Banking in Uganda, in the eyes of the public, runs about two terms – savings and loans. The expansion of these germinates into other details such as the interest rates that the economically learned can interpret easier. Of late, the industry is bracing for the birth of Islamic Banking which has equally attracted a lot of attention from people in Uganda.
The ongoing debates are not any different from what was initially perceived when this kind of banking was first developed in the 1970s in the Persian Gulf. It was thought of as an exclusive for Muslims who wanted a banking system that complied with their religious values.
In the Financial Institutions Act 2004 amendment done in 2016, the establishment of fully fledged Islamic Financial Institutions was allowed and the existing Financial Institutions were given the green light to offer the banking system alongside their conventional banking services.
What is Islamic banking?
Precisely, it is a banking system based on the principles of Islamic or Sharia law.
It applies concepts derived from the Quran and the writings of Islamic scholars which revolve around the value of a sound currency and fairness in transactions. This requires that whoever makes a transaction conducts it according what is permissible and lawful under Sharia law.
Key principles of Islamic banking
There are four key principles that support this type of banking. These are:
Prohibition of payment and receipt of interest
While the conventional commercial banks create value out of the earning of interest, Islamic Banks are prohibited from doing so. Instead, it allows for the engagement in trade and commerce, from which value is created through profits earned.
Just like the other banks, Islamic banks make their profits by loaning money to customers. However, where a bank loans with interest, Islamic banks loans through buy-and-sell transactions.
Mutuality of risk sharing-profit and loss
Islamic Banks and their customers share the profits or losses in a predetermined and agreed ratio. In case of a bad year, the Islamic bank might not pay a profit share to the customer, whereas a conventional bank is contractually bound to pay customers the interest rate it promised.
Prohibition of investment in harmful Businesses
The banking system prohibits the financing of harmful products and or activities as defined by Sharia Law, and thus Islamic banks cannot therefore finance businesses such as gambling.
Prohibition of uncertainty and speculation
There are strict rules in Islamic finance or banking against transactions that are highly uncertain or speculative or that may cause any injustice or deceit against any of the parties.
Read About: Agency Banking in Uganda
When does it start in Uganda?
According to the Bank of Uganda, various bodies have expressed interest in establishing Islamic Banking entities in Uganda.
The central bank is currently processing three applications: one for an Islamic products window by a locally domiciled conventional Bank, and two applications by foreign entities interested in establishing fully fledged Islamic financial institutions.
The banking system is already in practice in territories around the globe in countries like South Africa, Nigeria, Mauritius, Botswana, Kenya, Tanzania, Rwanda, Senegal, Algeria, Egypt, Sudan and Tunisia.
