UGANDA: THE FINANCIAL INSTITUTIONS ACT AMENDMENT TO ALLOW ISLAMIC FINANCE/ ISLAMIC BANKING IN UGANDA: What You Need To Know
The face of the banking industry in Uganda is changing in the wake of the passing of the Financial Institutions (Amendment) Act 2016 (FIA). The FIA introduced a dual system of Islamic banking alongside conventional banking in what is the single most important development in banking in 2016.
Islamic finance is a financial system governed by Shari’ah law, which is derived from the religious text of the Quran. The Law defines an Islamic financial institution as “a company licensed to carry on financial institution business in Uganda whose entire business comprises Islamic financial business and which has declared to the Central Bank that its entire operations are and will be conducted in accordance with the Shari’ah.” The amendment incorporates various definitions and amendments so as to legalise and create a basis for Islamic banking in Uganda.
Islamic finance is not limited to Islamic institutions; conventional financial institutions may also adopt this finance system provided they adhere to the principles of Shari’ah law. Financial institutions’ clients, both Muslims and non-Muslims, who have historically used traditional products, have the option of choosing Shari’ah-compliant options.
The FIA permits an already licensed financial institution carrying on financial institutions business to apply to the Central Bank to carry on Islamic financial business in addition to its existing licensed business and also have a separate Islamic banking window within the banking hall for Islamic banking transactions. The FIA also empowers the Central Bank, in consultation with the Minister of Finance, to make regulations with special provisions for the licensing and operation of Islamic banking. It is expected that since Uganda is a non-Shari’ah law jurisdiction, the regulations that will be passed under the FIA will provide for licensing requirements that explicitly address the issue of Shari’ah compliance.
Whereas existing financial institutions acquire a licence to carry on Islamic banking business, it will be distinct from the mainstream financial institutions business. Islamic banking services/products will definitely benefit from the experience and systems that the conventional banking business has.
The Amendment further provides that for an institution other than one that is already existing under the Financial Institutions Act to apply for a licence to carry out Islamic finance business, the applicant's memorandum and articles of association or other instrument under which the company is incorporated, the certificate of incorporation and, in the case of a person intending to conduct Islamic financial business, shall submit to a statement stating that the business of the financial institution's operations shall be conducted in accordance with the Shari’ah. In the case of an applicant proposing to be an Islamic financial institution, a declaration shall be signed by all the directors and persons proposing to become directors, to the effect that the entire business operations of the applicant will be conducted in accordance with the Shari’ah.
The FIA defines Islamic financial business as being financial institutions business which conforms to the Shari’ah and includes:
(a) The business of receiving property into profit-sharing investment accounts or of managing such accounts;
(b) any other business of a financial institution which involves or is intended to involve the entry into one or more contracts under Shari’ah or otherwise carried out or purported to be carried out in accordance with the Shari’ah including (1) equity or partnership financing, including musharakah, musharakah mutanaqisah and mudarabah, (2) lease based financing, including al-ijarah, alijarah muntahia bi al-tamlik and al-ijarah thumma al-bai, (3) sale based financing, including istisna`, bai` bithaman ajil, bai` salam, murabahah and musawamah, (4) currency exchange contracts and (5) fee based activity, including wakalah;
(c) the purchase of bills of exchange, certificates of Islamic deposit or other negotiable instruments,
(d) the acceptance or guarantee of any liability, obligation or duty of any person, and
(e) the business of providing finance by all means including through the acquisition, disposal, or leasing of assets or through the provision of services which have similar economic effect and are economically equivalent to any other financial institutions business.
The FIA requires every financial institution which conducts Islamic financial business to appoint and maintain a Shari’ah advisory board. The Shari’ah advisory board must be separate and distinct from the board of directors appointed for conventional banking operations. The FIA also prohibits a member of a Shari’ah advisory board in any financial institution from being appointed as a director on the main board of directors of a financial institution while he or she holds that position. The advisory board is tasked to advise, approve and review activities of the Islamic financial business in order to ensure that the financial institution complies with Shari’ah law. However, this does not mean that the financial institutions’ main board of directors is excused from its oversight role. The FIA gives additional responsibility and authority of the main board of directors in relation to Shari’ah compliance, though typically, the Shari’ah advisory boards have the ultimate responsibility and authority in advising on Shari’ah matters.
Under the FIA, the Islamic financing business in the financial institutions will still be regulated by the Central Bank through the Central Shari’ah Advisory Council, whose duty will be to advise the Central Bank on matters of regulation and supervision of Islamic banking systems and approve any product to be offered by financial institutions conducting Islamic banking. The prescriptions on risk management contained in the existing regulatory framework before the passing of the FIA will apply to all banks in the supervisory process.
The Law is yet to be tested as the regulations which should govern the applicability of the Act are yet to be enacted and we are yet to see banks actually taking on Islamic banking.