Islamic banking in Kenya: need for a regulatory framework compliant with principles of Sharia

Simiyu, Chrispine Maondo
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Strathmore University
Islamic banking has developed into a key component not just within the financial sector but also a major catalyst for growth of various world economies. The position in Kenya is no different, and the growth in Islamic banking over the last decade and its effect on the economy cannot be understated. As is the position with every sector, growth and development mostly supersede legislation and it is only after a product has been developed that suitable legislation, taking into account its characteristics is promulgated by the legislature, or policy developed by the regulator to not only govern but also ensure sustainability and protect consumers of the product. Islamic is no different, many countries including Kenya have embraced its operations in the last few years. This thesis looks at the growth of Islamic banking in Kenya and conducts an in depth examination of the existing institutional and regulatory frameworks impacting its operations in order to determine their responsiveness. The thesis thereafter details the various deficiencies existing both in the regulatory and institutional frameworks currently existing and as a result thereof makes a case for reform. The study illustrates that the operations of Islamic banking, which is fundamentally different in terms of ideology to that of conventional banking, are within the Kenyan content mostly undertaken through what is termed “a window of banking”. This is because the existing framework was designed with the conventional banking sector in mind. That being the position, for Islamic banks to offer certain financial products compliant with Sharia, they must obtain the consent of the Central Bank of Kenya since these products ordinarily fall within the category of prohibited business under the Banking Act. This consequently subjects them to a different type of treatment thereby disadvantaging their operations. This position is different to that of their competitors, the conventional banking sector for whom the regulatory framework was developed. Islamic banks are similarly subjected to the same institutional framework including supervision and dispute resolution without differentiation premised on its characteristics. The operations of institutions trading in Islamic banking products are mostly therefore variously curtailed, which fact has hindered introduction of other financial products in Kenya. The thesis identifies proposals necessary to align the existing framework to the principles of Sharia, and this is done through a case study of two economies, the UK and Malaysia which have greatly advanced on the field of regulation to ensure that the operations of Islamic banks are aligned to Sharia. The thesis traces the developments in the legislative and institutional frameworks in these two jurisdictions, including the deliberate action through policy and amendment of existing legislation in the case of the UK, and promulgation of specific legislation by Malaysia, and proposes a case for change including the incorporation of Sharia Advisory Boards and Sharia Committees to offer policy guidelines and ensure that institutions transacting in Islamic products do so in compliance with the principles of Sharia. The two institutions similarly offer policy that guides in dispute resolution. The findings of this thesis make it necessary for action to be taken by the legislature to amend the existing laws in a manner that integrates the operations of Islamic banking institutions to the current regulatory framework but in a Sharia compliant manner. The findings shall also guide the regulator in developing policy that takes into consideration the Sharia governance principle hence facilitating the operations of Islamic banks.
A Thesis submitted in partial fulfillment of the requirements of the Degree of Master of Laws, at Strathmore University
Islamic banking_Kenya, Regulatory framework compliant, Sharia