The Central Bank is working on a framework that will eventually lead to the flotation of sharia - compliant bonds and treasury bills in the local money market.
The move to entrench Sukuk bonds and bills in the law is seen as a push by CBK to tap the increasing amount of cash flowing into Africa from the Gulf region.
Sukuk -- bonds that are structured to be in compliance with Shariah law which bars payment of interest -- have seen rapid uptake in recent years as more and more businesses and governments have used them to raise financing.
They has a maturity that is determined in advance and is backed by an asset which makes it possible for the investor to earn a return from the profits derived from the assets.
Much of this activity has taken place in the Gulf and South East Asia so far, and analysts believe a government issue could be the key that Kenya needs to place it as the premier Islamic finance hub in the region.
"We're are still waiting for the structured Sukuk to cover bonds and the Treasury bills market," says Alex Nandi - deputy director banking supervision at the CBK.
Plans for a framework to oversee the flotation of Sukuks come two years after the licensing of the first Islamic banks in Kenya.
Gulf African Bank and First Community Bank are still finding their footing in the Kenyan banking sector and are on course to turning profitable two years into operations.
But unlike conventional banks which are able to trade in bonds and treasury bills, Sharia law has constrained income avenues for Islamic banks.
With the flotation of Sukuk bonds, Islamic banks will have an investment avenue to generate income from the new form of government securities.
Gulf African Bank for instance invested Sh500 million in the sukuk portion of a government infrastructure bond issue last year and received a 13.5 per cent rate of return.
In 2009 the bank earned Sh56.6 million from its investment in government securities compared to no income from government securities in 2008.
The banks are also benefiting from cash flowing from the Middle East into investment projects in the country.
Sovereign funds in Gulf States, flush with cash are eyeing African countries as lucrative investment zones and most of this cash is handled by these institutions.
"There is a huge appetite by business people from the Gulf region to invest in Africa," says Suleiman Shahbal, the chairman of Gulf African Bank.
Since the break-out of the global economic crisis which took it's toll on conventional banking, Islamic banking and financing has enjoyed a growing popularity.
Touted as the answer to conventional banking whose risky practices have come under the spotlight since the start of global financial crisis back in 2008, it presented an attractive alternative.
Last year, global issuance of Sharia - compliant bonds and loans grew 40 per cent in the first 10 months of 2009 compared to the same period a year ago, as reported by the New York Times.
The total amount of Sharia - compliant debt outstanding is estimated at about $1 trillion, up from $700 billion just two years ago.
Still, Sukuk issues were not spared the snowball effect of the global financial crisis that hit conventional banks.
Sukuk issues fell from $25 billion in 2007 to $15 billion last year.
Jawal Ali a managing partner at law firm King and Spalding's Middle East office says that by 2008, up to 85 per cent of Sukuks issued were not considered Shariah compliant.
But the Dubai Debt crisis early this year did nothing to firm-up the credibility of Islamic financing as a bright spotlight was cast on Sukuks.
About 10 per cent of the Dubai's $80 billion debt load is estimated to comply with Shariah, casting the spotlight on the credibility pedestal Islamic financing has ridden on over the years.
A key problem was a collapse in value of underlying assets - primarily real estate investments - which back Sukuk issues.
Islamic bonds are structured as profit-sharing or rental agreements, and their returns are derived from underlying physical assets such as real estate or commodities.
Unlike conventional banking which has a vast array of investment options, Islamic banks are heavily concentrated in real estate placing them at high risk should property values fall as they did during the financial crisis.
But as the global economy limps out of the recession and the choke-hold on credit eases, Islamic financing is expected to gain traction this year.
"There is a lot of market activity and there might be a pick up this year," says Mr Ali.