Quality compliance in the age of rising Islamic financing

The Kenyan financial sector is progressively adopting Islamic banking by integrating new products, including loan facilities, insurance, mortgages, real estate trusts, and derivatives that adhere to Ahkamu Shariah (rules of Shariah).

The surge stems from regulatory and policy reforms that have opened up the financial sector to create products aimed at a considerable segment of the bankable Muslim population, including Muslim-owned businesses and a significant number of consumers.

This has resulted in the emergence of Sharia-compliant divisions within banks, driven by the rising demand for ethical banking solutions.

As a result, we are witnessing a growing demand for Shariah-compliant products and businesses, driving entire industries from food and finance to insurance, pharmaceuticals, cosmetics, fashion, logistics, travel, and tourism, among other sectors.

The East African region has diversified its products to tap into Islamic finance, with Kenya launching its Linzi Finko sukuk (bond) this year. In Tanzania, several new Islamic financial products were introduced this year, following their inaugural sukuk issuance in 2023.

Uganda is also looking to follow suit, as authorities there announced the establishment of a regulatory framework that includes provisions for sukuk bonds, Shariah-compliant collective investment schemes, and relevant capital markets instruments.

In Kenya, Islamic banks, positioned at the forefront of this movement, are experiencing heightened customer engagement, particularly within Muslim-dominated regions.

As the market expands, Islamic banks bear the critical responsibility of offering innovative financial products and upholding the highest standards of Shariah compliance. This dual mandate necessitates a meticulous approach, seamlessly blending financial expertise with a profound understanding of Islamic jurisprudence.

To truly resonate with this market and uphold the integrity of Islamic finance, Islamic banks must adhere to essential conditions that ensure both the substance and perception of Shariah compliance.

This includes having a highly qualified, independent Shariah Supervisory Board (SSB) with expertise in Fiqh al-Muamalat (Islamic commercial law), Arabic language, and banking operations to approve products and guide their development.

This board will oversee the work of a dedicated Shariah compliance department and its officers, who monitor daily compliance with Shariah principles, train staff, and provide the first line of defence against deviation.

Compliance should not only be superficial but must be intrinsic to the product and the management of finances. This includes the separation of funds and activities, meaning that Islamic banking operations must be completely distinct from conventional banking activities to avert the commingling of funds.

Moreover, the bank should uphold a Shariah-compliant core banking system, which is vital for efficient operations and precise reporting. Ultimately, compliance must be audited through regular reviews by independent Sharia audits, which are essential for ensuring ongoing compliance.

The writer is the Head of Islamic Banking, Absa Bank Kenya