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Uganda stands to benefit from Islamic Finance

by Ben Oduor

Two years since the Ugandan parliament passed the Financial Institutions Amendments Bill 2015 that paved the way for Islamic Finance, uptake of the new concept has been slow. Ian Mutibwa, head of Tax, Banking and Finance at Signum Advocates in Uganda, explains to East African Business Times writer Ben Oduor why stakeholders have dragged their feet and how the country stands to benefit with the adoption of Sharia-compliant banking

 As one of the delegates that attended this year’s East Africa Islamic Finance Economy Summit held recently in Nairobi, what critical lessons can East Africa gather from other countries that have adopted Sharia-compliant banking and what do they stand to benefit with the adoption of this new concept? 

First, East Africa needs to deal with the tired narrative that “it’s a Muslim/Islamic thing” towards Islamic Finance. This is not the case since other countries have adopted its products regardless of religion. Regional governments need to be directly involved- like countries such as Cote D’Ivoire did- so the concept flows easily from top down to the grassroots and adopt the products wholesome, since the option of legislating it in bits isn’t much rewarding.

What would you attribute to the slow uptake of Islamic Finance in Uganda two years after parliament passed the Financial Institutions Amendments Bill 2015?

This is largely attributed to the piecemeal introduction of regulations, and attitude. The amendments to existing law come in phases, making it harder not only for the industry players to plan and adjust to meet market demands, but also makes individuals skeptical about what other changes the government may introduce hence making Islamic Banking less attractive to both sides of the spectrum- bankers and customers.Not much information has been provided to the public regarding Islamic Banking and many interested players remain in the dark, with just a few- mainly Muslim leaders- taking centre-stage in the discussions, making it look like an Islam affair. Whereas the Financial Institutions Amendments Bill 2015 was passed two years ago, Uganda has just passed the Financial Institutions Islamic Banking Regulations this year. The slow pace of the parliament is mirrored in the population which is hesitant to take on a product they remain uncertain about. The other reason could be attributed to Uganda’s religious population. Per the 2014 census, 84 per cent of Ugandans are Christians while 14 per cent Muslims.

What are some of the legal, regulatory and institutional measures taken by the Bank of Uganda as it paves the way for the adoption of Islamic Banking in the country?

The Financial Institutions Act was amended in 2016 to provide for Islamic Finance. The Financial Institutions (Islamic Banking) Regulations were further enacted in February of 2018. This paved way for the regulatory framework of Islamic Finance.Under the institutional framework, the law provides for the granting of licenses to Islamic Banks and Conventional Banks that seek to carry out Islamic Finance through Islamic windows by the Central Bank. In addition, the Law provides for the creation of the Shari’ah Advisory Boards in financial institutions conducting Islamic Finance whose members are tasked with approval of the Islamic Financial businesses of those institutions to ensure compliance with the Shari’ah. There is also a requirement for a Shari’ah audit on a periodical basis to ensure compliance. Bank of Uganda has also provided for a Central Shari’ah Advisory Council to advise the Central Bank on matters of regulation and supervision of Islamic banking systems in Uganda.The 2018 Tax proposal provides for the Minister to pass regulations to regularise taxation of the Islamic Finance Products. To support the Banking sector, the Insurance Act was also amended to allow for Islamic insurance (Takaful), thus gearing the market for the uptake of Islamic finance.

Which stand-alone banking legislation has the regulator adopted to provide a streamlined platform where both conventional and Islamic banking products will operate without contradicting governing legislation? 

The Financial Institutions (Islamic Finance) Regulations, 2018, that came into force in February 2018 provides for the licensing of Islamic banks and conventional banks that may desire to operate Islamic windows. The Financial Institutions Act was amended to allow for the operation of the Islamic Banking products. For example, the Banks were allowed to own property under the amended Law, in preparation for asset ownership products such as Murabaha.

What measures has the government endorsed to create awareness about the new concept while building capacity in its products to challenge the arising misconceptions and knowledge gaps associated with Islamic Finance?

Other than the fact that the regulations regarding Islamic Finance were just enacted recently, there are not many sessions where government is creating awareness for Islamic Finance in Uganda. Awareness and capacity building has mainly been through the Private sector and other institutions such as our law firm Signum Advocates which has undertaken such trainings.

What will be the comparative advantage(s) of Sharia-compliant banking products over the conventional banking products to Uganda’s bankable population once the new concept takes full shape?

One of the prohibitions of financial inclusion is uncertainty. Many people who would have taken banking products shy away due to the uncertainty mainly due to the fluctuation of interest rates. Due to the fact the Islamic Finance is built on principles of certainty, the profit is predetermined and certain. This creates a comparative advantage for the Islamic Banking products. In addition, Shari’ah banking products such as musharakah (profit and loss sharing partnership) provide a more flexible and realistic response to the market. The fact that banks also share in profits and losses together with its customers, creates a big advantage for the Islamic Banks.

Bank loans are currently a big scare to a majority of potential borrowers in Uganda due to the relatively high interest rates. How will Sharia-compliant banking products seal such gaps once rolled out?

Interest or Riba in Sharia is forbidden. This means that under a Sharia compliant banking products, one is not charged Interest. This doesn’t mean that the Banks shall not make profit. They may charge transaction arrangement fees, service fees and a profit that is determined at the start of the transaction.  With a profit, there must be certainty and no speculation. This therefore eases borrowing from the Banks as there is no surprise hiking of rates when the market takes a downturn.This will go a long way in enhancing consumer confidence given that the customer knows the bank is standing with them through thick and thin.

What are some of the Sharia-compliant banking products the Uganda government would opt to exploit in a bid to speed up infrastructural development at convenient and affordable costs?

The government may exploit the sovereign bond (Sukuk) option to speed up infrastructure development. This is already working for other countries such as South Africa and Cote D’Ivoire. I have argued that where Uganda wishes to fly Uganda Airlines again, they can opt for the Sukuk arrangement. In this respect, the populace shall have a stake in the airline and it shall flourish. However, there may be need to amend the Capital Markets laws in Uganda to allow for the Sukuk to be issued.

What does the future look like for Islamic Finance in Uganda?

Uganda is a ripe market for Islamic Finance that is preparing and getting ready for the best that is yet to come. It is a more customer based system of financing. However, a lot more needs to be done to plug the information gaps in the banking sector, build enough capacity and deal with the current attitude. I suggest it should start with replacing the term Islamic Finance with an alternative such as Participation Banking/Finance to change people’s attitude faster.





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