The perceived sustainability and attractiveness of Islamic finance as an alternative financial management model in a post global financial crisis continues to flourish in new regions and countries trying to change banking regulations and laws to facilitate the introduction of such institutions and products in their respective jurisdictions.
The latest region which is trying to open up to Islamic finance is East Africa, including Ethiopia, where local reports suggest that the National Bank of Ethiopia, the central bank, is in the process of finalizing a banking regulation and business directive that would allow the authorization of a bank operating under interest-free principles.
At the same time the government of Kenya is studying the possibility of issuing the country's debut sovereign sukuk issuance, while the First Community Bank (FCB), Kenya's second Islamic bank, has launched FCB Capital, which plans to issue a series of local currency sukuk plus other Islamic capital market products for a growing market segment.
In neighboring Tanzania, private sector investors have applied to the Bank of Tanzania, the central bank, to establish their own Islamic bank to be called Al-Barakah Bank.
Perhaps more importantly, the Jeddah-based Islamic Corporation for the Development of the Private Sector (ICD), the private sector funding arm of the Islamic Development Bank (IDB) Group, is in the process of applying for an Islamic banking license in Uganda, a member country of the IDB.
The rationale, according to general manager and CEO Khaled Al-Aboodi, is to establish the bank in a member country, a pre-condition under the ICD articles of memorandum, which could then enter other countries in the region, and to finance or do business in these countries, whether they are member countries. "For example, in East Africa we only have Uganda as a member country. We are thinking of setting up a bank in Uganda which will serve the entire East African region including Tanzania and Kenya, which are not member countries. The headquarters has to be in a member country but it can do business anywhere."
East Africa, including Ethiopia, has a sizeable Muslim population of between 25 million to 45 million. In Kenya, despite the fact that the country has a Muslim population of 4 million, Islamic banking is growing at a steady rate, not only servicing the needs of Muslims but also anyone of any institution interested in ethical and socially-responsible financing. In addition, some parts of Kenya have a large expatriate Somali community as a result of the civil war in neighboring Somalia, which, in some branches, constitute 60 percent of the clientele of FCB in Kenya.
The business case for Islamic finance in Kenya and East Africa, says FCB chairman and prominent Kenyan businessman, Hasan Varvani, is proven. "The best case scenario that we had in our feasibility study and compared with what we have achieved to date is more than proof that Islamic finance is here to stay in Kenya. We have out-achieved our initial targets and objectives by far," he explained.
Kenya has ambitions of becoming the Islamic finance hub of East Africa and has the first mover advantage. The Central Bank of Kenya (CBK) has already licensed two Islamic banks - Gulf African Bank (GAB) and FCB - under CAP 488 of the Banking Act of Kenya. In terms of capital and deposits, FCB, whose CEO is the experienced Islamic banker, Nathif Adam, formerly with Qatar Islamic Bank and Sharjah Islamic Bank, is the largest Islamic bank in Kenya with a capital of 1bn Kenya Shillings (KSh).
Since starting operations in June 2008, FCB has also recently been authorized by the CBK to launch FCB Capital, which will offer Islamic asset management business and capital markets products especially sukuk. Similarly, FCB has been authorized to act as an Islamic insurance (Takaful) broker for general Takaful products the bank is structuring in conjunction with the local Cannon Insurance Company.
Religion, especially Christian-Muslim relations, in East Africa can be a sensitive issue. Despite the fact that Muslims form a largish minority in many of the East African countries, some non-Muslim groups perceive the entry of Islamic finance in religious terms and available for Muslims only, as opposed to an alternative financial system open to anybody irrespective of religion.
This is particularly so in Ethiopia, which is home to one of the oldest Christian churches and also to an ancient Islamic heritage. Not surprisingly, the government of Ethiopian Prime Minister Meles Zernawi, is treading cautiously by promoting the establishment of a so-called home-grown nascent Islamic banking industry.
The idea is to authorize the first local Islamic bank on the basis of only Ethiopian shareholders. As such, no foreign investors or Islamic banks would be allowed to have shares in any proposed bank.
The Bank of Ethiopia did publish the 2008 banking business proclamation — effectively a draft consultation document outlining the introduction of interest-free banks in Ethiopia. After the consultation period the Bank of Ethiopia in June 2010 published the directives for conducting interest-free banking, which once adopted would pave the way for the launching of the country's first Islamic bank.
In 2008, local Ethiopian Muslim investors set up the ZamZam Bank Share Company, and according to the local Capital website, this company is set to become the first Islamic bank in Ethiopia.