Two laws, one system: The dilemma slowing adoption of Islamic banking 

Islamic banking is part of the global financial system, but fitting it into conventional banking isn’t easy - and it is frustrating for financiers.

Why? Global banking regulations, set by the Basel Committee on Banking Supervision, ensure banks follow guidelines while managing risk.

But Islamic banks aren’t just “banks with rules,” they are “banks with values.” Unlike traditional banks that operate on a creditor-debtor model, Islamic banks share risk and reward.

Thus, trying to fit them into conventional frameworks is like forcing a square peg into a round hole.

In Uganda, this mismatch is even more pronounced. The law requires banks to follow banking rules, but Islamic banks must also comply with Shari’ah - ethical and religious rules that create a double compliance barrier.

Countries like US, UK, and South Africa have embraced Islamic banking, with global giants like HSBC and Citibank offering products, not just for religious reasons, but for business sense.

Its peg on values, fairness, and accountability offers a potentially more stable, socially responsible foundation than conventional banking.

And in Uganda, the Economic Policy Research Centre (EPRC) believes sectors like agriculture can be serious beneficiaries of Islamic banking.

Commercial banks initially entered agricultural lending but quickly retreated.

Lending to the sector only rose from Shs291b to Shs876b between 2009 and 2014, driven by the Agricultural Credit Facility. 

However, from 2020 onwards, growth slowed, and by 2023, loans had dipped from Shs852b to Shs840b.

Banks, facing rising non-performing loans in other sectors, became more cautious, while microfinance institutions stepped in, their limited funds couldn’t fill the gap.

Thus, Lujja Sulaiman, a banker with over a decade in Islamic finance, believes Islamic banking could save the day as it “offers patient capital [which] can support farmers to transform seeds into food security because Shari’ah-compliant agricultural financing, based on risk-sharing, can power long-term growth”. 

Uganda has embraced Islamic banking, but governance gaps are slowing its growth.

A governance hiccup

Islamic banks operate under two frameworks: corporate governance, which ensures transparency, accountability, and good management, and Shari’ah governance that ensures that all services and transactions comply with Islamic principles.

Shari’ah governance involves regulators, bank boards, and Shari’ah Advisory boards - panels that verify that everything from profit-sharing to loan structures aligns with Islamic law.

But Shari’ah isn’t just about Islamic law; it’s a comprehensive ethical framework that covers faith, economics, justice, and social good.

In finance, it emphasises fairness, public welfare, and avoidance of harm.

While many East African countries hesitated on Islamic banking, Uganda took the bold route -rewriting its laws to make room for Shari’ah-compliant finance.

It started with the Financial Institutions (Amendment) Act, 2016, which officially allowed Islamic banking, and then the 2018 regulations, detailing licensing and operation principles.

But along the way, Bank of Uganda flagged one major issue – the proposed Central Shari’ah Advisory Council at BoU, which meant that the regulator would both approve and oversee Islamic financial products - a clear conflict of interest.

So, in a legal clean-up in June 2023, Parliament scrapped the section, shifting approvals to individual bank-level Shari’ah boards, while also introducing other reforms - income tax, value added tax, stamp duty, and excise laws - to create a level playing field between Islamic and conventional finance.

Subsequently, on September 8, 2023, BoU licensed Salaam Bank after it acquired Top Finance Bank.

BoU is now reviewing Islamic banking applications at different levels.

Supporting capacity building 

At the 2024 Islamic Development Bank annual meeting in Riyadh, Saudi Arabia, Uganda secured a $295m deal to upgrade national roads.

But this was beyond roads. It included helping Uganda to shape Islamic banking regulations and increase access to Shari’ah-compliant financing.

“This matters most in agriculture,” says Lujja, who believes that a stronger Shari’ah governance system could help direct Islamic capital toward boosting farm productivity.

The regulatory gap

The enactment of the Financial Institutions (Amendment) Act 2023 marked a significant shift in Uganda’s approach to Islamic banking.

By repealing some provisions, the responsibility for Shari’ah governance was fully transferred to individual financial institutions.

While this sought to align regulatory practices with global standards, it has exposed a critical gap in prudential supervision. The absence of a centralised authority to oversee Shari’ah compliance has thus delayed licensing banks seeking to offer Islamic banking.

The challenge stems from the nature of Shari’ah law itself, subject to varying interpretations based on context, geography, and school of thought.

“Without a mechanism to harmonize divergent views across Shari’ah Advisory Boards, Uganda risks a fragmented Islamic banking sector where regulatory inconsistency could erode public confidence,” says Lujja, who is also the head of Islamic Banking and Finance Department at Islamic University in Uganda.

Currently, skepticism lingers around some Islamic finance products that mimic conventional models without fully aligning with Shari’ah principles, a credibility mismatch.

Policy reforms

Now, the conversation is that given the strategic opportunities Islamic banking offers, Uganda needs to revisit its regulatory posture and implement targeted policy reforms. 

Right now, Uganda’s Islamic finance space is running on a hands-off model where banks police themselves on Shari’ah matters. 

Thus, government needs to be more involved, not to meddle, but to mentor through hiring experts or upskilling existing staff.  

“This boosts market confidence and opens doors to cheaper, ethical capital from wealthy Islamic finance hubs,” Lujja says. 

Then, bring in a National Shari’ah Advisory Council (NSAC). 

Think of this as Uganda’s Shari’ah Supreme Court - a body that would set the tone and offer final say on what flies and what flops under Islamic law. 

Currently, each bank makes its rulings, leading to inconsistency, or what insiders call “Shari’ah arbitrage.”

By setting up the NSAC—possibly under the Ministry of Finance or Uganda Muslim Supreme Council - the country could standardize rulings, limit confusion, and reassure investors.

Beyond this is the need to clean up the Islamic microfinance confusion. 

At the grassroots, Islamic finance looks promising, but it’s tangled in a legal grey zone due to conflicting laws. 

The Co-operative Societies Act and the Tier 4 Microfinance law don’t quite agree on how Islamic Sacco should be treated. 

Thus, Lujja proposes the creation of a dedicated Islamic Microfinance Directorate to professionalise rural Islamic lending, protect communities from dodgy schemes, and ensure Shari’ah isn’t just a buzzword but a standard.

Then stop the turf war between Shari’ah Committees and Bank boards, where bank directors and Shari’ah scholars, each want to have a say on what the institution should do. 

“Be clear: Shari’ah Committees rule on religious compliance. Bank boards focus on business strategy. No overlap, no drama. It’s the corporate version of ‘stay in your lane, ’” says Lujja.

Then, there is also need to plug into global best practice. Uganda doesn’t need to reinvent the Islamic finance wheel, the heavy lifting has already been done. 

By adopting global standards, Uganda can cut out the guesswork, reduce legal risk, and skip the years of trial-and-error other countries endured. 

[email protected]