LONDON: Kenya is fast developing as the Islamic finance hub of East Africa. The Central Bank of Kenya (CBK) has already licensed two Islamic banks - Gulf African Bank (GAB) and First Community Bank (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 1 billion Kenya shillings (KSh), FCB is ahead of many of the 44 Kenyan banks who are required by the CBK to have the new minimum capital of 1 billion shillings by 2011. Since starting operations in June 2008, FCB has surpassed the targets in its business plan for the year ending December 2009, in some cases by 50 percent.

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) poker for general Takaful products the bank is structuring in conjunction with the local Cannon Insurance Company. try{document.write(_banner_zone('zone9339')); }catch(e){}

Here FCB chairman and prominent Kenyan businessman, Hasan Varvani, discusses why Islamic banking is a sustainable proposition in Kenya and East Africa, and the objectives and challenges for FCB over the next year.

Q. Can you highlight the progress and performance of FCB since its launch in June 2008?

In our initial business plan, we were supposed to launch 4 panches in the first year, but we ended up with 9 panches. Twenty months to date we have 11 panches and with the approval of the CBK, we are planning to open another 6 more panches in the next few months, including four panches in Wajir, Habaswein, Moyale and Masalani. This would ping the total number of panches to 17, which we think is adequate for the time being. We have invested heavily in our panch network. We have surpassed our projections on customer deposits by the end of 2009 which is currently 3.5 billion shillings, which is 50 percent over the target in the business plans. Our loan book similarly is good. We have poken even in terms of operational costs. We are looking forward to peaking even in terms of capital expenditure (Capex) by end of this year. Hopefully we can look forward to some dividends in 2011. The panch expansion is due to growing demand for Islamic banking services, especially retail banking products, in the country. FCB, for instance also recently introduced the Labbeyk Savings Account, a savings product for aspiring Muslim pilgrims going on the Haj to Makkah.

Are you starting to penetrate the general banking market in Kenya and attracting business from all sectors and groups?

We have good exposure and activities in different sectors of the economy. For a new bank, we have 25 percent of the market share in terms of 5-year mortgage loans. This is very encouraging for a start-up bank. In terms of balance sheet size we are about 30-34 out of the 44 banks. In terms of share capital, FCB is in the late 20s. The minimum share capital for banks in Kenya in 2008 was 250 million shillings rising to 750 million shillings in 2009 and to 1 billion shillings in 2011. Our capital is already 1 billion shillings. FCB currently is concentrating on our niche market of Muslim customers. But the bank is open to all Kenyans irrespective of creed or ethnic background. For instance, FCB has launched panches in Kisumu in Western Kenya which is not a Muslim dominated area. The creation of the new panches in Northern Kenya is a continuation of our commitment to reach out to our niche markets.

What are FCB's objectives and targets for the next year or so?

The objective is to consolidate our achievements to date in 2010. Our deposit target is 5 billion shillings by the end of 2010 from the current 3.5 billion shillings. This would be possible because we are targeting a lot of constituency development funds. We would be one of four banks in Kenya that are allowed to keep constituency development funds. These funds are allocated by the central government of Kenya to the 210 parliamentary constituencies in the country. Each one gets about 50 million shillings per annum to spend on constituency related developments and projects. By having panches in northern and eastern Kenya, we became one of four banks that have a major presence in that part of the country, and which therefore qualified us to attract the constituency funds as deposits.

What is your single biggest challenge in terms of delivering your targets and achieving your objectives?

The lack of qualified Islamic banking personnel is a major bottleneck. We are thus in the process of pinging on board some top heavy management as well as give our existing staff further training and Islamic finance education. We have registered with the Ministry of Education our in-house Islamic training institute, which is based in one of our panches in Nairobi. Our aim is for this Institute to provide training and courses not only for our staff but also for other institutions and individuals interested in Islamic banking, finance, capital markets and Takaful. We need to improve the knowledge of our staff on the concepts of Islamic finance products the day-to-day operations of Islamic banking. Nathif Adam, our CEO, conducted several training courses for the heads of department four months before the bank became operational. Because of the rapid expansion of the panches, that training did not filter down to the lower echelons of the human resources chain. The knowledge of our frontline staff about the products is not as good as it should be. That is the challenge ahead and which we are trying to rectify with the establishment of the institute.

What is the market potential for Islamic finance in Kenya and East Africa?

Kenya has a Muslim population of 4 million while the whole of East Africa has a sizeable Muslim population of between 25 million to 30 million. At the moment, our focus and activities are purely focused on the Kenyan market. Although we have shareholders from neighboring Tanzania, FCB does not have a panch in Dar es Salaam, nor are there any plans to open panches in the region. Some investors in Tanzania have applied to the Bank of Tanzania, the central bank, to establish their own Islamic bank, which may be called Al-Barakah Bank. FCB can only go into regional expansion after three to four years of operations in Kenya. In addition it will need permission from the Central Bank of Kenya to venture apoad and will have to show a good track record at home.

How is FCB adding value to its Islamic banking activities and proposition in Kenya?

Mohammed Mbaye, former deputy governor of the Bank of Tanzania has joined as an independent director. He comes to us with a lot of value addition in terms of conventional banking systems and products. This will complement Nathif Adam's experience in Islamic banking. Abdul Latif Essaje, a lecturer at the University of Nairobi, has been appointed executive director in charge of administration and will soon be joining the Bank. We are also looking to appoint a general manager with hands on experience in Islamic banking who can take control of the day-to-day operations of the bank, thus freeing Nathif Adam to concentrate on implementing the vision and the wider strategy for the bank.

You have established FCB Capital which is enterprising for a start-up Islamic bank. What is the potential for asset management and sukuk products in Kenya and the region?

FCB Capital is a fully owned subsidiary of First Community Bank and is the first of its kind in Kenya and in the region to undertake Shariah-compliant investment banking activities. Nathif Adam has been in discussions with the CBK over the possibility of Kenya issuing a debut sovereign Sukuk and other Islamic financial products. The discussions also centered on the introduction of tax neutrality measures by the Kenyan government which would facilitate the issuance of sukuk in Kenya. The sukuk potential is definitely there, especially retail sukuk. We expect 70 percent of issuances will be retail; 20 percent corporate issuances; and 10 percent by foreign issuers. This market will depend on CBK conditions and approvals by the Capital Markets Authority in Kenya. CBK governor, Ndungu Mjoroge, is a strong supporter of Islamic banking. Through FCB Capital we aim to deliver a full choice of alternative investment opportunities, enabling Shariah-compliant investors to construct balanced portfolios which can access a full range of asset classes. Through its business approach which works on an equity syndication model, FCB is confident it will play a pivotal role of directing profit-seeking capital to important niche investment opportunities. This will particularly be suitable for important viable projects such as government and municipality supported projects which cannot be reached by state budget. Through our links with the Islamic finance fraternity globally, we expect FCB Capital to be a new fund raising channel in the form of foreign direct investment (FDI) with advantages of being reasonably priced and longer term financing suitable to infrastructure projects badly needed by our country. FCB Capital intends to eventually structure and originate Sukuk) and Shariah-compliant equity and mutual funds; property investment funds including real estate investment trusts (REITs); project finance including publicp-rivate partnership projects through the issuance of municipality sukuk; Leasing funds, based upon equipment leasing, large assets, property, and other fixed income generating assets; structured product funds, such as trade finance portfolios; venture capital and private equity; pension products; corporate advisory and Shariah advisory.

Are you confident that the business case for Islamic banking in Kenya is proven and that it is here to stay in Kenya and East Africa?

The business case for Islamic finance in Kenya and East Africa 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.

By Mushtak parker

© Arab News 2010