Islamic banking is simply a system of banking that
is consistent with the tenets of Islamic law ( Sharia).Islam prohibits the charging or payment of interest and
this forms the basis of distinction between Islamic finance and banking on one
hand and the conventional banking on the other.
Islamic banking practice is a new phenomenon in the
Kenyan market. Although it was widely practiced in the Middle East and some
European countries especially The United Kingdom, legislation made it
impossible in Kenya. Consequently many Muslims as a matter of faith avoided
banks and thus remained unbanked. It was not until a few years ago that major
banks such as Barclays and KCB sought to tap into this market and introduced
sharia-compliant products and services within their mainstream banking.
Barclays bank was the first bank to venture into this territory, probably
taking the cue from its parent in the UK where Islamic banks and products were
already in existence.
The Sharia
based products of these banks were widely accepted and set the stage for the
advent of Islamic banking in Kenya. When the banking regulation was finally amended,
removing prohibitions on trading in and holding of fixed assets, First
Community bank and The Gulf African bank were established. These two
fully-fledged Islamic banks have seen tremendous growth in the past two years
and within a short time, Kenya is fast developing as the Islamic finance hub of
East Africa. The Central bank of Kenya has acknowledged the importance of these
banks and how they have contributed in bringing the unbanked into the banking
halls. The two banks currently command 1 percent of the market share with a
customer deposit of 7.5 billion and a loan portfolio of 5 billion shillings.
The products offered by sharia-compliant banks are
not very much different from the traditional banking products and services.
They range from debt financing to capital markets, insurance (takaful), asset management,
hedge funds, Sukuk (Islamic bonds),
currency swaps and many more. However, all these products must be offered
within the confines of the Islamic law. As earlier mentioned, Islamic law does
not permit the indulgence in interest based financial transactions. The
principle being that it is unacceptable to increase the value of any commodity
by merely lending it to another person but rather profit should be earned on
goods and services through trade only. The probihibition of interest in Islam
stems from the fact that it is exploitative and unjust. The creditor only
provides the capital but is guaranteed a fixed amount of profit. The debtor on
his part puts in effort and time in the business but is made to bear all the
losses. This increases the gap between the haves and the have-nots. As an alternative to interest, Islam
encourages direct investment where the creditor shares in whatever profit or
loss the business incurs. Thus profit from trade is allowed and profit sharing (Mudarabah) enables banks to sustain
their business and report profits.
In a mudarabah agreement, the bank lends money to an
entrepreneur who invests it in a viable and desirable business. The profits
made out of the business are then shared between the bank and the entrepreneur
according to a predetermined ratio. In case of a loss, the bank suffers all the
loss by way of a reduction in the amount of loan due. This continues until the
loan is fully repaid.
The rule is that there should be no reward without
risk bearing and is applicable to both labor and capital. As no payment is allowed
to labor unless it is applied to work, so no reward for capital should be
allowed unless it is exposed to business risk. There are at least three reasons
for considering mudarabah arrangement to be more just than the normal
debtor-creditor relationship:
1) Both
parties agree on the ratio in which profits will be shared between them.
2) The
treatment of both parties is uniform in the event of loss, since if the
provider of the capital (the bank) suffers a reduction of the principal, the entrepreneur
(borrower) who manages the business is deprived of a reward for his labour,
time and effort.
3) Both
parties are treated the same way if there is any violation of the agreement. If
the entrepreneur violates any of the stipulated conditions, or if he does not
work, or is instrumental in causing loss to the business by negligence or bad
management, he will have to return the whole amount of the principal. If , on
the other hand, the bank violates any of the conditions, for example by
withdrawing funds lent before the agreed time, the entrepreneur will have to be
paid an amount equivalent to what he would have earned in similar work.
It is important to note that Islamic banks only
finance businesses that are considered lawful under the Islamic law. Sharia
allows all economic activities in the framework of protecting public interest
and adherence to ethics. They therefore do not provide funds for investment in
undesirable ventures such as alcohol, gambling, drugs, cigarettes etc.
If the customer wants to buy a certain asset, for
example a house or a motor vehicle, the bank acquires the specified asset and
sells it to the customer at cost plus a profit margin. The customer then pays
the price on a differed basis in installments. The asset is registered in the
name of the buyer from the start of the transaction. This is called murabaha. The bank has to expressly
mention the cost price of the commodity and the profit margin must be mutually
agreed upon. There are no additional penalties for late payment since the
profit of the bank cannot be determined explicitly and as such any additional
charges are assumed to have been included in the initial profit. To protect
itself against default, the bank asks for strict collateral.
Using this arrangement, Barclays bank recently
introduced La-Riba personal finance which allows clients to purchase goods and
equipment from Nakumatt supermarket outlets, and La-Riba vehicle finance where
customers can buy motor vehicles from CMC motors and DT Dobie on Sharia
compliant terms.
Hibah
(gift)
is a voluntary payment made by a debtor to a creditor. It is used by banks to
share a portion of the profits made by using the funds of their customers in
saving accounts. This may appear similar to interest and may have the same
impact but unlike interest which is a contractual obligation that must be paid, hibah is paid voluntarily at the
discretion of the bank. The bank pays such gifts to encourage clients to
maintain deposits in their accounts that the bank can lend to borrowers.
Other products offered include Ijarah (lease), Ijarah thuma
al bai (hire purchase), Musharakah
(joint venture), Bai’ al-Inah (Sale and buy-back agreement)
and qard Hassan (interest free loan).
Islamic banks and banking institutions that offer
Islamic banking products and services are
required to establish Sharia Supervisory Board(SSB) to advice them and ensure
that the operations and activities of the bank comply with shariah principles.
Such boards are made of religious scholars who are well versed with Fiqh al-muamalat (Islamic rules on
transactions) in addition to modern business, finance and economics. The
products of the bank must be certify by this board before they are offered to
the customers .A major challenge facing the Islamic banks in Kenya is the lack
of qualified Islamic banking personnel in the country and the few scholars who
are there are highly sought after, making them
sometimes serve in more than one board.
In the wake of the recent financial crisis, the
merits of Islamic banking as an alternative banking model came into focus. This
is because it offers safe guards against the excesses that precipitated the crisis.
Islam not only prohibits investment in unlawful activities which is deemed
harmful to the society but also transactions involving excessive gharar (uncertainty about the terms of
the contract or the subject matter) and all forms of gambling are prohibited.
For example, one cannot sell what he or she does not own. Islamic banking is
therefore not necessarily confined to muslims.Many of the basic tenets of
Islamic banking are applicable beyond the Muslim world since they deal with
simple morality and common attention to human dimension of the economy. It is
therefore not surprising that many non-Muslim bank customers have opted for the
relative safety of these banks’ products and services. In Kenya, both banks
have witnessed a surge in the number of non-Muslim clients which they term
beyond expectations and still signs point to a continuing growth of Islamic
finance not only in Kenya but the world over.
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