Islamic asset financing makes its mark in Kenya’s homes market
Posted Thursday, July 19 2012 at 21:10
Ever since the Central Bank of Kenya granted Gulf African Bank a licence to sell Sharia-compliant financial products in Kenya, more than a half a dozen banks have followed suit with a wide range of services, ranging from bonds to asset financing.
Initially, these products were targeted at the growing wealthy Muslim population, but most have become popular with non-Muslims.
“Several banks have launched various products aimed at Muslims showing that the market is now ready for Islamic banking,” Asad Ahmed, the chief executive of Gulf African Bank told the Business Daily.
The Islamic asset financing, which includes mortgage or home loans, is one of the major products the Gulf African Bank launched within a year of business in Kenya.
The mortgage, known in Islamic banking as Diminishing Mushrakah (DM), has opened up new opportunities for property buyers and has reported steady growth since its launch in 2009.
“The uptake of this product by our customers has been so successful for all segments of the market,” says Mr Ahmed, who believes lack of clear understanding of the product remains a big hurdle for potential beneficiaries.
This is because unlike an ordinary home loan that comes with clearly set payment period and interest rate chargeable, Islamic teaching prohibits the involvement of a Muslim in any transaction that involves charging interest.
Keeping in line with this principle has meant that the DM is structured differently. The product is built on the principle of joint partnership between the bank and the borrower.
Mushraka refers to a partnership established under a contract, by the mutual consent of the parties for joint ownership of the property.
DM allows equity-type participation for the bank in the property along with the customer where the bank rents out its share to the customer.
With each instalment paid by the customer, the equity of the bank reduces and ultimately the ownership of the asset transfers to the client. This compares well with a mortgage product for an owner-occupied residential property.
“The contribution by the home owner becomes his share and the contribution by the bank, becomes the bank’s share in the asset,” explains Mr Ahmed.
At the onset, the bank and the borrower agree on the rent to be paid on the share owned by the bank.
“The bank and the owner agree on how to buy out the share on the agreed percentage,” he says.
This leaves the sharing of the reward and loss in the investment as the fundamental difference between conventional mortgage and Islamic DM.
In conventional home loans, the lender leaves all the market risks, such physical destruction, to the borrower. Under DM, such risk is shared by the two parties.