Ugandan parliament agrees to introduce Islamic banking, but central Shariah advisory board needs to be in place first

As the Ugandan government seeks to do away with laws prohibiting Islamic banking transactions, the onus has fallen onto its central bank to form a central Shariah advisory board in order for Shariah banking to be included into the East African Republic’s financial system.

In a landmark development, the Ugandan parliament has given its stamp of approval to the Financial Institutions (Amendment) Bill 2015 which will see key features of the country’s banking system dissolved and drastically altered in the name of greater financial inclusion for the landlocked nation of 39 million. These changes include lifting a ban on Islamic banking products and allowing, for the first time ever, for financial institutions to engage in insurance activities. Under the recommendations of the Committee on Finance, Planning and Economic Development, banks would also be granted licenses to offer Takaful solutions.

“The committee recommends that the proposal to introduce Islamic banking and its products be adopted subject to the establishment of a central Shariah advisory board in the central bank to regulate banks providing Islamic banking products,” it said in its report on the amendment bill. The committee also confirmed that it will introduce this particular amendment at the committee stage.

The government’s decision is in line with its ambitious 30-year plan – branded as Vision 2040 – to hoist itself out of the low-income bracket to become a competitive upper middle-income country. In a bid to boost its economic fundamentals and broaden its financial spectrum, Uganda is positioning itself to tap the burgeoning US$1.8 trillion Islamic finance industry as it aptly recognizes that “the provision of Islamic banking and financial products by banks is growing rapidly in many countries”. It is noted that half of the 22 licensed conventional and commercial banks in Uganda have voiced interest in providing Shariah banking products. Should the proposed regulation be implemented, this could usher in new opportunities for domestic banks and significantly give the much-needed boost for Uganda’s Islamic finance industry which has so far lagged behind its regional peers (such as South Africa, Senegal, Kenya and Nigeria) which have already dipped their toes into Shariah banking, Sukuk and Islamic insurance.

Source: IFN Alert.