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Capital Markets

Why top exchange stocks are unfit for Sharia investment

Gulf African Bank on Kenyatta Avenue in Nairobi. Photo/FILE
Gulf African Bank on Kenyatta Avenue in Nairobi. Kenya has two fully Shariah-compliant banks namely First Community and Gulf Bank. The two control one per cent of the banking sector. FILE PHOTO | NATION MEDIA GROUP 

The majority of companies at the Nairobi Securities Exchange do not comply with Islamic law, limiting their attractiveness to Sharia-minded investors.

Nabo Capital, a fund manager, said only 16 of the 63 listed companies were Sharia-compliant, restricting Muslims’ investment options.

None of the 10 largest listed companies that include Safaricom, East African Breweries Ltd, cigarette maker BAT and banks is compliant with Islamic law.

“Safaricom was previously considered compliant till it started offering loans through M-Shwari,” said managing director of Nabo Capital Pius Muchiri.

Kenya currently has an Islamic Finance Country Index (IFCI) score of 2.2 which is low compared to Iran’s 73 that is the highest globally. In Africa, Sudan has the highest score of 14 followed by Egypt with six.

Sharia-compliance is pegged on the kind of business a company undertakes. Banks charge an interest that is not in compliance with Islamic law which requires sharing of profits.

Kenya has two fully Sharia-compliant banks namely First Community and Gulf Bank. The two control one per cent of the banking sector.

Eight conventional banks operate autonomous departments in an effort to meet the needs of the Muslims. Some of those that run departments include Barclays, National Bank, Standard Chartered and Chase Bank.

Other financial institutions that comply with the Islamic law include insurers, Takaful Insurance and Takaful Re-insurance and Crescent Sacco.

Kenya has been seeking to improve its ranking and attract cash from the rich Middle East economies by structuring Sharia-compliant products including Sukuks and real-estate investment trusts (Reit). The government has announced plans to issue a Sukuk bond next financial year to tap cash from the middle eastern petro-dollar economies.

Government securities receive the largest allocation of investments by fund managers. This puts institutions that choose to mobilise cash from Muslims at a disadvantage in terms of the rate of return they can fetch on their money and thus the need for compliant State bond.

Real estate was identified as the only option that was open to Islamic faithful. Recently Sharia-compliant investment firm, Kurwitu, listed at the Nairobi Securities Exchange. The firm is seeking to raise cash from Muslims and find compliant investment options for them.

The Acting Chief executive of the Capital Markets Authority (CMA), Paul Muthaura, said the country needed to increase the number of institutions involved in Islamic finance industry, set up a central Sharia supervisory regime, conduct public awareness as well as put up conducive regulatory environment.

Institutions offering products compliant to Islam have to operate a Sharia advisory board that is expensive to them. CMA is pushing for the creation of a national advisory body which will oversee operations of all players.

The regulator is currently hosting a conference on strategic implementation of Islamic financial regulatory framework.

In the banking sector there are no regulations to guide the banks on how to conduct the business. Investors are also concerned about tax application on earnings made from Sharia-compliant ventures.

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