Investor interest in Sharia-linked products grows
Posted Friday, October 15 2010 at 00:00
Investors are showing increasing interest in offering Sharia-compliant financial services in the Kenyan market. The two Islamic banks, First Community and Gulf African Bank, last week said they had acquired regulatory licenses to roll out takaful — Islamic insurance covers. Business Daily spoke to Dr Hassan Anandwa, a scholar at the Thika College for Sharia and Islamic Studies, on the new products.
What is the main difference between conventional financial services and the Islamic versions?
Conventional financial services involve earning or charging interest. The Islamic versions, however, prohibit interest earning which is called haram. Those that comply with the above condition are called halal.
What products are halal among Islamic banks?
Savings and current accounts are halal and so are commissions and fees charged on these and other services like money transfers.
Ordinary banks earn the bulk of their income from interest on loans. How do Islamic banks earn income from the loans they advance?
Instead of earning interest on loans, Islamic banks simply put a markup on the value of the loan a borrower is seeking. There are several ways of doing this. One, the bank and borrower enter into a joint investment funded largely by the bank.
The bank and the borrower share risk and profits from the investment and ownership tilts gradually to the borrower as the bank recovers the principal amount and the markup agreed between the parties from revenues collected.
Alternatively, the bank can buy property such as a car on behalf of a borrower and fully own the log book. The borrower buys the car in a series of instalments or as a lump sum payment at an agreed price that gives a profit to the bank.
Are Islamic banks more profitable than conventional banks?
They tend to make more money and are generally more expensive than conventional banks. Because of this, some Muslims go to conventional banks. Islamic banks are, however, more flexible in terms of repayments even when there are delays.
Ordinary banks are guided by interest charged by the Central Bank and the capital markets. Are Islamic banks free from such market forces?
They are sensitive to interest rates charged by their peers. They watch the market and try to make their mark-ups competitive. Otherwise, they would lose clients to the interest-based banks.
The profit on loans is often decided on a case by case approach, offering more flexibility than using a simple interest guide. Sharia law does not put a cap on the profit a bank can make.
Does this mean the Central Bank as a regulator will not interfere even when the mark-ups on loans are higher than the industry average?