Malaysia lessons on firming up Islamic finance

Islamic banks in Kenya are hugely expected to conform to regulations as stipulated under Central Bank Prudential Guidelines, 2013. Despite its wide application in the banking spectrum; be it conventional or Islamic banking, unique challenges and practices by Islamic banks justify the need to review the prudential guidelines or develop a set that will focus on unique aspects of Islamic banking operations, financing practices and risk management.

To buttress the importance of regulations of Islamic financial institutions, Bank Negara Malaysia introduced few guidelines in 1996, firstly New Financial Disclosure (GP8) to give greater transparency and disclosure of Islamic banking operations. There was also the establishment of Shariah Advisory Council (SAC) as the sole authority to advice BNM on Islamic banking and Takaful operations.

It is difficult to have a vibrant Islamic banking system without shariah compliant Islamic money markets to help in Islamic banks liquidity management. To overcome this problem, Malaysia introduced a number of Islamic money market products. Bank Negar Malaysia influences Islamic interbank market liquidity through an array of Shariah-compliant instruments, the main instrument being the Qard acceptance (loan). Through the Qard acceptance, the Bank manages liquidity in the context of a surplus liquidity environment by inviting Islamic banking institutions to place their surplus funds with the Bank. The Bank also uses Commodity Murabahah Programme (CMP) to manage liquidity. CMP utilises mainly crude palm oil-based contracts as the underlying commodity transactions to facilitate liquidity management via a commodity trading platform. For longer-term liquidity management, the Bank issues Bank Negara Monetary Notes-i (BNMN-i) which are structured based on Islamic concepts of Murabahah (BNMN-Murabahah), Ijarah (BNMN-Ijarah), Bai Bithaman Ajil (BNMN-BBA) and Istithmar (BNMN-Istithmar). Other financial market instruments are Malaysia Islamic treasury bills, Islamic commercial papers or medium term notes programme and murabahah negotiable certificate of deposits.

In terms of regulations, there must be a pool of trained and competent human resources at the regulators level to inform the development of guidelines to regulate specific activities and operations of Islamic banks. Malaysia developed the International Centre for Education in Islamic Finance (INCEIF) to ensure there is standardised approach to training of Islamic finance professional and to meet the shortfall in human capacity. Building a competent pool of professionals at all levels from the regulatory agencies such as Central Bank of Kenya, Capital Markets Authority, Insurance Regulatory authority and the Nairobi Securities Exchange and to individual Islamic financial institutions will help speed up the drafting of regulations, establishment and operationalisation of Islamic money and capital markets.