Thursday January 28 2016

Islamic banking is an important addition to our financial services

By Olive Kigongo

At the beginning of the year, Parliament passed amendments to the 2004 Financial Institutions Act that opened the door for banks to offer a variety of new services, including Islamic banking.
We return to that later. The net import of the amendments in introducing agent banking and bank assurance in addition is to lower the cost of banks doing business, which benefit we hope will trickle down to our Uganda National Chamber of Commerce members.

In agent banking, for instance, clients will be able to deposit or even withdraw monies from designated bank agents. This will save banks the cost of setting up branches while increasing the convenience to its clients and probably lower the costs to the clients.

For instance, this wider reach of the banks may lead to more deposits, which could lower the cost of lending in the medium to long-term.
Bancassurrance means that insurance will be sold through banks and promises greater penetration of insurance services to the general population.
These are all very good but of particular concern or interest to us at the Chamber is the long overdue introduction of Islamic banking. In Kenya, the law was amended to allow for Islamic banking in 2010.
The world over, Islamic banking will see products that meet Islamic law, Sharia criteria for lending. Under Sharia law, loans do not incur interest.

Under this system, banks either provide equity financing where they share in the profit and losses of an enterprise, lease finance, during which the bank buys equipment and leases it to the client until the lease period is over and finally there is sale-based financing where the bank lends the company money to buy produce and shares the profit with the client.
This is a departure from the current practice in several ways.

First, our businessmen will be spared the extortionate rates banks are extracting from us for loans but more importantly, banks will become more intimately involved with our businesses and hopefully more knowledgeable and empathetic to the vagaries of the economy.
We can’t help but feel that bankers are out to get their pound of flesh regardless of the circumstances and would rather bury our businesses than help us along.

Of course, this more intimate relationship should help our members get more disciplined in their business practices, be more open to inviting new partners and hopefully grow their business beyond current limited boundaries.
As any entrepreneur will tell you, there are serious gaps in our financial sector, which means the scope for survival, growth and expansion are curtailed.
For instance, we have no venture capitalists – institutions that are willing to back start-ups, to speak of. There is little to no equity financing and narrow development finance space.

Islamic banking is not the silver bullet but it could prove useful in introducing new products or even serve to shake up the existing players to be more innovative in the context of our circumstances.
We at the Chamber are excited about this new development and will encourage our partners to explore the new options and offer any support in making sure the new entrant remains feasible.

Ms Kigongo is the president of the Uganda National Chamber of Commerce and Industry