By Priscilla Mutebi[1],
In January 2016; the Parliament of Uganda amended the Financial Institutions Act 2004, to introduce Islamic Banking, a constituent of Islamic Finance. Uganda is the third East African Country to embrace Islamic Banking, following Kenya and Tanzania. Despite the emergence of this concept in Egypt in the 1970’s; the industry of Islamic Banking is still in its infancy across the African continent. Currently, there are about thirty eight (38) Islamic financial institutions across the African continent in comparison to the eighty (80) institutions found in Asia.
Islamic Banking is a system of banking, which is consistent with Islamic Shari’ah (law) and guided by Islamic economics. Shari’ah denounces the underlying principle of conventional banking which is that: money creates money or that money has a premium known as interest/usury, known in Arabic as “Riba”. Under Shari’ah, money is not seen as a commodity but as a means to facilitate trading, leasing and investment. It follows therefore that the operation of transactions in Islamic Banking is rooted in assets. In the stead of the conventional lender-borrower relationship established in traditional banking, Islamic banking features alternate relationships such as seller-purchaser; lessor-lessee, investor-entrepreneur and partnerships.
Further to Islamic Banking; Islamic Finance offers various other products including: Insurance (Takaful) and Capital Markets. Takaful differs from conventional insurance practice in that it forbids uncertainty, known as “Gharar”. Conventional life insurance companies are profit seeking entities and make provisions for average life expectancy, and high risk customers when setting their premiums in order to realize profits. Takaful introduces the contract of donation among the participants/policyholders as a substitute for the contract of sale of indemnity for a premium as practiced in conventional insurance.
Islamic capital markets consist of both equity investments and fixed income instruments and do not take the same form in both contractual and transactional context as conventional capital markets. Investments in activities forbidden by the Shar’iah such as pork, immoral activities are prohibited. There is no requirement to obtain capital guarantees on equity investments. A sukuk denotes a sovereign bond, which is one of the most common products in Islamic capital markets.
Islamic Finance is premised on trust and one is expected to pay back their debt. In the event of default, the pure practice would be to consider the defaulter’s circumstances and based on the gravity thereof; extend the payment period. In the event that default continues, then the last resort is a court action to recover the monies advanced based on the existing laws.
In Uganda where the conventional banks are lending at high interest thus limiting access to capital; Islamic Banking in particular, may majorly benefit SMEs for which due diligence and monitoring is less challenging. In order to explore the gap in Uganda, Islamic Banking may have to be modified with a bias to agricultural lending, microfinance, or use of innovative technology. There is also need to constitute a Central Shari’ah Advisory Board, which is mandated with the regulation of the providers of Islamic financial products. There is also need to revise and/or update the relevant taxations laws in order to sufficiently accommodate the various models of Islamic Financing.
[1]Ms, Mutebi, LL.B (MUK), MBA (Edinburgh) is a Partner at Engoru, Mutebi Advocates and heads the Firm’s Real estate and Telecommunications law practice.