The Ugandan government has embraced Islamic banking as
evidenced by Cabinet’s recent approval of the same with the proposed Islamic
Banking Bill 2014 currently before the Uganda Law Reform Commission undergoing
a few changes, and likely to be tabled on the floor of Parliament soon.
Islamic banking is Sharia-compliant banking based on the
principles of trade, partnerships, Profit and Loss Sharing (PLS) and the
prohibition of reckless risk. Specifically, it prohibits interest-based
banking, speculation and financing of haram transactions such as gambling and
alcohol. It has the same purpose as conventional banking: to make money for the
bank by lending out capital. However, the Islamic economic system revolves
around the prohibition of interest. Two of the several Islamic banking products
that avoid the concept of interest are Musharaka and Murabaha.
Under a Musharaka contract, the bank provides the money
while the client provides the business expertise, and profits are shared at a
predetermined ratio while losses are borne exclusively by the bank, having
provided all the capital initially. This is essentially a partnership loan
between the bank and customer. The bank obtains ownership interests in the
assets it finances, or earns a profit-share. Because of the bank’s involvement
in the implementation of the project, it has a higher likelihood of success,
which should see more successful investments.
On the other hand, Murabaha is cost-plus financing. Because
Islamic banks are prohibited from making returns on money lending, these
contracts provide for the bank to buy an investment good or commodity on behalf
of the client and resell it to the client at a fee which enables the bank to
make a profit. So, for example, an Islamic bank will not offer an interest loan
to clients to buy a house, but will buy the house instead and sell it to the
client for a profit.
Between 2010-2012, interest rates of some commercial banks
in Uganda were as high as 30-32 percent. Islamic banking, being interest-free,
should increase access to investment finance and see a rise in entrepreneurship
projects, as well as boost competition in Uganda’s banking sector inevitably
leading to provision of more efficient and better banking services.
Kenya and Tanzania have already embraced Islamic banking
with banks such as Standard Chartered offering Islamic banking windows. Kenya’s
central bank introduced Sharia-compliant bonds, also known as Sukuk which are
bonds backed by an asset, with the bank sharing in the profits derived from the
assets. Islamic finance currently accounts for about 2 per cent of the total
banking business in Kenya, with corporations making up a considerable portion
of the clientele. In Tanzania, Islamic banking gained such popularity upon its
introduction more than seven years ago that demand for it eventually far
exceeded supply. This was due not only to the large number of Muslims in the
country, but also to the lucrative services and partnerships that Islamic banks
have offered.
In Uganda, only 8.3 percent of the Ugandan population use
banking products, and the Muslim population is only about six million of the
total population. Islamic banking products would likely be particularly
appealing to Muslims, but would also be available to all Ugandans and should be
a viable option for the majority of youthful entrepreneurs and low-income
earners, regardless of religious affiliation.
It is noteworthy that the Financial Institutions Act of
Uganda (2004) neither envisages nor provides for Islamic banking. The proposed
Islamic Banking Bill (2014), therefore, would provide a much needed regulatory
framework to realise the benefits of this alternative banking model.
Source: http://www.independent.co.ug/column/comment/9392-interest-free-banking-a-reality-
