By Dr. Tumubweinee Twinemanzi
In operation, Islamic Banks mobilize customer deposits and provide financing arrangements to customers by structuring various types of financial contracts. These contracts or transactions must uphold the four (4) key principles of Islamic Banking
Mobilization of Deposits: Under mobilization on deposits or funds, the existing legal and regulatory framework in Uganda allows for customer deposit mobilization through the following arrangements:
Profit Sharing Investment Accounts: These are akin to fixed deposit accounts in that the account holder allows the bank to invest the funds on their behalf either in projects specified by the account holder or in unspecified projects. The bank and the account holder share profits / losses arising from the investments.
Profit Earning Investment Accounts: These in operation are akin to savings accounts in conventional banking. With these accounts, the customer earns a profit on their deposits held with the financial institution.
Non-profit-bearing deposit accounts: These are akin to current accounts in conventional financial institutions. The depositor does not earn any profit on their deposits.
Disbursement of Credit: Regarding funds mobilized in a Sharia compliant manner, Islamic banks provide and extend Sharia compliant credit facilities in the following forms:
Sale Based Financing (Cost-Plus Mark-up); in this contract, the financial institution purchases an asset directly from a supplier and sells it to customer at a pre-determined price. The selling price includes the original cost plus a negotiated profit margin.
Lease Based Financing: where the financial institution purchases an asset directly from a supplier and leases it to the customer for a certain period at a fixed rental charge. The repayments made by the customer comprise the cost price plus the financial institution’s profit.
Equity Partnership: Financing; these contracts are based on Profit or Loss Sharing arrangements and they mainly take two broad forms: Trust Financing and Partnership as indicated below: i) Trust financing: The financial institution provides the entire capital needed to finance a project, and the customer provides the expertise, management and labor. The profits from the project are shared by both parties on a pre-agreed (fixed ratio) basis. However, in case of losses, the entire loss is borne by the bank.
ii) Partnership: These are similar to joint venture agreements, in which a bank and an entrepreneur jointly contribute capital and manage the business project. Any profit or loss from the project is shared in accordance with a pre-determined ratio. The financial institution would ordinarily terminate the joint venture gradually after a certain period or upon the fulfillment of a certain condition.
Regulatory framework: The Financial Institutions Act 2004 was amended in 2016 to enable Islamic Banking. The amendments therein included exemptions offered to licensed Islamic Financial Institutions with respect to restrictions on engaging in trade and commerce, activities not allowed for in conventional banks. Subsequently, Bank of Uganda issued the Financial Institutions (Islamic Banking) Regulations in February 2018 to cater for the technical aspects unique to Islamic financing, and to operationalize the amendments related to Islamic Banking in the Financial Institutions Act 2004.
This regulation covers the “how” and “what” for the licensing and regulation of Islamic banking in Uganda, and a proviso that outside of the specific exemptions granted in the amended Financial Institutions Act 2004, Islamic financial institutions are still bound to comply with all existing regulatory requirements.
One key requirement of the abovementioned Regulation is the establishment of a Shariáh Advisory Council (SAC) at the Bank of Uganda. This SAC is responsible for ensuring that all Islamic financial products presented and marketed as such, meet Shariáh based criteria for the said products and services. The establishment of this SAC should be concluded once consensus has been gotten with the relevant stakeholders.
Islamic Banking in Uganda, where we are today:
Various entities have expressed interest in establishing Islamic Banking entities in Uganda. Bank of Uganda 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 Banks.
It should be noted that Islamic Banking is practiced in various jurisdictions around the World. In Africa, this includes countries like South Africa, Nigeria, Mauritius, Botswana, Kenya, Tanzania, Rwanda, Senegal, Algeria, Egypt, Sudan and Tunisia. The diversity of the dominant religious belief systems of the nations on the list above, underscore the fact that Islamic banking is not a preserve of Islamic states or nations.
The writer is the Executive Director Supervision, Bank of Uganda