1St East and Central Africa
Conference on Islamic Banking
Regulatory Framework and Legal Issues
Relating to Islamic Finance
Presentation by Atiq S. Anjarwalla
Anjarwalla & Khanna, Advocates
ALN (Africa Legal Network)
Kenya | Burundi | Rwanda | Tanzania | Uganda | Zambia
1St East and Central Africa
Conference on Islamic Banking
• Legal Parameters
• Regulatory Framework
• Tax
• Documentation
1St East and Central Africa
Conference on Islamic Banking
Legal Parameters
• Applicable Law and Jurisdiction:
– The Judicature Act
– The Constitution
– The Kadhis’ Courts Act
3
1St East and Central Africa
Conference on Islamic Banking
The Judicature Act
Section 3 of the Judicature Act (Chapter 8, laws of Kenya) provides for
the following as sources of law in Kenya:
(a)
the Constitution;
(b)
all other written laws, including the Acts of Parliament of the United
Kingdom;
(c)
the substance of the common law, the doctrines of equity and the statutes
of general application in force in England on the 12th August, 1897, and
the procedure and practice observed in courts of justice in England at
that date; and
(d)
African customary law in civil cases in which one or more of the parties
is subject to it or affected by it.
1St East and Central Africa
Conference on Islamic Banking
The Constitution
• Section 66(5) of the Constitution provides that:
“the jurisdiction of a Kadhi’s court shall extend to the determination of
questions of Muslim law relating to personal status, marriage, divorce or
inheritance in proceedings in which all the parties profess the Muslim
religion”.
The jurisdiction of the Kadhi’s court does not, therefore, extend to
commercial transactions like banking arrangements.
1St East and Central Africa
Conference on Islamic Banking
The Kadhis’ Courts Act
•
Section 5 of the Kadhis’ Courts Act (Chapter 11, laws of
Kenya) provides that:
“A Kadhi’s court shall have and exercise the following jurisdiction,
namely the determination of questions of Muslim law relating to personal
status, marriage, divorce or inheritance in proceedings in which all the
parties profess the Muslim religion....”
•
The effect of this section is twofold, it only applies:
(a) to matters relating to personal status, marriage, divorce or inheritance; and
(b) where all parties profess the Muslim religion.
1St East and Central Africa
Conference on Islamic Banking
Regulatory Framework
•
Principal Acts of Parliament in Kenya that regulate the
banking industry in Kenya:
(a)
the Banking Act (Chapter 488, laws of Kenya); and
(b)
the Central Bank of Kenya Act (Chapter 491, laws of Kenya).
1St East and Central Africa
Conference on Islamic Banking
Prohibited Business under
the Banking Act
Banks in Kenya are prohibited under section 12(1) of the
Banking Act from the following, to:
“…(a) engage, alone or with others, in wholesale or retail trade, including
the import or export trade, except in the course of the satisfaction of debts
due to it; and any trading interest carried on by an institution at the
commencement of this Act shall be disposed of by the institution within
such time as the Central Bank may allow….
...(c) purchase or acquire or hold any land or any interest or right therein
except such land or interest as may be reasonably necessary for the
purposes of conducting its business, or for housing or providing amenities
for its staff, where the total amount of such investment does not exceed such
proportion of its core capital as the Central Bank may prescribe…”
1St East and Central Africa
Conference on Islamic Banking
The Central Bank of Kenya Act
• The Prudential Guidelines on Prohibited Business under the Prudential
Guidelines reiterate the position stated by the Banking Act under section 12
prohibiting banks from engaging in trade.
1St East and Central Africa
Conference on Islamic Banking
Saving Provisions
• Section 53 (1) of the Banking Act states:
“The Minister may, by notice in the Gazette, exempt an institution from the
provisions of section 12 or 14 subject to such conditions as the Minister
considers necessary.”
• Section 52(1) of the Banking Act states:
“For the avoidance of doubt, no contravention of the provisions of this Act
or the Central Bank of Kenya Act shall affect or invalidate in any way any
contractual obligation between an institution and any other person.”
1St East and Central Africa
Conference on Islamic Banking
Islamic Finance Products Caught
Under Certain Acts
• Ijara and the Hire Purchase Act (the “HPA”)
• Murabaha and the Sale of Goods Act (the SGA”)
• Murabaha and other Statutes, for example, the Energy Act
1St East and Central Africa
Conference on Islamic Banking
Ijara and the HPA
• An Ijara can be classified in conventional terms as a leasing arrangement.
• The HPA defines a “hire-purchase agreement” to mean “an agreement for
the bailment of goods under which the bailee may buy out the goods or
under which the property in the goods will or may pass to the bailee”.
• Certain Ijara transactions could be deemed to be hire purchase transactions,
and would accordingly require a licence issued under HPA to conduct such
business.
1St East and Central Africa
Conference on Islamic Banking
Murabaha and the SGA
• Islamic banks may be perceived as “sellers” under the SGA.
• The SGA places by operation of law a number of obligations on a seller of
goods which include an implied warranty that the relevant goods are of
merchantable quality and fit for their purpose.
• Passing of risk under the SGA.
• A bank undertaking a Murabaha transaction should therefore consider the
application of the SGA and consider how to limit its exposure under the
SGA.
1St East and Central Africa
Conference on Islamic Banking
Murabaha and other Statutes
• Implications of the Bank as “seller” of certain goods.
• Section 80 of the Energy Act provides that:
“…(1) a person shall not conduct a business of importation,
refining, exportation, wholesale, retail, storage or
transportation of petroleum, except under and in accordance
with the terms and conditions of a valid licence; and
(2) a licensee shall not sell petroleum to a person for the
purpose of exportation or for resale in Kenya unless that
person has a valid exporters or retail licence under this Act…”
1St East and Central Africa
Conference on Islamic Banking
Tax Issues
• Stamp Duty
• Income tax
• Customs duty
• VAT
• Withholding tax
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1St East and Central Africa
Conference on Islamic Banking
Stamp Duty
• Financing of immovable property:
– Diminishing musharakah or murabaha?
1St East and Central Africa
Conference on Islamic Banking
Income tax
• Application of default damages for charitable purposes.
• Tax treatment of default damages.
1St East and Central Africa
Conference on Islamic Banking
Customs duty
• Who is importer and consignee on shipping documents?
• Who takes risk and obligation to clear goods and therefore pay
custom duty?
1St East and Central Africa
Conference on Islamic Banking
VAT
• In the case of a Murabaha:
– Financing transaction or a contract for sale and purchase?
1St East and Central Africa
Conference on Islamic Banking
Withholding tax
• Customer as bank’s agent pursuant to the Agency Agreement
in a Murabaha transaction.
• Income may be deemed to be in the hands of the customer as
an agent of the bank.
• Would withholding tax be deductible?
1St East and Central Africa
Conference on Islamic Banking
Documentation
• Requirement to ensure that documentation accords with
applicable common law principles and statutes of Kenya.
• Exclusion of relevant provisions of SGA.
• Inclusion of limitation of liability language with regard to the
duties and obligations and liabilities of an agent .
• Consideration of appropriate dispute resolution forum arising
from governing laws of documentation being Kenyan law.
1St East and Central Africa
Conference on Islamic Banking
THE END