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Barclays launches sharia-compliant financing facility

From left: DT Dobie Managing Director, Mr  Zarak Khan, Barclays Sharia Advisory Board vice -chairman, Mr  Khalfan Khamisi, Barclays Kenya MD, Mr  Adan Mohammed, the Chief Kadhi Hammad Kassim and the board’s chairman, Mr Ahmed Mallam, during the launch of Islamic personal and vehicle finance products on February 2, 2010. Photo/LIZ MUTHONI
From left: DT Dobie Managing Director, Mr Zarak Khan, Barclays Sharia Advisory Board vice -chairman, Mr Khalfan Khamisi, Barclays Kenya MD, Mr Adan Mohammed, the Chief Kadhi Hammad Kassim and the board’s chairman, Mr Ahmed Mallam, during the launch of Islamic personal and vehicle finance products on February 2, 2010. Photo/LIZ MUTHONI 

Barclays Bank is set to woo Kenya’s massive Islamic community with the introduction of an asset financing facility, as competition in the nascent Islamic banking scene intensifies.

The La-Riba Vehicle Finance and La-Riba Personal Finance products are seen as an answer to asset financing products provided by new entrants —First Community Bank and Gulf African Bank — hoping to appeal to the underserved Islamic community in Kenya.

At a time when the Islamic form of banking and financing is gaining traction in the Sub-Saharan Africa — despite the credibility test from the Dubai Debt crisis— both conventional banks and pure Islamic banks are eyeing the budding sector.

The new products from Barclays, like other sharia products, are vetted by an advisory board that affirms their compliance to Islamic principles and tenets; key among them being the strict prohibition of levying usury.

“It is not a loan given on interest but of a sale of commodity based on price and an agreed profit,” says Adan Mohammed, Barclays Bank’s regional managing director of East and West Africa.

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The repayment is facilitated through a monthly standing order from the borrower’s account with a repayment window of up to five years based on the Islamic Murabaha mode of financing.

Murabaha is a common method of finance in Islamic banking and is a deferred sale of goods at cost plus an agreed profit mark up.

The seller then purchases goods at cost price from a supplier and sells the goods to the buyer at the cost price, including an agreed mark-up.

According to London-based Institute of Islamic Banking and Insurance (IIBI) in its publication New Horizon, asset ownership in Murabaha versus a charge on assets in the case of a secured loan: an Islamic bank takes ownership of an asset, even for a very short period, before selling it to the customer.

This ownership period by the lender is an insignificant part of the total useful life of the asset. However, the ownership risk is covered by insurance.

This means that it does not constitute a major difference with the charge on assets in case of conventional loan which extends bank’s right to asset used as collateral.

Conventional banking

Touted as the answer to conventional banking whose risky practices have come under the spotlight since the start of global financial crisis back in 2008, Islamic banking and financing has enjoyed a growing popularity.

Last year, global issuance of Shariah-compliant bonds and loans grew 40 per cent in the first 10 months of 2009 compared to the same period a year ago, as reported by the New York Times.

The total amount of Shariah-compliant debt outstanding is estimated at about US$1 trillion, up from US$700 billion just two years ago.

But about 10 per cent of the Dubai’s US$80 billion debt load is estimated to comply with Shariah, casting the spot light on the credibility pedestal Islamic financing has ridden on over the years.

Islamic banking experts at IIBI say that Islamic finance as a viable solution to get rid of the weaknesses of conventional finance is mainly limited to theoretical debate.

“It is because of this fact that practitioners have not yet developed flagship products and solutions not available in conventional finance,” said Muhammad Ismail, an associate with the IIBI.

But because modern Islamic banking is relatively new, rules for financial accounting, bank governance, and lending standards are continually evolving as business practices become more refined.

Locally, Islamic banking has taken off since the introduction of Sharia — Islamic laws—compliant products back in 2006.

But it was not until 2008 when Gulf African Bank and First Community Bank became the first two fully fledged Islamic banks to operate in Kenya.

Targeting an estimated nine million Muslim population in the country, Islamic bankers have been keen to grow the sharia model in Africa.

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