Ugandan banks can now offer Islamic banking products.
Legal restrictions in the past have made it difficult to have such alternative banking, but now amendments have been made; paving the way for the new sector.
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 Sharia advisory boards, which are crucial in upholding sharia compliance.
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 differs in many ways from the conventional model of banking. For instance, Islamic banking does not allow charging of interest and any profits or losses that accrue are shared 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.
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 economies would be replicated in emerging markets such as Uganda once it is rolled out.
She pledged Bank of Uganda’s 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.