Written by Geoffrey Irungu

October 04 2007: World Bank private lending affiliate, International Finance Corporation, is considering funding Islamic banks in Kenya following the licensing of two such institutions recently.

IFC is out to buy shareholding in them, giving them loans, guarantees or technical assistance in financing as it seeks to take advantage of the popularity of the Islamic banking products locally. It is part of the IFC's worldwide initiative to finance Islamic banking as it takes a fast growth path.

IFC head in Kenya Philippe Prosper said yesterday that exploration of the business opportunities was going on to exploit what it sees as a "huge potential market." Already, CBK has licensed Gulf African Bank and First Community Bank as Islamic banks.

They are due to start local operations while a number of commercial banks including Barclays, KCB and Dubai Bank offer Islamic banking products.

However, some players in the industry have sounded an alarm following a ban on the service in Southern Sudan, which has substantial business links with Kenya and Uganda.

Though local banks offering Islamic financial services said they would not be affected by the move, one has emphasised on the need for better understanding of the concept.

Mr Viju Cherian, the former chairman of Dubai Bank Kenya, recently told Business Daily: "From a business point of view we are not affected, although it seems the concept of Islamic banking is still not properly understood."

Recently the Bank of Southern Sudan ordered that Islamic banks in the territory change into conventional banks or call quit.

The change would mean paying interest on deposits and being paid interest for loans to customers, procedures which most Muslim jurists say are against the Koranic ban on usury. At the time Mr Cherian said: "Islamic banking is commercially viable.

Rather than pay interest at a fixed amount — which is not allowed in Muslim law, depositors are rewarded by way of a dividend on the tenure of deposits. At the end of the day, the system allows for profit sharing on the deposits made."

IFC is the single largest foreign shareholder at K-Rep bank which is associated with microfinance. To exploit the increased trade between western and Islamic nations in the Middle East, western banks such as Citibank and Deutsche Bank have opened Islamic banking units.

But rules for financial accounting, corporate governance, and lending standards are continually evolving since modern Islamic banking is relatively new.

London-based Institute of Islamic Banking and Insurance says Islamic banks are organized such that they differentiate between shareholders' funds and clients' deposits to ensure correct profit sharing according to Islamic law.

On microfinance, Mr Prosper said he did not think change in capital requirements for microfinance institutions would impact negatively on the business as it would even help foster mergers and acquisitions among them.

At the end of 2006, the Microfinance Act was enacted stipulating that MFI operating nationwide must have minimum core capital of Sh60 million while those operating only within certain local jurisdictions must have a minimum capital of Sh20 million.

It was the first time that a law was being put in place to regulate MFIs that have traditionally operated either informally or were registered under the companies, societies or co-operatives Acts.

Some players in the MFI sector have expressed concern that there is a possibility that enacting minimum capital law goes against the informal and unstructured nature of MFI business.

Mr Prosper was speaking during a ceremony to initiate World Bank's six-weeks of activities to help Kenyans gain a better understanding of the group and its operations.