying
valuables like silk, pottery, metal goods, jewel-
lery and medicine.
The latest offering that these trade winds
have wafted down the eastern coast of Africa
is Islamic finance. And as happened with theitems, the first port of call was Kenya and from
here Islamic finance is sweeping across the
region.
According to theIslamic Banking Competitive-
ness Report, Islamic finance assets have grown
at double-digit rates over the past five years and
in 2012 exceed $1.1 trillion (Sh92.4 trillion).
International estimates predict that up to half
of the savings of the Islamic world will end up
being managed by Islamic financial institutions.
The growth rates of Islamic banks globally have
outstripped those of conventional institutions
(threefold, according to the IMF). And because of
their ethical and risk-sharing approach, Islamic
financial institutions shrugged offthe finan-
cial crisis, making them more attractive and
helping contribute to their growth beyond the
traditional areas of Asia and the Middle East.
What this means is that Islamic finance can
no longer be ignored. At 1.5 billion, the Muslim
population is the second largest in the world. In
Africa, 540 million people 50% of the popula-
tion are Muslim. With only 38 Islamic financial
institutions operating on the continent, it is
Islamic finance makes abig sale in new markets
considered to be a huge untapped market.
Estimates suggest that 9 million Kenyans are
Muslims (or 11% of the countrys population)
and the rapid uptake of Islamic products has
led several conventional banks to introduce
sharia-compliant products to tap the Muslim
population.
Kenya is considered to be among the African
countries leading in sharia-compliant services.
Islamic banking started in Kenya in 2005 when
Barclays, a conventional bank, offered currentaccount products through its Islamic window,
LaRiba. But it was only in early 2008 that two
fully fledged Islamic banks First Community
and Gulf African opened for business. This
created the first link in a chain of financial
inclusion that heralded the establishment of
Islamic finance in East Africa.
The launch of an Islamic insurance compa-
ny, Takaful Insurance Africa, in 2011 was the
second link. Six months ago, the third link in
the chain was created when First Community
Fund Manager was licensed, an institution that
will grow into an investment bank with time.
Before the end of the year, two more links will
be added: an Islamic pensions scheme and the
most important cog in the wheel around which
all other Islamic institutions will spin, a basket
of shares at the NSE which will be screened for
consistency with Islamic law. The availability
of sharia-compliant investment products at the
capital markets will work in a complementary
manner to fund management.
In February 2009, Kenyas pioneering Islamic
lender First Community Bank participated in a
Sh1 billion sukuk issue from the government,
which was split between itself and Gulf African
Bank and raised Sh18.5 billion. First Commer-
cial Bank this year announced its intention
to launch a sukuk through its newly-formed
investment bank.
Sukuks are sharia-compliant and trad-
able asset-backed, medium-term investment
certificates that have been issued internation-
ally by governments, quasi-sovereign agencies
and corporations. They represent ownership
claims in pools of investment assets or services.
Their launch in Kenya allow Sharia-compliant
banks to participate in government debt market,
which is a major source of interest income for
conventional financial institutions, says Mr
Kabaki Wamwea, executive director of Dyer &
Blair, an investment bank.
The challenge with sukuks in Kenya is lack ofan enabling legal framework complete with tax
neutrality measures. Islamic finance industry
players say Uganda and Tanzania have a better
chance of issuing a sukuk than Kenya However,
the amendment of section 45 of the Central Bank
of Kenya Act last year to recognize the payment
of a return rather than interest on govern-
ment securities was a major win, as it opened
up the spectrum of sharia-compliant invest-
ments in Kenya.
The regulatory changes that Islamic insti-
tutions are pushing for include allowing their
authorised capital to be waived or accepted as a
guarantee in an Islamic bank, since the interest
earned on the amount while it is with the CBK
is forbidden by sharia law and cannot be used
on operation costs. It must go to charities or
disadvantages communities.
Other changes include the separation of
operations and risk fund accounts. The first
goes into running the company while the other
into the pool of premiums from which claims
are paid. There are things we are supposed to
do within the sharia model, which cannot be
Growth of Islamic banks globally outstripsthose of conventional institutions three-foldand opens a new niche market as countries
change laws to accommodate sharia models
| Nairobi Business Monthly September
SPECIAL FOCUS:ISLAMIC FINANCE
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September Nairobi Business Monthly |
done within Kenyas regulatory environment,
said Mr Hassan Bashir, CEO of Takaful Insur-
ance Africa.
Another contradiction between sharia law
and Kenyan law is the treatment of zakat. Under
Islamic law, 2.5% of the companys liquidity has
to be declared at the end of the year as zakat, an
obligatory alms giving. Kenya Revenue Author-
ity considers this amount as a profit and taxes it
whereas in other countries zakat is tax exempt.
Even with these gaps, Kenya is miles ahead
of the rest of the region, said Mr Bashir. Most
countries are still struggling with whether they
should license the first banks. Tanzania is done
with theirs, Uganda is trying to do theirs and
we are looking at a complete sector.
The irony, however, is that while Kenyas
regulatory framework is playing catch-up on
sharia, Islamic institutions are operating in an
over regulated environment since in addition
to following prudential guidelines that are
enforced by their boards, they are also evalu-
ated by a sharia board that follows standards of
equity and fairness and protects the interests
of policy holders.
We are over-regulated as a takaful model
but all these government institutions create
solidness. Ultimately, this is a profit motivated
risk mitigation model, explained Mr Bashir.
Corporate governance is simpler and stronger
in Islamic banks by design.
FCB Capitals First Ethical Opportunities Fund
(FEOF), which was licensed in March, delivers
a choice of investment opportunities, in addi-
tion to sukuks, allowing sharia investors to
construct balanced portfolios across a range
of asset classes.
The other major financial inclusion is the
creation of an Islamic cooperative of people who
cooperate for their mutual social, economic, and
cultural benefit, and who follow the principles
of Islamic law. 2012 has been identified as the
year of Cooperatives by the United Nations. As
businesses driven by values, and not just profit,
cooperatives fit naturally into the principles of
Islamic law and enhance the financial opportu-
nities offered to Islamic SMEs and micro finance
institutions.
Kenya has a very well developed cooperatives
sector, said Mr Bashir But the missing gap is
a sharia-complaint cooperative, both a credit
as well as a deposit taking co-op.
When this circle is complete, the implications
for Kenya and the region are enormous. The
development of enabling capital market regula-
tions and a nascent Islamic security markets
will open Kenya up to the large pools of sharia-
compliant funds from the Middle East, South
East Asia and other Islamic markets.
The other country in which Islamic finance
is growing rapidly is Mauritius. Although it has
only 200,000 Muslims in a national popula-
tion of 1.8 million, and its first Islamic bank
was recently licensed in October 2009, the
Bank of Mauritius has been busy creating the
infrastructure for a sharia-compliant retail and
investment banking. The small Indian Ocean
island has already attracted the Tata Indian
Sharia Equity Fund, suggesting that Mauritis
is positioning itself as the offshore financial
centre for the Islamic banking in the same way
that Caribbean nations like the British Virgin
Islands or Cayman Islands have serviced the
conventional funds industry.
With this full circle in place, funds fromother East African countries will be attracted
to Kenya, while local sharia funds that are being
invested outside will be retained. Research costs
and compliance concerns incurred by sharia-
compliant investors in Kenya will also reduce,
and projects in sharia-compliant industries
including oil, real estate and mega infrastruc-
ture projects will thrive. Innovation will open
up and Kenya will be positioned as the Islamic
finance gateway to East Africa. Even as the Capi-
tal Markets Authority (CMA) plans its own shar-
ia-compliant index, it signed a Memorandum
of Understanding with the sharia compliant
Somalia Stock Exchange Investment Corpora-
tion to establish links between the bourses.
The procedure is not uncommon and major
index providers across the globe, including
Dow Jones, MSCI, Russell, Canadian index S&P
(Standard & Poor) and Securities Commission
Malaysia and FTSE have launched sharia indices.
In June, S&P launched a sharia index measuring
the performance of 50 leading sharia-compliant
companies from 19 countries and territories
who are member states of the Organisation of
September Nairobi Business Monthly |
First Community Bank, the first full fledged
Islamic bank to open in Kenya
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| Nairobi Business Monthly September
Islamic Cooperation. In the same month, FTSE
launched its trading of 48 global and regional
indices and 48 country indices that are sharia-
compliant. Smaller markets that are home to
a large Muslim population have also begun to
offer sharia-compliant indices, including the
Bombay Stock Exchange.
Last year, leading financial news providers
Bloomberg and Thomson Reuters set up Islamic
finance platforms to provide analytical tools
to maximise investment performance in the
rapidly growing market for sharia-compliant
products and services.
Today, Islamic institutions can be found in
developing economies where the financial
sector is almost entirely Islamic (such as Iran
and Sudan) or where Islamic and conven-
tional financial systems co-exist (including
Indonesia, Malaysia, Pakistan and the United
Arab Emirates). They can also be found in
developed economies (such as Europe and the
United States) where a small number of Islamic
financial institutions have been established and
large conventional banks have opened Islamic
financing windows.
Kenya has adopted the co-existence model.
Metropolitan Life Insurance (Kenya), a subsidi-
ary of South Africas listed MMI Holdings, earlier
this year opened a Takaful window to sell sharia-
compliant life insurance product making it the
second in the country to do so after Cannon
Assurance.
A number of conventional banks including
Standard Chartered, Barclays, Chase and KCB
have set up Islamic banking divisions. Equity
Bank, the countrys largest bank, recently
received its licence to operate an Islamic
window. The reason they are called windows
is because it is only the outer facade, the window
dressing, which is different - the essentials of
the conventional financial model remain.
The windows have not been successful in
Malaysia; it is the dedicated institutions that
capitalise Islamic finance which have been
successful. I dont know how successful they
will be in Kenya, said Mr Bashir. Malaysia only
allows Islamic institutions that have been capi-
talised separately, as they have greater Muslim
support.
Reinsurance companies are following suit
and last month, Kenya Reinsurance Corpora-
tion appointed a sharia board in preparation to
offer Re-Takaful products, which will bring it in
line with Africa Re and Zep Re, which already
| Nairobi Business Monthly September
Shareholder fund
Internal auditor
-Operating costs
-Claims
+Profit for
shareholders
+Profit for insured/
policy holders
Board of directors
Sharia board
Risk fund
Islamic banksoperating in other
East African countries arealso eyeing the Kenyanmarket and Sudans IslamicBank of Khartoum plans tomove into Kenya in what
will be the first crossborder
expansion in East Africa.
THE BUSINESS MODEL
SPECIAL FOCUS:ISLAMIC FINANCE
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September Nairobi Business Monthly |
have sharia-compliant subsidiaries: Africa
Re-Takaful and ZEP-RE Re-Takaful. The CMA
is also working to set up a National Sharia Advi-
sory Board that will ensure uniformity across
the sector.
Islamic banks operating in other East African
countries are also eyeing the Kenyan market and
Sudans Islamic Bank of Khartoum plans to move
into Kenya in what will be the first crossborder
expansion in East Africa.
The release of Takaful Insurance Africas
first year results in April showed heavy losses
from operating expenses and high set-up costs
prompting many to criticise the financial model.
This was, however, in keeping with the first year
results of Kenyas first two fully fledged Islamic
banks: Gulf African and First Community Bank
which respectively recorded a loss of Sh281
million and Sh307 million.
Both banks broke even in a relatively short
time given the global financial scenario prevail-
ing in 2008 and 2009. Gulf African Bank built
14 branches in four years and broke even in less
than two years, while First Community Bank has
17 branches and took three years to break even.
Gulf African Banks first quarter results for
2012 showed a remarkable 2,560% growth in
income before tax compared to the same period
last year, earning it the Best Recovery award fromThink Business. And if the case study of Islamic
banks in the Middle East and North Africa coun-
tries, which are projected to increase from $416
billion assets in 2010 to $990 billion in 2015,
is any indication, Islamic finance is poised to
become profitable.
Another reason for TIAs poor performance in
its first year was because it incurred a large claim
relating to goods in transit, which pushed total
claims to over Sh61 million. We paid because
the claim was due, and that is why we exist,
said Mr Bashir.
TIA Chief Operating Officer Habib Shatry
explained that although first year results reflect-
ed as a loss, if they had followed the Islamic
financial reporting standards, the loss would
not have seemed as large because the risk fund
(policy holders) would be declared separately
from the company fund (shareholders). Our
operations account is in the red because of high
set up costs but the policy holders account is
in the black, he said.
Kenya is on the pedal of Islamic finance; we
are really pressing the pedal, said Mr Bashir.
When the entire Kenyan insurance commu-
nity converged at the Hotel Continental
on the evening of July 18 to fete excellence
and creativity at the third Annual Insurance
Awards, there was a newcomer among the
participants.The big boys, Jubilee, UAP, CIC and Co. took
with the big prizes. There was, however, one
special prize that went to a special innovation
in insurance.
Takaful Insurance of Africa (TIA) scooped
the Special Award for product innovation. It
was the first award of its kind at the gala and
the judges confessed they could not ignore the
creativity. We are excited and honoured to
have won this award, said TIA Chief Executive
Hassan Bashir. This speaks volumes about
the appreciation of our insurance model by the
industry and its potential as an alternative to
conventional insurance.
The Takaful concept of insurance is based
on the principles of togetherness, cooperation
and mutual solidarity. It espouses tenets of
Shariah, which prohibit interest, gambling and
uncertain investments.
It is the first licensed Takaful operator in the
East and Central Africa and has pioneered a
unique alternative concept of insurance in the
region. The concept derives from the Islamic
financial principles whose rationale is provi-
sion of risk management and financial security
based on ethics and values.
The operational framework is a system
where each member contributes a given
premium to a general Takaful fund managed
by the operator. Through the concept of dona-tion, the members allow TIA to pay any losses
suffered by the participants contributing to
the pool. Any surplus left from the contri-
bution after payment of claims and other
expenses is either used to grow the reserves
or distributed among the members. This is
referred to as surplus profit.
Although Takaful operates and manages
its activities in accordance with Shariah law,
they play by Insurance Regulatory Authority
regulations.
In addition, operational matters, invest-
ment dealings, management and marketing of
Takaful products are overseen by the Shariah
Advisory Council to ensure that good govern-
ance and obligation to customers, also called
participants, are met.
Unlike the conventional insurance model
that is designed on the premise of risk transfer
model, ultimately maximising shareholder
value, TIA promotes a risk-and-profit sharing,
welfare-based model that balances the inter-
ests of both participants and shareholders.
DAVID WANJALA
Islamic insurance findsspace at the high table
RECOGNItION
September Nairobi Business Monthly |
Hassan Bashir,
CEO of Takaful
Insurance Africa