April 19— Islamic banking, which unlike Western-oriented principles does not involve any payment of interest on borrowings, can change the face of the financial industry in Uganda and how it operate.
“Financial markets impact on the way we do business, because easy access to credit means more opportunities in the economy. Since conventional banking is driven by interest rates, it means that when interest rates are high, people shy away from borrowing and this affects private sector growth and when the interest rates are low, there is a lot of liquidity as many people rush to take loans which they may fail to pay sometime; especially when the interest rates rise again,” Mustafa Omar Mohammed from the Department of Economics at the International Islamic University in Malaysia has said.
Last year, Parliament passed an amendment to the Financial Institutions Act (2004) which legalized Islamic banking in the country. However, as the regulator, Bank of Uganda has to set up a Central Shariah Advisory Board before banks can offer the product to the general public.
Mohammed said, “It is difficult to control the economy in cases where financial markets are driven by interest rates and that is where Islamic banking comes in to help salvage the situation since it is not driven by interest rates.”
The new amendments also provide for introduction of bancassurance (insurance services provided by banks), Agent Banking and the setting up of more credit reference bureaus.
Mohammed was speaking at a workshop organised by the Uganda Development Bank Limited (UDBL), a government owned financial institution and the Association of National Development Finance Institutions in Member Countries of Islamic Development Bank (ADFIMI) under the theme ‘Essentials for Islamic Banking.’
Islamic banking is based on three principles of equity, participation and ownership and it focuses on sharing profits or losses that accrue if any, with the clients. Its main pillar is the sharing of net profit/loss and the risk involved in a proportional manner between the lender and the beneficiary.
Nuri Birtek, the ADFIMI’s Secretary General said since Islamic banking comes with models that focus on principles of investment in real assets and risk sharing, it will contribute to the spread of real asset based financing and is also regarded as an ideal option for financing of infrastructure projects.
The CEO of UDBL, Patricia Ojongole said Islamic banking will become an alternative to the Ugandans and also help bridge the funding gap with new lines of credit.
Justine Bagyenda, the Executive Director for Supervision at Bank of Uganda however cautioned before final approval from the Ministry of Finance, banks should have all the sensitization materials which they should disburse to the customers on the operations of Islamic banking. She said customers must be informed about all the benefits and risks that come with Islamic banking before they go in for the new products
She said since Islamic banking and finance is banking business, it will have to conform to the same regulatory and supervisory framework governing conventional banking with a few modifications to cater for the unique features of Islamic banking.