Ugandans to access interest free loans as Parliament passes Islamic Banking Bill

by Christopher Kiiza
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Islamic banking

Parliament on Thursday passed the Income Amendment Bill and the Foreign Exchange Amendment Bill to pave way for the implementation and operationalization of Islamic banking financial products by commercial banks, once assented to by the President.

The two Bills were added to the other four Bills that include; excise duty, value added tax, financial institutions act and stamp duty tax which were passed by the House on Tuesday.

The passing of the Bills generated intense debate on the floor of Parliament and in the Committee of Finance which scrutinized them. The area of contention was about interest rates on loans in relation to sharia law (Islamic law) and whether this will not affect other products offered by the commercial banks.

Sharia law, which is derived from Islamic principles and teachings, has specific guidelines regarding the charging and payment of interest on loans. According to Islamic finance principles, charging or paying interest, commonly referred to as “riba,” is considered usury and is prohibited.

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.

Although, Sharia law prohibits interest, the word was being maintained in the Bill, but defined in a way that does not contradict the law of sharia. The officials from the Ministry of Finance who were interfacing with the House Finance Committee were arguing that much as the word interest was maintained in the Bill, it would not impact the objectivity of the Bill since it is clearly defined on how it will be used.

However, various lawmakers especially Muslims such as Butambala county MP Muhammad Muwanga Kivumbi who doubles as Shadow Minister of Finance campaigned for total deletion of the word interest in the Bill.

Kivumbi and the Attorney General, Kiryowa Kiwanuka, had to have multiple sessions of consultations to agree to the final definition of interest.

But Kiryowa Kiwanuka argued that clause 1(c) of the Bill amended Section 2(kk) of the Income Tax Act by defining Islamic financial business to mean “financial business undertaken by a person that conforms to Shari’ah principles…”

The definition of partnership is amended to read, in terms of clause 1(d) to mean “…association of persons carrying on business for joint profit, that includes an equity of partnership financing under Islamic financial business.”

Section 67 of the principle Act was amended to create an obligation to withhold tax on the part of a non-resident partner under Islamic partnership as is required of any other taxpayer.

Muwanga Kivumbi and his Bugiri Municipality counterpart, Asuman Basalirwa concurred that the Islamic banking is not intended to target only Muslims, clarifying that all Ugandans will be beneficiaries of the law irrespective of their religious beliefs.

“Islamic banking is not for Muslims. It will go to the poorest poor of our community. Our constitution is very clear, we are secular country,” said Muwanga Kivumbi.

Terming the legislations historic, Basalirwa hailed Speaker Anita Among for seeing through the enactment of Bills which, if assented to by the President, will pave the way for the introduction of Islamic law compliant banking products.

“I want it to go on record that you presided over the passing of Bills that introduced Islamic banking in Uganda,” he said during the plenary sitting on Thursday.

Speaker Among said there is need to conduct mass education on the benefits of Islamic banking, and asked finance state minister for general duties, Henry Musasizi, to organise workshops for MPs to bring them up to speed on the opportunities that Islamic banking presents.


What distinguishes Islamic financing from conventional banking is the concept of “riba” (interest).

“When you want to do Islamic financing/ banking, the essence is to be charitable. You go after someone with the need, and you want to help him come out of that difficulty. Therefore, you cannot do it with the intention of earning a profit, and therefore interest,” Muwanga Kivumbi explained.

Kivumbi further explained how islamic financing will be operationalized by commercial banks, and how it is not just for Muslims, but the entire population of Uganda.

“This is going to be a product like any other product in banks. If you want to go to the bank and access financing under Islamic financing, nobody will ask you about your religious identity. They will simply say, you have a need, you want this product, these are the requirements. There is nothing like you are Muslim. They (bank) will say, this is the way to access it, and it will be accessible to all Ugandans.”

Kivumbi, however, admitted that the only danger of Islamic financing is that it will compete with other banking products that are fairly expensive yet it will be the same banks that will be providing those expensive products (loans).

What awaits is whether commercial banks will prioritize Islamic financing which is interest free ahead of other products that are extended to consumers on interest.

Once assented to by the President, financial institutions and individual players will now introduce and participate in Sharia compliant banking, including insurance (takaful) and re-insurance (re-takaful).

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