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Kenya freezes new Takaful licenses

Kenya has frozen the licensing of new Takaful companies until a proper law to regulate them is completed.

The move offers an unexpected boon to Kenya’s existing Takaful firms, who can now grow unimpeded by new competition. However, the regulator’s strategy risks losing its position as the leading IF hub in East Africa to neighbors Tanzania and Uganda, who have put no such restrictions on new local and foreign firms entering their markets.

In one of the boldest reforms of the insurance industry, Kenya licensed two local Takaful operators, the fully-fledged Takaful Insurance of Africa (TIA) and First Community Bank’s Takaful window run by Cannon Assurance in 2010, leading the way for Islamic insurance in Africa.

As an indication of demand for the services, TIA underwrote business worth slightly over $1m in its first four months of operations last year, mainly in commercial and private motor vehicle Takaful. Although this is small beer compared to some of the more developed markets like the GCC and Malaysia, it is quite a significant sum to raise in premiums in such a short time in the insurance markets of East Africa.

“We have withheld the licensing of more Takaful companies until we fully understand the dynamics of Takaful operations with the two companies,” Sammy Makove, head of Kenya’s Insurance Regulatory Authority told The Islamic Globe in an exclusive interview in Nairobi.

He added: “We have received many inquiries from investors who want to set up Takaful companies but we cannot rush until proper regulations are established in the view of operational experience of the two entities.”
The enquiries received were from local entities as well as foreign insurance firms wanting to expand into the rapidly developing markets of East Africa – tipped by many as one of the hotspots for IF in 2012.
However Makove’s decision has courted criticism from some quarters in Kenya, primarily as a moratorium would inhibit the growth of the sector at what some see as a vital time in the development of the regional industry.

“Takaful is a model that has been successful elsewhere and what we should have done from the word go was to borrow regulations and operational procedures from other countries that already have a flourishing Takaful sector and adapt them for local conditions,” said Professor Hassan Nandwa, a lecturer of Law and Shari’ah at Zanzibar University and leading commentator on IF in Kenya.

He said Kenya has adequate Takaful expertise at the advisory level that the IRA can tap into, but the decision to not involve local expertise means the learning process will be much slower. “The problem is that the IRA is trying to learn [Takaful] on its own, [without asking for help or advice] and this will delay the progress of the industry,” he said.

Currently Kenya’s insurance law does not recognize Takaful as a standalone product, although the law empowers the IRA to issue ad hoc regulations authorizing individual operators on a case-by-case basis to sell Takaful products.

Across the Kenyan financial sector, Islamic finance is a new thing and although the latent demand, especially on a retail level is vast; the regulators have not caught up with the operators. Hence laying down the proper regulations is vital to the development of the industry.

For example, Kenya’s capital markets do not yet have Shari’ah compliant financial products like Sukuk, which is limiting where Takaful companies can invest their premium revenue. Hassan Bashir, CEO of TIA, has regularly complained to The Islamic Globe about having nowhere to place his premiums in Kenya, as the local infrastructure simply does not exist. Kenya is currently addressing this issue with recommendations for experts being reviewed by the Capital Markets Authority, the market regulator and in the process of imminently issuing its first sovereign Sukuk.

The insurance law also does not allow companies to invest in offshore assets, locking out Kenyan Takaful entities from established capital markets in the Middle East and Asia.

Takaful companies are also facing double taxation, as Shari’ah requires them to pay Zakat while the national insurance law in Kenya requires that they also pay corporate taxes.

“We are consulting widely. The options are to hasten the review of the national insurance law to address the liquidity and taxation issues affecting Takaful, or issue new [bolt-on] regulations to achieve the same objective,” said Makove. He said the IRA has sent staff members to the Middle East and Asia to learn about Takaful regulations with the view of replicating some elements of it in Kenya.

There is no doubt that demands for Takaful and Islamic finance in Kenya is high. Although there has not been a comprehensive survey carried out, with a population of 4.4m domestic Muslims and Muslim-owned businesses in Kenya dominating the coastal city of Mombasa, as well as the capital city Nairobi, especially in shipping, transport, wholesale, and light manufacturing sectors, there is a large reservoir of wealth to be tapped into.

A large amount of capital has washed into the Kenyan economy from across the border as the Somali Diaspora, which makes up a significant minority in the north of the country and parts of Nairobi, has made Kenya its business hub and investment abode because of instability in Somalia. The Somali Diaspora has bought up substantial real estate in Nairobi and Mombasa over the last 10 years.

Many Somali residents of Kenya are now agitating for Shari’ah compliant vehicles for investment, borrowing and insuring, which has acted as a catalyst for the development of the Islamic finance sector in Kenya.
Money is also starting to flood across Kenya’s border with the newly created country of South Sudan, from both the north and the south of Sudan, as sanctions against the Islamic republic continue to choke up legitimate business in the north and civil conflict rears its ugly head in the south.

The worry is that the moratorium on Takaful could inhibit the growth of the whole Islamic finance sector and see investments diverted to regional competitors, essentially the virgin Islamic finance markets of Tanzania, Uganda, Zambia and Malawi.

However, most of these countries have been following Kenya’s lead with a view to replicating Kenyan regulatory and operational procedure and practice in IF and may not have the capacity to absorb large sums of money looking for a Shari’ah compliant home, so Kenya’s moratorium might not be the disaster for the sector that some experts are predicting.