Kenya’s economy has demonstrated remarkable resilience in recent years, navigating a series of challenges including fiscal constraints, rising debt levels and the imperative for structural reforms, which have tested its robustness.
In 2023, the gross domestic product growth rose to 5.6 percent, up from 4.9 percent in the previous year, according to a World Bank report.
However, the economic landscape in 2024 presented new challenges, prompting the World Bank to revise Kenya’s GDP growth projection for the year to 4.7 percent. This adjustment was attributed to factors such as severe floods in the second quarter, subdued business sentiment following mid-year protests, tighter monetary policy, and ongoing fiscal consolidation efforts.
Amid these economic challenges, the banking sector continues to play a pivotal role in fostering financial inclusion and supporting economic development.
Islamic banking has emerged as a competitive and viable alternative to conventional banking systems.
Since the licensing of the first Islamic bank in 2007, Islamic finance has flourished in Kenya, offering Sharia-compliant financial products and services that cater to a diverse clientele.
Islamic banking has grown substantially, becoming one of the world’s fastest-growing economic sectors. Following Kenya’s approval of the establishment of the first Islamic bank, Uganda and Tanzania also adopted similar frameworks, extending the influence of Islamic finance in the region.
Islamic banking has contributed to economic recovery and development in several ways, including fostering inclusive capital markets, encouraging alternative sources of long-term finance, attracting investment flows through foreign direct investment, and facilitating international market development.
Additionally, Islamic banking emphasises inclusivity and social welfare by investing in long-term tangible assets such as infrastructure, water systems and rural electrification. These investments enhance living standards, particularly for underserved populations.
The future of Islamic finance in Kenya and in the region remains bright. The government continues to pursue policies that foster an enabling environment, positioning Kenya as a regional financial hub as envisioned in Vision 2030.
Furthermore, the risk-sharing model inherent in Islamic finance, in contrast to the debt-based approach of conventional finance, encourages responsible lending and borrowing practices. This model enhances financial stability and promotes economic growth, creating an environment where business communities can thrive.
The Islamic finance and investment industry plays a crucial role in the development of more efficient and capable capital markets. It has the potential to contribute significantly toward building a more robust global economy.
Despite its potential, the Islamic banking sector faces several challenges, including liquidity and cashflow management issues, the absence of enabling regulatory and legal infrastructure and low consumer awareness.
Addressing these issues effectively is crucial for the sector to continue supporting economic development. Islamic Finance Stakeholders must advocate for policies that advance the industry’s collective interests.
As Kenya navigates its current economic landscape, the continued development of Islamic finance presents an opportunity to deepen financial inclusion and support the nation’s broader economic objectives.
By fostering an enabling environment for diverse financial services, Kenya can build a more resilient and inclusive economy capable of withstanding future challenges.
As part of the vision, the Kenyan regulators are working to develop financial markets that offer Islamic products and services aimed at providing an inclusive financial sector. Sukuk issuance across Africa has gained momentum in recent years, due to increased demand for Sharia-compliant financial assets, further supporting the domestic policy goals of African nations for Islamic finance.
The writer is Head of National Amanah at National Bank Of Kenya
