The Ugandan government has embraced Islamic banking as evidenced by Cabinet’s recent approval of the proposed Islamic Banking Bill 2014, currently before the Uganda Law Reform Commission undergoing a few changes. It is likely to be tabled on the floor of Parliament soon.
Islamic banking is Sharia-compliant banking based on the principles of trade, partnerships, Profit and Loss Sharing and the prohibition of reckless risk. Specifically, it prohibits interest-based banking, speculation and financing of transactions such as gambling and alcohol. It has the same purpose as conventional banking: to make money for the bank by lending out capital. However, the Islamic economic system revolves around the prohibition of interest.
Between 2010 and 2012, interest rates of some commercial banks in Uganda were as high as 30-32 per cent. Islamic banking, being interest-free, should increase access to investment finance and see a rise in entrepreneurship projects, as well as boost competition in Uganda’s banking sector, inevitably leading to provision of more efficient and better banking services.
Kenya and Tanzania have already embraced Islamic banking with banks such as Standard Chartered offering Islamic banking windows. Kenya’s central bank introduced Sharia-compliant bonds, which are backed by an asset, with the bank sharing in the profits derived from the assets. In Tanzania, Islamic banking gained much popularity upon its introduction more than seven years ago that demand for it eventually far exceeded supply.
In Uganda, only 8.3 per cent of the Ugandan population use banking products, and the Muslim population is only about six million of the total population. Islamic banking products would likely be particularly appealing to Muslims, but would also be available to all Ugandans and should be a viable option for the majority of youthful entrepreneurs and low-income earners, regardless of religious affiliation.
It is noteworthy that the Financial Institutions Act of Uganda (2004), as it stands, neither envisages nor provides for Islamic banking. The proposed Islamic Banking Bill (2014), therefore, would provide a much needed regulatory framework to realise the above-mentioned benefits of this alternative banking model.
SOURCE: Daily Monitor