June 16—There is UGX35 billion available, (nearly $10 million), for Ugandan Savings and Credit Cooperative Organizations (SACCOs) that meet the criteria for loans to be channeled through the Microfinance Support Centre (MSC), but under the provisions of Islamic banking.
“The biggest problem that continues to constrain productivity and household income in Uganda has been inadequate access to development capital. This is due to high interest rates, complicated eligibility procedures and concentration in urban areas by most conventional banks hence leaving out majority of Ugandans who live in rural areas and are small entrepreneurs. Islamic micro-finance will solve the problem,” John Peter Mujuni, the MSC Executive Director has said.
The Islamic Development Bank, which has its headquarters in Jeddah, Saudi Arabia, is providing the money. However the loans are open to all Ugandans once all conditions are met. Earlier this year, Parliament passed the Financial Institutions (Amendment) Act 2016 that cleared the way for a parallel Islamic banking system to run alongside the Western one. Islamic banking is based on the principle of loss and profit sharing and emphasizes the principle of no interest on loans.
Mujuni said, “However the money will be given under the guidelines of the Islamic Shariah law meaning that the money given cannot be used in ventures that differ from the Islamic beliefs. For example, businesses dealing in pigs, alcohol, prostitution and gambling will not benefit from the fund.”
Racheal Kobugabe, a business consultant with MSC said they have already trained over 123 staff members and over 80 client institutions all over Uganda who will help in implementing the loans.
She said, “We have already given out over UGX3.3 billion to 24 member projects in western parts of Ugandan in districts of Kanungu and Kisoro. The first disbursement was in March 2017 having been rolled out.”
However MSC officials have admitted that they were already facing challenges of non-compliance with the Shari’ah law, but had an institution in place to make sure that the money lent out is used for projects that comply with the rules set by IDB.
Kobugabe said in addition to following the Shari’ah laws, the projects that needed funding under the Islamic banking will have to be registered, have clear ownership and governance structures, should have been in existence for two years. She cautioned that businesses that are uncertain and based on market speculation will not be funded.
Islamic banking is already available in several African countries like South Africa, Rwanda, Kenya, Tanzania and Sudan. MSC is the first institution to take it up in Uganda.
Islamic banking various options like the Musharaka (equity financing or joint venture partnership between the entrepreneur and the financial institutions, marabaha (cost plus financing or asset financing ), madaraba (profit sharing ) Salam (forward sale) muqawala and istisna.