Njuguna Ndung'u: Islamic finance - the African experience
Remarks by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the 2nd Gulf
African Bank Annual East & Central Africa Islamic conference, Nairobi, 3-4 May 2010.
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Suleiman Shahbal, Chairman, Gulf African Bank Ltd;
Najmul Hassan, Chief Executive Officer, Gulf African Bank Ltd;
Board Members;
Distinguished Guests;
Ladies and Gentlemen:
I am delighted and honoured to be here this morning to preside over the opening ceremony
of this important conference. To start with, let me extend a very warm welcome to all of you
who are attending this 2nd Gulf African Bank Annual East and Central Africa Conference
titled "Islamic Finance: The African Experience". Allow me in particular to extend a special
hand of welcome to the international participants "Karibuni Kenya". I also wish to convey the
apologies of the Governor, Professor Njuguna Ndung'u, who would have wished to
personally preside over this occasion but had to attend to other engagements. I will make
some remarks that reflect his strong views on Islamic finance and extend his best wishes for
fruitful deliberations at the conference.
The conference is important as it offer opportunities for the banking and financial sector
fraternity to meet and discuss emerging industry developments, to learn from their
accomplishments and challenges and to share views on sound practices.
Islamic Finance is so far the fastest growing segment in the global financial industry. Despite
the global financial crisis, Islamic finance has demonstrated strong growth with new areas of
business such as mutual funds and Takaful industry attracting a lot of attention. We need to
understand this business model that will support our relative comparative advantage in the
EAC region.
Kenya was the first country in the East and Central African region to introduce Islamic
banking. In this regard, two banks were licensed in the last two years to exclusively offer
Shariah-compliant products with many other conventional banks establishing a window
specifically for Shariah-compliant products. With this, I am proud to inform this gathering that
the concept of shariah complaint banking has emerged as an alternative vehicle for
mobilisation and supply of finance. For example, the two banks have already contributed in
development agenda of the country by participating in Shariah-compliant (Sukuks)
components of infrastructure bonds issued by the Central Bank of Kenya on behalf of the
Government of Kenya. We are still waiting for "Structured Sukuk" to cover the bonds and
T-Bills market.
However, although the concept of Islamic Finance has generated a lot of interest and
overwhelming support from both muslim and non-muslim population in Kenya, as a regulator,
we have faced certain challenges which I wish to share with this gathering. Key among these
are:
a) Islamic Banking prohibits interest and allows profit sharing. However, most of our
prudential returns and disclosure report formats were tailored for institutions which
have the element of interest in their financials. We have therefore tailored our
returns and disclosures formats to cater for the new market niche;
b) The Banking Act prohibits wholesale trading and restrict holding land and buildings
while Sharia compliant lending has an element of trading and land and building.
However, this challenge has been cured through granting of exemptions to
institutions concerned upon request. But also we are happy that this allows theses
banks and their clients to endogenise risk;
c) The law requires all banks to pay interest on savings accounts as long as the
minimum balance is maintained. This challenge has also been addressed by
incorporating in the Banking Act the leeway for banks to give some form of return for
Shariah-compliant savings products.
It is worth noting that the two fully fledged Shariah-compliant banks currently boast of
1570 loan accounts and 58,548 deposit accounts and control 0.8 percent of banking sector's
net assets after being in operation for less than two years. These developments have
enabled the formerly unbanked Kenyans and specifically the muslim community in the
marginal areas have access to financial services adding to the wealth creation in the
economy. This is a solid testimony of the vast potential of Islamic finance in Kenya, which
should be tapped, and opportunities explored in the insurance (takaful) and capital market
segments using sharia compliant vehicles.
On the regional front, there is a move by the countries in the region to permit their institutions
to offer Islamic products. Central Bank of Kenya is therefore sharing its experience in
Shariah-compliant banking with other Central Banks in the East African Community.
Therefore, there is growing interest in Shariah-compliant banking in our neighbouring
countries and Kenya has the potential to be regional Islamic finance hub. This is tandem with
vision 2030 aspirations. Under this Vision, one of the key aspirations for the financial sector
is positioning of Nairobi as a regional financial hub by 2030.
With these few remarks, it is now remains for me to wish you very fruitful deliberations over
the next two days and to declare the 2nd Gulf African Bank Annual East and Central African
Islamic Conference officially opened.
Thank you.