The regulatory flexibility has brought into the formal financial system billions of shillings in assets that would either be circulating in the black market or flown to foreign jurisdictions.
Regulators do not necessarily like it when regulatory gaps are pointed out in the open, as this exerts pressure on them to act quickly and not necessarily within their preferred timelines.
The sector requires a firm, proactive, but also pragmatic regulatory hand to sail through.
The Kenyan banking sector watchdog must take seriously the IMF’s warning on risks posed by weak regulations of Islamic banking.
As it is, regulation often lags behind innovation. It is laudable that the Central Bank of Kenya (CBK) #ticker:CBK allowed banks to offer Sharia-compliant products in measured steps that eventually saw the licensing of fully-fledged Islamic lenders.
The regulatory flexibility has brought into the formal financial system billions of shillings in assets that would either be circulating in the black market or flown to foreign jurisdictions.
But when the International Monetary Fund (IMF) uses words such as “gaps in the legal and governance framework, and weak consumer protection” then the regulator must pause and take note.
Regulators do not necessarily like it when regulatory gaps are pointed out in the open, as this exerts pressure on them to act quickly and not necessarily within their preferred timelines.
But the IMF should be commended for openly highlighting the weaknesses, as this can only help in catalysing timely action on the matter.
Fortunately, current CBK governor Patrick Njoroge is a student of the IMF and he would also most likely appreciate the urgency of the matter and the overall benefit of such transparency to the Kenyan banking sector.
Even though Parliament may not pass any substantive laws between now and the August 8 General Election, it could be worth the effort for the CBK to gazette regulations that could seal some of the gaping loopholes.
The Kenyan banking system, though still reasonably sound, is in a trying period on many fronts.
A cap on the cost of lending has significantly shrunk their profit margins, forcing most of them to cut deep into their cost structures.
Increased sophistication of cyber criminals also poses a menacing danger, laying online landmines that threaten what the lenders see as the future of banking.
The sector requires a firm, proactive, but also pragmatic regulatory hand to sail through.
The already suggested regulations on cybercrime preparedness are one way to prepare for these risks.
Tightening the regulatory gaps on Islamic banking as advocated by the IMF is also another way of cushioning the banking sector.
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