Kampala. Parliament has amended the Financial Institutions Act and introduced Islamic Banking a system of banking, which is consistent with Islamic Shari’ah (law) and guided by Islamic economics.
The parliamentary clearance is, however, subject to the establishment of a Central Shari’ah Advisory Board in the Central Bank to regulate banks providing Islamic banking products.
President Museveni has been advocating for Islamic banking model, also known as Halal banking—where instead of a bank imposing interest, it shares the profit it accrues with the clients.
The highlight of Islamic banking contained in the new government amendments to Financial Institutions (Amendments) Bill, 2015 is its stand on interest charged on borrowed money and other islamic banking products such as agency banking, bancassurance - (insurance provided by banks), mobile banking and money transfer, deposit protection fund and free access to credit reference bureau services.
Since financial institutions will be allowed to sell insurance products, Islamic banks will also be interested in investing in insurance products.
The Shari’ah non-compliant insurance products will cause Shari’ah non-compliant risk of loss of confidence in the general public. Islamic banks shall require Shari’ah compliant insurance.
The chairperson of the Finance Committee, Mr Robert Kasule Ssebunya and Speaker Rebecca Kadaga told the House that the Muslim community in Uganda has been calling for “these reforms” explaining that Islamic law prohibits the payment and collection of ribah (interest or usury).
The main argument against interest is that money is not used as a commodity with which to make a profit but that it should be earned on goods and services only, not on control of money itself.
Working for profit
Former Finance minister Syda Bbumba, Mr Milton Muwuma (Kigulu South), Mr Latif Ssebaggala (Kawempe North) and other members also informed the House that unlike the Western models of banking and finance, in Islamic finance, one must work for profits, and simply lending money to someone who needs it does not count as work.
“Under Islamic law, money must not be allowed to create more money. Instead, a bank must provide some service to “earn” its profits,” Mr Ssebaggala explained, adding that instead of traditional accounts with given interest rates, Islamic banks provide accounts which offer profit/loss.
The bank in turn purchases assets with your money, which generate returns for the bank.
The Financial Institutions (Amendment) Bill, 2015 was read for the first time on August 13, 2015, and referred to the Finance Committee for scrutiny. After consulting Bank of Uganda, the Uganda Bankers Association, Finance minister and Uganda Muslim Supreme Council, the committee in accordance with Rule 116 of the Rules of Procedure of Parliament scrutinised the Bill and presented its findings to the House with a no objection to the amendments.
The passing of the Bill means that government can now issue Shariah-compliant bonds and that a special Islamic index will be created on the Uganda Stock Exchange.
These moves, according to Mr Ssebunya, show recognition of Islamic finance’s unique model, and of the important role it has to play in providing stable economic growth.
However, the committee noted that the provision of Islamic banking and financial products by banks is growing rapidly in many countries.