Kampala. Commercial banks intending to provide Islamic banking services will be subjected to stringent control measures because the product could expose customers to unwarranted losses if poorly supervised.
The regulator’s warning for robust supervision of Islamic banking is partly informed by the fact that this is not only a new model here but it also entails several contracts which demand tight and prudent supervision.
“Bank of Uganda will ensure that financial institutions rendering Islamic banking (Islamic finance) are not treated with “kids” gloves,” Ms Sophia Kironde Iwumbwe, the project manager, Islamic Banking at Bank of Uganda (BoU), said.
She continued: “The same stringent rules applied to conventional banking model will be no different in any other model including Islamic banking, because there are risks involved here despite its solid moral aspect.” In her presentation last week at the first Islamic finance conference organised by Islamic University in Uganda (IUIU) in Kampala, Ms Iwumbwe said requirements such as good governance and proper risk management also apply to the Islamic banking model.
Speaking at the same conference, Ms Justine Bagyenda, the Central Bank’s executive director supervision, said her department will oversee the operation of Islamic banking products and monitor banks that the regulator will have licensed.
Need for controls
Mr Sulaiman Lujja, the IUIU head of department, Islamic banking and finance, said Islamic banking cannot work here without stringent regulations.
He said: “Bank of Uganda should ensure that customers are not exploited; that means stringent rules or even the law of the land should be enforced by the regulator.”
He continued: “Islamic banking will fail if the Central Bank does not prudently manage it. This is because customers will be left exposed to risks considering the multiplicity of contracts involved.”
He proposed that the existing laws be extended to deal with laxity leading to exploitation of customers transacting under the Islamic banking model.
He was also of the view that the tax regime be customised to Islamic banking so that those involved are not left out of the tax bracket.
According to Mr Lujja, the consultative working groups that would identify the industrial challenges and subsequently advise on appropriate regulatory response also ought to be established.
And so is developing a centralised system of Shari’ah governance in the Central Bank.
While closing the conference, the guest of honour, Prince Kassim Nakibinge, a banker, said Islamic banking is here to provide an alternative model of banking.
He added that those who are opposed to the Islamic banking model, on the grounds that it is a tool to spread religion (Islam) lack knowledge about the model that has since been embraced even in the Western world.
According to the Bank of Uganda statistics, about 62 per cent of Uganda’s population has no access to mainstream financial services.
The number of the population holding accounts in banks is 4 million or 33 per cent of the 12 million who are bankable.
The savings to GDP Ratio is still low at 16 per cent. In addition, financial intermediation is poor as indicated by the stock of private sector credit of 11.8 per cent Of GDP.