Almost eight years since the discussion started, commercial banks in Uganda can now offer Islamic banking products.
This is after the legal restrictions that made it difficult to have such an alternative model of banking were amended.
According to the Ministry of Finance and the Central Bank senior technocrats, regulations to allow the smooth operation of the Islamic banking have also been finalised.
This means that Islamic banking products can now be offered within the premises of the existing commercial banks or even a fully-fledged bank providing purely Islamic finance (in this case Islamic banking) can be established uninterrupted.
Islamic banking model is different from the conventional model of banking. Whereas charging of interest is at the heart of conventional banking, in Islamic banking model that is not allowed. Instead it shares the profits or losses that accrue, if any, with the clients.
Speaking at a two-day Islamic Banking Conference organised by the Islamic University in Uganda in Kampala last week, the executive director supervision, Bank of Uganda (BoU), Ms Justine Bagyenda, said financial institutions can now apply for business as everything is good to go. Explaining further in an interview, she said: “We are waiting for applications because there is nothing stopping Islamic banking from operation now.”
During the same interview, the director for economic affairs at the Ministry of Finance, Mr Lawrence Kiiza, said Islamic banking is a product that anybody irrespective of race, religion or even tribe can partake because of its advantages.
According to Ms Bagyenda, who was representing BoU governor Tumusiime-Mutebile, Islamic banking has gained prominence internationally due to its exponential growth and resilience to financial crises.
This is in addition to the nature of Shari’ah-compliant finance models that focus on the principles of investment in real assets and risk-sharing.
“In the Islamic banking model, each contract is backed by an underlying asset or investment activity which creates a direct link between financial markets and economic activity,” she said.
She continued: “The Islamic finance model has thus contributed to the spread of real-asset-based finance principles in many jurisdictions and is regarded as an ideal option for the financing of infrastructure projects.
She is also convinced that the success stories of Islamic banking experienced in other econimies would be replicated in emerging markets such as Uganda once it is rolled out.
She, therefore, called out all stakeholders to clearly understand Islamic Banking and Finance model; appreciate its unique tenets that distinguish it from conventional banking.
She pledged Bank of Uganda support, saying it will ensure that the requisite regulatory and supervisory structures for supporting the growth of Islamic Banking and Finance are robust and conducive for investors.
Section 37 of the then Financial Institutions Act, 2004 (FIA 2004) prohibited Financial Institutions from directly or indirectly engaging in trade, commerce and industry. This restriction inevitably delayed the smooth operation of Islamic Banking given that it is anchored on financial institutions’ participation in these very sectors.
Also, section 38 of the then FIA, 2004 prohibited Financial Institutions from acquiring immovable property that was not intended for use in conducting banking business.
As available literature suggests, in some Islamic banking contracts, a financial institution must buy and therefore own the asset before reselling it to the customer at a profit. This very critical process was rendered impossible under the then FIA, 2004.
The FIA 2004 was, therefore, amended to lift the above-mentioned restrictions for Islamic Banks and/or conventional banks that would want to offer Islamic Windows.
In addition to the above amendments, the Financial Institutions (Amendment) Act 2016 provides for the institution of key governance structures such as Shari’ah advisory boards, which are crucial in upholding Shari’ah compliance.
The history of Islamic banking in Uganda can be traced to 2008 when Bank of Uganda (BoU) first received an application from an institution which was desirous of operating as an Islamic Bank.
Subsequently, BoU received numerous inquiries from most of the commercial banks in Uganda seeking to offer Islamic financial products through Islamic banking “windows”.
At that time, the Central Bank of Kenya had licensed two Islamic Banks while National Bank of Rwanda had licenced an Islamic Microfinance Institution and Bank of Tanzania had commercial banks offering Islamic Financial Services through windows.
Like conventional banking, Islamic banking can only thrive with the existence of an enabling legal and supervisory framework. The study revealed that the Financial Institutions Act, 2004 (FIA 2004), contained prohibitions, which could not facilitate the operation of Islamic banking.
In recognition of this fact, therefore, BoU proposed amendments to the FIA, 2004, which were approved by Parliament and hence the enactment of the Financial Institutions (Amendment) Act 2016, in January 2016.