Kampala, Uganda.
A pivotal development for the financial landscape of Uganda has prevailed as the Parliament has passed the Financial Institutions (Amendment) Bill, 2023. If signed into law by President Museveni, this bill will introduce interest-free loans under Islamic Banking. This move is seen as a positive step towards providing financial opportunities to Muslims in Uganda. However, concerns have been raised about the readiness of the country’s infrastructure and taxation systems to accommodate this new banking model.
The Financial Institutions (Amendment) Bill, 2023, which was introduced on June 20, underwent swift processing, being referred to the Committee on Finance for scrutiny within a week. The bill allows borrowers to access interest-free loans by implementing the principles of Islamic Banking. Under this system, lenders and borrowers share profits and losses based on pre-agreed ratios, while the concept of usury (high-interest lending), speculation, and gambling is strictly prohibited.
Despite the passage of the bill, concerns have been raised about the lack of infrastructure and necessary training for the effective implementation of Islamic Banking in Uganda. The Uganda Bankers’ Association (UBA) has not commented on the implications of the new law. The Uganda Law Society (ULS) has cautioned against rushed enactment, highlighting the need for proper training and understanding of Sharia law taxation. There are also discussions about the identification of individuals operating under Sharia law and the establishment of appropriate regulatory bodies.
Some legal experts, have suggested that instead of amending existing laws, a new bill should be introduced to address the specific requirements of the Islamic banking sector. They argue that the current legislative framework may not adequately support the growth and supervision of Islamic Banking. Additionally, concerns have been raised about the establishment of the Central Shariah Advisory Council within the Bank of Uganda, with suggestions to amend the Bank of Uganda Act rather than the Financial Institutions Act.
Islamic Banking, as a system rooted in Islamic traditions and guided by Sharia law, aims to promote ethical financial practices and avoid interest-based transactions. It emphasizes profit-sharing and investing in tangible assets rather than earning interest. The introduction of interest-free loans through Islamic Banking in Uganda is expected to provide an alternative financial avenue for individuals who adhere to Islamic principles.
While the passage of the Financial Institutions (Amendment) Bill, 2023 is seen as a milestone, further discussions and clarifications are needed to address the concerns raised by experts. The government, regulators, and financial institutions will need to work collaboratively to develop appropriate regulations, train personnel in Sharia law taxation, and establish supervisory bodies to ensure the smooth functioning of Islamic Banking in Uganda.
