By: The Standard
NAIROBI—Islamic banks could soon be allowed to fully implement Sharia banking principles without seeking exemptions from the Central Bank of Kenya (CBK).
The Central Bank of Kenya Amendment Bill, 2023 seeks to establish a regulatory framework for Islamic banks and financial institutions, to be expressly recognised under the Central Bank of Kenya Act.
The current Act does not do so, with the said institutions only recognised through regulations under the Banking Act. The effect of such a change would see Islamic banks regulated distinctly from conventional banks.
“The object of the Bill is to address the need for a regulatory framework that has become necessary based on the fact that international banks offering Islamic products are keen on breaking into the financial market in Kenya in order to exploit the full potential of Islamic banking,” the Bill sponsored by Wajir West Member of Parliament Yusuf Farah reads in part.
The International Monetary Fund has previously faulted the licensing framework as failing to address risks specific to Islamic banking.
The proposed law will essentially free Islamic banks from the current regulations that do not conform to the religion’s principles and remove restrictions to Sharia banking that exist under the current law. Such restrictions, falling under the Prudential guidelines, bar banks from engaging in trade and investment with deposits belonging to their customers.
Islamic banks are currently required to seek exemptions to the stated prohibitions on principals such as Murabaha, a cost-plus financing principle that allows Islamic banks to purchase goods on behalf of a customer and Musharaka, which allows banks and customers to form partnerships or joint ventures by combining assets for trade and sharing in the eventual profits and losses, among others.
“The introduction of Shariah Advisory Council will ensure that there is a uniform application of the principles and concepts of Islamic banking from a panel of experts,” Farah argues.
The Sharia Council will be chaired by the CBK Governor and will comprise their governors, two members appointed from the CBK staff, four members with knowledge of Sharia banking and the Treasury Principal Secretary or a representative.
“At least once every six months the Council shall submit a report to the Minister with respect to its activities and the Minister shall lay a copy of each report before the National Assembly,” the Bill reads in part.
The changes will take effect owing to a series of amendments to the CBK Act that Farah is seeking. Among the sections to be amended include Section 2, which will effectively set up Islamic banks and financial institutions and Section 4A, which will mandate the CBK to license the said institutions.
Others are Section 4D, which establishes the Council, Section 35, which provides that the CBK will be the banker of the Islamic institutions and Section 57, which will see the CBK make regulations for Islamic banking.
