With the growth in Kenya’s Islamic finance market picking up pace, it’s only a matter of time before the trade finance market starts to realise the opportunities. Shannon Manders reports.

Shariah-compliant finance continues to gain popularity in Africa, and Kenya has set its sights on becoming the Islamic finance hub of the East Africa region. With two shariah-compliant banks in operation, licensed takaful and retakaful businesses and a number of financial institutions offering products that comply with Islamic law, the country is well on its way to making this happen.

The increasing popularity of Islamic finance in Kenya can be attributed to a rising awareness in Sub-Saharan Africa of the growing trade interactions with the Middle East. Trade between Arab member countries of the GCC and Africa has grown from an estimated US$6.8bn to US$18.1bn in the last 10 years.

“Islamic finance has seen significant growth over the last two years, and will be a growth area in the region in the near future,” says Hassan Bashir, CEO of Takaful Insurance of Africa, Kenya’s first shariah-compliant insurance company.

Kenya is in the process of changing its finance laws to allow a smooth integration of Islamic finance in its banking sector. Indeed, the increasing interest in Islamic finance poses a new challenge to the country’s central bank, which will need to be well-prepared to regulate Islamic financial institutions looking to enter the market.

Paving the way

Shariah-compliant financial institutions and products started taking root in 2007 after the Kenyan government provided operating licences to two banks – Gulf African Bank and First Community Bank (FCB).

For Gulf African Bank, Islamic trade finance volumes are largely generated from letters of credit (LCs) and guarantees.
“There is a market, but it’s not looking for sophisticated deals,” says Abdalla Abdulkhalik, general manager, business, of Gulf African Bank. “The type of market we have is looking for shariah-compliant plain vanilla LCs. Last year, the volume that was traded on Islamic LCs that we opened was about Ksh5bn (US$532mn),” he adds.

The potential for Islamic financing in Kenya and the region is significant. According to the 2009 Kenyan census, the country’s Muslim community, at 4.3 million, makes up 11% of the population.

“If we take that only 25% of these are bankable, then we are talking a population of 1 million that can be incorporated into this system. And today our client base doesn’t even reach 100,000 – so the potential is quite huge,” says Abdulkhalik.
Gulf African Bank has plans to expand into the region, and according to its CEO, has picked Tanzania as its next destination. The bank hopes to be set up there by Q1 next year.

The larger of the two banks in terms of capital and deposits, FCB was authorised to launch FCB Capital, Kenya’s first Islamic investment bank, in early 2010. The bank also launched its insurance arm, FCB Takaful Insurance Agency, late last year.

Mounting interest

Takaful Insurance of Africa (TIA), the first shariah-compliant insurance company in Kenya – and indeed in East and Central Africa – was licensed and launched in Nairobi at the beginning of the year.

“The reasons behind takaful lie in the need to provide risk management and financial security services founded on Islamic principles and values,” the company said in a press release. In the first three months of opening, TIA wrote business worth approximately US$700,000, its CEO told GTR.

In terms of trade business, the company has written Comesa covers for commercial transporters, as well as policies for goods in transit to regional markets such as Rwanda, Uganda and South Sudan.

“We are also exploring opportunities with the Islamic banks in providing takaful protection for their trade financing activities,” says TIA’s Bashir, commenting on future prospects.

“We have signed agreements with Gulf African Bank and FCB, as well as other banks. Our premium contribution through the Islamic banks is growing; we believe this is one of our key channels of distribution.”

Both Kenya Re and the African Trade Insurance Agency (ATI) are venturing into the shariah-compliant reinsurance, or retakaful, business.

In March this year, ATI partnered with the Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC) to reinsure trade transactions between Sub-Saharan Africa and the Middle East. “Sub-Saharan Africa has been lacking capacity to offer retakaful, forcing such business to be sourced from the west. We can now underwrite it,” says George Otieno, ATI’s CEO.

However, the agency has yet to reinsure any exports or import deals to date. Otieno tells GTR, that he believes that the business will begin to thrive “in due course”, most likely next year. Kenya Re too reports that its Islamic trade finance business is in its formative stages. The company set up its retakaful business in June, as part of its plan to meet the reinsurance needs of new businesses.

“We are working on setting up structures in order to be fully compliant by the end of the year. This will allow us to start writing this business,”says Beth Nyaga, general manager of the company’s reinsurance department.

Both ATI and Kenya Re face the same challenges as other local Islamic banks and reinsurers in that they will have to reinvest income from their retakaful departments outside the country until such time as Kenya launches shariah-compliant capital market products, such as sukuks, or Islamic bonds.

Other institutions looking to cash in on the region’s Islamic finance dynamics include Sudan’s Bank of Khartoum, which earlier this year announced plans to move into Kenya.

The Islamic bank will reportedly be looking to offer trade finance and investment banking services to Kenya, and, eventually, to other East African countries.

Laying down the law

Kenya’s central bank has made adjustments to some of its regulations to accommodate Islamic banking, though there are still calls for the banking laws to implement interest-free economic systems. Kenyan law, for example, required banks to pay interest on savings accounts as long as the minimum balance was maintained. But changes to the banking act now offer Islamic banks the leeway to give some alternative form of return on shariah-compliant products.

“Islamic finance is not fully incorporated yet, though it is being reviewed on a case-by-case basis,” Abdulkhalik of Gulf African Bank, tells GTR. “The central bank is working very closely with us to incorporate it, because it is also in the interest of the central bank to make Kenya the central hub of Islamic financing.”

Today, the remaining bottleneck in the banking system is the delay in the release of guidelines to make it legal to trade sukuks. The central bank has already announced its intention to launch shariah-compliant treasury bills, a welcome move for the country’s two Islamic banks, which need new shariah investment opportunities to underpin their growth.

Other African governments are reviewing their laws to accommodate Islamic banking, with applications for Islamic banking licenses being made in Tanzania and Uganda. Ethiopia too is reportedly in the process of finalising banking regulation to make Islamic financing a reality, further attesting to the fact that the business case for Islamic finance in East Africa is indeed proven.