The Inadequacy of the Legal Framework Governing Islamic Banking in Kenya

Abstract

Islamic banking refers to a system of banking or banking activity that is consistent with the principles of sharia and its practical application through the development of Islamic economics. Islamic banking sectors stem from the fact that Muslims are endeavouring to avoid interest based practices and transactions. The avoidance of riba (interest) is the fundamental principle underlying Islamic finance. The charging of interest is considered by Islam as unjust enrichment and is condemned in the Quran. The rapid growth and unique nature of this sector has made Islamic banking and finance an ideal topic for academic research. This paper scrutinized Islamic banking regulation at the international level and in Kenya, with the aim of finding challenges in Kenyan regulations, in addition to best practices that can be introduced for optimal expansion of Islamic banking. The study also looks into the current realities of Islamic banking in Kenya from the perspective of the regulatory challenges facing the industry which is a big step towards the realisation of the inadequacy of the regulatory framework of Islamic banking in Kenya. This paper will establish the need for a comprehensive legal, regulatory and institutional framework to govern the Islamic banking sector in Kenya. To sustain the growth and development of Islamic financial system, the resilience of the industry has to be strengthened through evolving legal and regulatory reforms by the regulators. Putting in place an appropriate and effective legal and regulatory framework is particularly important for Islamic financial institutions. This paper recommends components for the development of comprehensive Islamic Banking Regulation in Kenya.