Kenyans warned against joining Islamic Banks

The financial institution further expressed concern of the rapid growth of Islamic finance in the country without adequate protection of depositors as is the case with conventional banking.

In a newly released report IMF said Kenya was yet to refine its prudential regulations to cater for Islamic banking despite the fact that the Shariah banks are offering loan products that are collateralised differently from conventional bank loans.

“The legal framework exhibits some gaps, prudential frameworks have not been adapted to the specificities of Islamic banking and there are also remaining gaps in the Shariah governance framework, consumer protection framework, liquidity management, resolution and safety nets,” says the IMF report.

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Kenya has three pure Islamic banks namely Gulf African Bank, First Community Bank and Dubai Islamic Bank while 11 other lenders offer a mix of conventional and Islamic banking products.

Despite this, the country is yet to come up with a Shariah-compliant deposit insurance scheme and is continuing to manage deposit insurance premiums in a single pool for all banks, a situation that could complicate compensation of depositors in the event a bank offering conventional and Islamic products collapses, the IMF warns.

Furthermore banks with Islamic windows are also not segregating Islamic deposits from other funds, as should be the case says IMF.

“The legal framework could benefit from further amendments to clarify permissible contracts and segregation laws to minimise risks of comingling funds that can weaken Shariah compliance and public confidence,” the report says.

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Islamic law prohibits charging or earning of interest (riba) by both bank and customer, instead allowing them to share profit and loss.

This therefore means some banks are using this loophole to earn an extra buck contrary to Islamic law while Muslim who have deposited their money with the said banks, become unsuspecting victims of the scheme and have deposited money used to earn interest.

President Uhuru Kenyatta early this week signed into law some of the proposed amendments raised by IMF.

The Stamp Duty Act (Cap.480) seeks to provide for tax neutrality for Islamic financial products to favorably compete with similar conventional products in Kenyan markets.

The Sacco Societies Act (Cap.490B) on the other hand seeks to define “deposits” and “deposit taking sacco business” to take on board the principles of Islamic law in the Act as a form of recognition of Islamic saccos.

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The IMF report however appears to be proposing wider and deeper banking sector reforms citing banks as the dominant players in Kenya’s emerging Islamic finance market ahead of insurance and investment firms.

Islamic banks have a significant amount of assets hence the concern, Gulf African Bank leads the pack with assets worth Sh26.2 billion as at March 2017 followed by First Community with Sh15.5 billion.

There is still no data for Dubai Islamic Bank, which was licensed to operate in Kenya in April.

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