Just a month after President Yoweri Museveni assented to the Financial Institutions (Amendment) Act 2023 to clear all the legal roadblocks to the commencement of Islamic banking products in Uganda, the Central Bank has issued the first Islamic banking license.
The Deputy Governor, Bank of Uganda (BoU), Michael Atingi-Ego issued the license to Salaam Bank Limited on Friday.
Atingi-Ego handed over the licence to Mr. Michael Mande in presence of Ramathan Ggoobi, the Permanent Secretary/ Secretary to the Treasury in the Ministry of Finance, Planning and Economic Development and BoU Board Member.
“The BoU is committed to provide oversight and support to Salaam Bank Limited as it embarks on this new journey. We believe Islamic banking has the potential to make a significant contribution to the development of Uganda’s financial sector,” said Atingi-Ego at the handover ceremony at Bank of Uganda in Kampala.
About Islamic banking
Islamic banking also known as Sharia compliant or Islamic finance is a financial system that operates under the principles of Islamic law known as the Sharia.
At the close of June this year, Parliament passed a series of Bills to harmonize issues relating to Islamic banking products to pave way for the long-awaited implementation and operationalization of Islamic banking financial products by commercial banks.
The Bills passed by the House included: the Income Tax Amendment Bill, Foreign Exchange Amendment Bill, Excise Duty, Value Added Tax, Financial Institutions Act and Stamp Duty Tax.
The passing of the Bills sparked heated discussions both in Parliament and within the Finance Committee which examined them. The primary point of contention revolved around the interest rates applied to loans in accordance with Sharia law (Islamic law), and whether these rates might have repercussions on other financial products (loans) provided by commercial banks.
Sharia law, rooted in Islamic principles and teachings, offers distinct directives regarding the imposition and settlement of interest on loans. Islamic finance principles categorize the act of charging or paying interest, often referred to as “riba,” as usurious and forbidden.
In Islamic finance, the concept of riba extends beyond simple interest and encompasses any predetermined, fixed, or excessive return on a loan or debt. This prohibition is based on the belief that money itself has no intrinsic value and should not be used to generate additional wealth without engaging in productive economic activity.
Instead of interest-based transactions, Islamic finance promotes alternative mechanisms that adhere to Sharia principles. Some commonly used financial instruments include profit-sharing arrangements (such as Mudarabah and Musharakah) and asset-based financing (such as Murabaha and Ijarah).
Under these principles, financial transactions are structured in a way that ensures the parties share risks and rewards. For example, in a profit-sharing arrangement, the lender becomes a partner in the investment and shares in the profits or losses generated by the venture rather than receiving fixed interest.
Interest free loans
The issuance of licence to the Salaam Bank Limited means that Ugandans will now enjoy free interest loans from the bank.
There have been concerns that although President Museveni assented to the Islamic financing law, it would be poorly implemented by the same commercial banks which provide loans on interest to make profits. This is because, what distinguishes Islamic financing from conventional banking is the concept of “riba” (interest), yet the essence of Islamic banking is charitable.
It, therefore, would be difficult for commercial banks which are established with the intention of earning a profit through interest, to fully implement Islamic banking.
Interest-free loans in Islamic banking uphold ethical principles, discourage debt dependency, foster financial stability, promote productive investments, and facilitate charitable endeavors, making them a socially responsible and economically viable financing option.