By Jaafar S. Abdulkadir Islamic finance industry that started modestly as a niche market in the 1950s in the Muslim countries of Malaysia and Egypt has been growing significantly into a multi-billion dollar industry with a huge impact globally. The remarkable growth of Islamic finance can be attributed to growing demand for alternative mode of finance that widens the choice for investors and governments that have proactively created the enabling environment to promote the diversification of their financial markets. In terms of functionality and the objectives of realizing financial intermediation, Islamic banking and finance is not any different from the conventional banking and finance only that the underlying structures are based on the trading of assets, leasing arrangements, and profit and loss sharing investments as dictated by the Shariah principles. Different jurisdictions have embraced Islamic finance for different reasons. Countries like Pakistan, Iran, Sudan and other Muslim countries have been compelled by their domestic demands to have Islamic finance for religious, social and economic reasons. A good number of other countries have found it hard to ignore the phenomenal growth of Islamic finance and its contribution to sustainable development. The membership of the Organisation of the Islamic Conference (OIC) and its affiliates like the Islamic Development Bank (IDB) have since the 1970s been progressively and strategically building the momentum of growth of Islamic finance. Jurisdictions like United Kingdom, Australia, S. Korea, Luxemburg and Hong Kong have deliberately focused on Islamic finance in their bid to promote social inclusion of the Muslim minorities and other persons and groups that have ethical concerns .The global financial crisis of 2007/2008 that exposed the vulnerabilities of the relentless capitalistic tendencies that puts the pursuit of profit at all cost above social and ethical concerns created room for consideration for Islamic finance as an alternative and innovative financing model that is not fraught with risk stemming from greed. Islamic Finance Gaining Traction in Africa In Africa, Islamic finance have been appreciated strategically to broaden the investor base and tap into the investment opportunities associated with the Gulf Co-operation Council that generates substantial funds from their oil resources. The growth in population in Africa that exerts pressure on the governments to provide quality public services against the odds of dwindling revenue bases and the rising public debts owing to huge capital expenditure and the need to enhance financial inclusion, form the basis for the consideration of Islamic finance as an innovative alternative approach of finance. Islamic finance instruments like Sukuk are growing in popularity globally because of its connection with the real economy and offers tremendous potential to bridge the funding gaps in the vital infrastructure financing. Unlike the conventional bonds, Sukuks are well-structured in compliance with the Islamic finance principles that outlaws the provision of interest (Riba), abhors excessive risk-taking and unambiguity in contractual obligations, prohibits investments in ethically wanting businesses like alcohol and other investments that harms the general wellbeing of the society. Countries like Egypt, Nigeria, Senegal, South Africa, Sudan, Kenya, Tanzania, Djibouti, Tunisia and Cote D’Ivore are among the countries that have introduced Islamic finance in their financial markets. Both Senegal and South Africa were among the first countries in Africa to issue Sukuks in their bid to raise funding for their development programmes. Role of Regulators Regulators like the Financial Services Authority of the United Kingdom and the Central Bank of Nigeria played pivotal roles in the introduction of progressive and pragmatic amendments and legislations to overcome the barriers to the introduction and growth of Islamic finance in order to boost further investments and opportunities in their countries. These regulators and others adopted the ‘’no-barriers and no-special favors ‘’ approach to developing banking regulations that created the enabling environment for the uptake of Islamic financial and banking products in their markets. The banking and financial regulators aim to develop regulations that are well anchored to safeguard the interests of customers and depositors, ensure the stability of the financial systems, promote fair competition for efficiency and reliable services, achieve the effectiveness of monetary policies, inculcate good market practices and high standards of corporate governance and prevent the risk of contagion and systemic failure of the financial systems. Kenya introduced Islamic banking after the amendment of Section 12 of the Banking Act that restricts the commercial banks from undertaking some well-defined trading and investment activities. These exemptions allowed the Islamic banks to engage either independently or jointly with others in trading activities and acquire and hold commodities and land as prescribed manner by the Banking Act. These exemptions made it possible for the Kenyan market to enjoy Islamic banking products introduced by the fully fledged Islamic banks like the First Community and the Gulf African Bank as well as the Islamic banking windows like Sahl banking of KCB, Lariba of Barclays Bank among others. Although the exemptions stated above have helped in the introduction of Islamic banking in Kenya, they have not managed to overcome the existing barriers to further grow industry. Some of the barriers include the lack of Shariah compliant liquidity management instruments, weak technical capacity to regulate and supervise the Islamic banks and shortage of skilled manpower that affects both the Central bank and even the practitioners. Kenya has a great deal to learn from the Central Bank of Nigeria as well the Bank of Negara, Malaysia and the Central Bank of Bahrain that have well developed regulatory and supervisory frameworks that serves both conventional and Islamic banking in a flexible manner. Just like the Central Bank of Nigeria, CBK can draw insights from the robust guiding principles on risk governance and Shariah compliance, developed by the Kuala Lumpur based Islamic Financial Services Board (IFSB) and the Bahrain based Accounting and Auditing Organisation of the Islamic Financial Institutions (AAOIFI). Indeed the CBK should have by now sought to become a member of all the standard setting bodies in Islamic finance like AAOIFI and IFSB in order to benefit from their expertise and experiences in supporting the growth of Islamic finance industry globally. The Kenya School of Monetary Studies that is affiliated to the CBK, ought to be more proactively involved in research and development and capacity building to help address some of the challenges facing the Islamic banking industry in Kenya. The Central Bank of Nigeria has in place an Advisory Council of Experts in Islamic finance that guides in all matters relating to the effective regulation and supervision in Islamic Finance. Uganda is likely to follow a similar trend after recently amending their Financial Institutions Act that makes it possible to roll out Islamic banking in their market. How the Central Bank can support Growth The CBK needs to strengthen its capacity to ensure compliance to Shariah principles in the Islamic banks in order to boost the confidence of the customers and prevent Shariah ‘arbitrage’ .Shariah arbitrage may stem from the Islamic banks that sway customers from the conventional banks under the pretext of offering Shariah compliant products while indeed their products are not different from the conventional ones. This practice does not promote good market practice and fair competition. The non-compliance to the Shariah principles by the Islamic banks also poses reputational risk as well that could easily erode the customers’ confidence and precipitate a run on the bank and occasion systemic risk to the entire banking ecosystem. CBK may also need to leverage on its partnership with the International Monetary Fund, International Finance Corporation, World Bank and other Middle East and Asian based organisations to drive awareness creation campaigns through seminars, workshops and conference in Islamic Finance. Kenya could easily become a regional financial hub like Bahrain and Malaysia if key institutions like the Central Bank, and the Capital Markets Authority formulate appropriate regulatory and legal frameworks that are responsive to the market needs. The Writer is the Head of Islamic Banking at KCB and Chairman of the Kenya Bankers Association Sub-Committee of Islamic Banking.