By Rhoda Mutuku
As commercial Banks continue to grapple with impacts of capping of interest rates, following the Banking (Amendment) Act, 2016, that came into force over a year ago, higher risk borrowers are now being advised to embrace Islamic based sharia finance as a favorable alternative to access credits.
Capital markets authority (CMA) director, regulatory policy and strategy Luke Ombara said in an interview that with impacts of capping that has made accessing bank loans for higher risk borrowers challenging, Islamic finance sticks out as the best option, in that the system is based on “Non-interest lending.”
“We are highlighting the opportunities in the Sharia based financing which is a non interest rates financing to help the capital market understand the opportunities that are available in this type of financing ,” said Ombara “…this will ensure the event that higher risk participants experience constraints in accessing capital because of the interest rates caps, we can still ensure that there is an effective flow of finance going into the economy to support long-term economic growth and wealth creation.”
While emphasizing on the transparent structures that are in place through instruments that are available for risk sharing and partnership under Sharia finance, the director hinted that the system could become the next popular credit alternative to cushion higher risk borrowers in the country.
He, therefore, encouraged investors to seek opportunities for economic growth and wealth creation through the above type of borrowing which is said to be gradually gaining popularity across the world.
Islamic finance refers to the means by which corporations in the Muslim world, including banks and other lending institutions, raise capital in accordance with Islamic law-Sharia, a unique form of socially responsible investment, based on an understanding of the importance of risk sharing as part of raising capital and the avoidance of riba (Interest) and gharar (risk or uncertainty).
When giving out loans to borrowers, Islam prohibits collecting or receiving of interest (riba or usury). It works on the principle that money should not create money in itself unless some forms of business activities are involved.
Islamic banking is growing at a good pace as several banks are tapping into the lucrative sector to provide Islamic financial services through sections or windows. Financial institutions in Kenya that are following Islamic sharia include First Community Bank of Kenya, Gulf African Bank of Kenya and Dubai Bank of Kenya among others.
Ombara clarified that Islamic finance is not exclusively a preserve for investors of Islamic faith but open for all who wish to invest in transparent capital market businesses, adding the system is a 2 trillion US Dollar market currently gaining popularity in the North America, Turkey, Malaysia as well as other developed countries such as Germany and Britain.
“Kenyans are used to invest in shares and bonds, but proceeds of these investments maybe from businesses some which are deemed dirty or unethical in accordance with the Sharia law… But because majority of people both Muslims and Christians would like clean money from clean business, we have come up with a product that gives room for clean profit… Capitalism emphasizes so much on profit and majority of investors in developed countries focus on this… Britain especially in becoming one of the largest bond market which is based on Sharia principles,” said Ombara adding, “I am sure that most people in Kenya will now move to this policy.”
This comes as Central Bank of Kenya (CBK) Governor Patrick Njoroge maintains reversal of the capping law is necessary because of the negative effect it has had on the economy.
The Banking (Amendment) Act, 2016, which came into force on September 14 last year, caps loan charges at four percentage points above the Central Bank Rate (CBR), presently standing at 10 per cent, and requires lenders to pay interest of at least 70 per cent of the CBR on term deposits.
More than a year down the line after President Uhuru Kenyatta defied critics and overruled some of his top advisers among them the CBK governor to sign the act into law, banks now say after this income from lending has fallen.
