Kenya's Islamic finance drive to tackle taxes, governance

Nov 4 (Reuters) - Kenya’s plans to develop Islamic finance include a wide-ranging taxation review and the establishment of a national sharia board, steps which could set it ahead of other African countries aiming to develop the sector.

The country wants to build up the industry as part of a long-term plan to turn Nairobi into an international financial centre and as a way to help finance infrastructure projects by building commercial links across Africa and the Middle East.

The initiatives are being led by the Islamic Finance Project Management Office (PMO), a body setup recently to coordinate efforts among Kenya’s regulatory agencies.

The PMO has submitted an initial set of policy amendments focused on taxation of sharia-compliant products, said Farrukh Raza, managing director of IFAAS, an Islamic finance consultancy which designed the PMO’s framework.

“This will be the first precursor to overall industry development by giving legal recognition to Islamic finance transactions,” Raza said.

The aim is to ensure neutrality of Islamic contracts in areas such as stamp duty and withholding tax, with the proposed amendments to be included in a finance bill to be presented to the parliament next year, he added.

Kenya’s decade-old Islamic finance sector includes two full-fledged Islamic banks and several Islamic windows, but until now they have operated by way of exemptions, and a lack of clear rules have stunted growth, said Raza.

A second batch of policy amendments will be presented by the end of this year, covering banking, insurance, pensions and capital market products - including a framework for sukuk or Islamic bonds.

Plans also call for establishing a sharia governance framework and a national sharia supervisory board, which could be in place by the first half of next year, said Raza.

Islamic banks have traditionally practiced self-regulation in terms of their adherence to religious principles, but a centralised approach is gaining traction to help standardise contracts and address consumer perception concerns.

“Over the past decade sharia compliance has been a challenge for them. Differences in opinions have led to some issues and these have affected take-up,” said Raza.

The PMO, which has a team of five government officials including from the Capital Market Authority and the central bank, is also tasked with developing industry awareness and human capital for the industry.

Kenya’s National Treasury has said it is looking at the possibility of a debut sale of sukuk, although it has yet to finalize details for such an issuance. (Editing by Amrutha Gayathri)