High costs to limit use of Islamic financing for projects

Isiolo Governor Godana Doyo opening a National Bank Islamic Division in Isiolo Town. PHOTO | FILE | NATION MEDIA GROUP 

In Summary

• High transaction costs involved in Islamic financing are likely to limit its use in funding infrastructure projects in Kenya.
• The costs include one-off administration fees, legal or notary fees as well as tax on some types of transactions.

By GEOFFREY IRUNGU

The high transaction costs involved in Islamic financing are likely to limit its use in funding infrastructure projects in Kenya, a new study commissioned by the Kenya Bankers Association (KBA) shows.

The costs include one-off administration fees, legal or notary fees as well as tax on some types of transactions — some of which are applied despite being against the principles of Islamic finance.

The study — which is formulated as a working paper still awaiting fine-tuning — was conducted by Wahida Mohammed of One Oak Consultants that specialises in monitoring and evaluation of development programmes.

It is being presented at a conference called by the KBA as part of improving understanding of the Kenyan banking sector.

“Islamic is deemed to be expensive. This fact is corroborated by the case study of Lekki project [port in Nigeria] which utilised a loan financing scheme that attracts huge transaction costs paid by the special purpose company in terms of 1.5-4.0 per cent one-off administration fees and notary fees,” said the study.

The working paper also recommended that a national Sharia board be set up so as to set standards for Islamic finance and spearhead sensitisation of stakeholders in infrastructure financing. It noted that by its nature, Islamic financing requires numerous documents that need to be standardised.

The research concluded that inadequate information on the financing had led to a situation where parties to infrastructure projects could not agree on various aspects of sukuk financing.