DealMakers AFRICA Q1 2019

Download Q1 2019 Issue

How Ugandan businesses could benefit

from Islamic banking

by Sophie Nyombi

Many Ugandan businesses are eagerly watching developments in the area of Islamic banking, which could offer a welcome alternative to conventional banking services for Muslims and non-Muslims alike.  


The cost of credit tends to be high in Uganda, where conventional banks are known for their high interest rates and bank charges. Islamic banking, on the other hand, does not allow the charging of interest (known as Riba). Such practices are considered unjust enrichment and are prohibited under Islamic laws (Sharia) and principles, on which Islamic banking anywhere in the world must be based.

Bowmans logo.jpg

Instead of charging or paying interest, Islamic banking works mainly on a partnership basis, where the financial institution enters into a profit-sharing contract with a customer. Profits and sometimes losses are shared at a pre-agreed ratio, depending on the type of contract. In a Mudarabah partnership, for instance, the financier will bear all losses incurred. In a Musharakah partnership, both the financial institution and the customer will share the profits and losses.


Given this risk-sharing approach, it is not surprising that Islamic banking transactions are typically subject to thorough due diligence before any agreement is entered into. Financial institutions scrutinise potential investments very closely and will not entertain any transaction that is speculative or prohibited under Islamic law. Responsible investment is a key principle of Islamic banking, which prohibits any investment that supports industries or activities considered harmful to people or society as well as prohibited in Islam, such as gambling, liquor, tobacco, arms, certain foods such as pork or any kind of speculative investment.


Sophie Nyombi.jpg

Legal framework already in place

With its emphasis on social justice and partnership, Islamic banking could be a potentially valuable source of funding for Ugandan entrepreneurs and small businesses that have been unable to access conventional funding.


Aware that Islamic banking could assist in extending financial inclusivity in Uganda, the government has put the necessary legal and regulatory framework in place, based on Sharia laws and principles. The Financial Institutions Act 2004 was amended in 2016 to make provision for Islamic banking and, in February 2018, the Financial Institutions (Islamic Banking) Regulations were passed into law.

Under the regulations, an existing commercial bank may apply for a licence to operate Islamic banking ‘windows’ and fully fledged Islamic banks may be licensed.


Although quite a number of Uganda’s 24 commercial banks have expressed interest in offering Islamic banking services, none has yet introduced a window for Islamic financing. In addition, the Central Bank has not licensed a fully Islamic financial institution.


Stringent governance requirements

There is an extensive governing framework that must be followed before Islamic financial services can be offered. According to the regulations, the Central Bank must have a central Sharia advisory council and commercial banks are required to have Sharia advisors and boards. Board members must have certain qualifications in order to serve and, at this point, there may be no Ugandans who qualify for such positions.

Product implementation also requires adherence to Sharia principles and is not merely an exchange of paperwork and terms. Implementing products involves having the right intention, following a prescribed sequence of steps and the correct timing.


It is to be hoped that Ugandan commercial banks are readying themselves for the introduction of Islamic banking and that it will not be too long before they launch their Islamic banking operations. After all, Islamic finance is one of the fastest-growing areas of finance worldwide.


Benefits could extend beyond Muslim customers

Islamic banking is practised in over 70 countries – 34 of which are non-Muslim countries and growing at an average of 19% a year. Uganda, where an estimated 13% of citizens are Muslims, is a late starter in the field and has some ground to catch up. Up to now, without sources of funding consistent with their faith, the country’s Muslim population has had no choice but to use conventional banks whose principles do not align with Islamic law.


However, it is not only Muslims who stand to benefit. There is a misconception in the Ugandan market that Islamic banking is exclusively for Muslims. Not so. Other religions, from Christianity and Judaism to Buddhism, all prohibit financial exploitation of the poor (Riba) and gambling. More needs to be done to make the general public aware of the principles of Islamic finance and its potential benefits for all citizens and the Ugandan economy.


Nyombi is a Senior Associate with Bowmans in Kampala, Uganda.