Bank of Uganda plans to widen the pool of financial products before the end of the year as it opens up the space for Islamic banking.
The public’s narrow view of Islamic banking has compelled Bank of Uganda (BoU) to commit funds for more sensitization about the risks and benefits of its practice. In the meantime, however, BoU is pressing ahead with its plans to license Islamic banks.
With President Museveni signing the Financial Institutions (Amendment) Bill 2016 into law, BoU is now drawing up a regulatory framework for the implementation of the Islamic banking model in Uganda.
The delay in passing regulations, Bagyenda explained, is to first create awareness about the principles and study the regulatory framework with all stakeholders.
“We are making the regulations and we need to discuss then with all commercial banks. By the end of the year , we would have licensed them…We cannot pass regulations when [some] stakeholders do not understand these regulations; that’s why the process is still on,” said Bagyenda.
Islamic banking is based on principles that prohibit risk-taking, earning interest, speculative trade and money-lending to customers. According to Sharia [the Islamic law], trading is based on real goods and services and sharing the rewards.
Yet, the majority of the banks in Uganda are based on a pure financial intermediation model, whereby commercial banks generate profits, while depositors earn some interest on their savings. Experts believe religious beliefs have also played a key role in keeping many Ugandans away from the banks. Earning interest is prohibited in Islam.
While presenting his paper on the Global outlook of Islamic Banking and Finance; Perspective and Trends, Ahmad Fadhlan Yahaya, a member of Islamic Development Bank group, said Islamic banking is not something new.
“As at 2013, there were 349 Sharia [Islamic law]-compliant institutions across the globe and 104 conventional institutions with Sharia-compliant window. So, it’s nothing new,” he said.
Yahaya explained that the industry is poised for growth with the increased attractiveness of the industry due to its resilience to the 2008 credit crisis and increased demands for Islamic financial products and services such as Sukuk [Islamic bonds] and Islamic microfinance.
The global Islamic finance assets with commercial banks have been increasing due to high demand. [For instance] in 2013, it reached $1.4 trillion. In 2015, it grew to $2 trillion and it is expected to reach $6.5 trillion in 2021.
Suleiman Kiggundu, the assistant director, budget office at parliament, said the advocacy for Islamic banking as an alternative form of finance will address the needs of low-income earners.
“Islamic finance should be promoted because it has a direct linkage with poverty reduction, expansion of financial access, development of financial sector and, above all, fostering shared prosperity,” he said.
The Islamic financial services industry has been the fastest growing segment in the global financial services industry with a 15 to 20 per cent annual growth rate over the past decade, Yahaya said.