SHARI'AH GOVERNANCE IN UGANDA ISLAMIC BANKING REGULATION OF 2018

"Shari'a-compliance is the backbone of Islamic banking and finance. It not only gives legitimacy to the practices of Islamic banking and finance, but also boosts the confidence of the shareholders and the public that all the practices and activities are in compliance with Shari’a at all times. The existence of non-Shari’a-compliant element would not just affect the confidence of the public but might also expose Islamic financial institutions (IFIs) to fiduciary and reputational risks. Compliance with the Shari’a principles will be achieved through having a proper Shari’a governance framework in placed." Above quotation explains the reason of having robust Shari'ah governance as a regulatory requirement besides being the best practice. SHARIA SUPERVISORY / ADVISORY BOARD. In East African region, IFIs constitute Shari'ah governance to conform with best practices with exception of Uganda which has issued Islamic banking regulations in 2018 therein Shari'ah governance is recognised as crucial component of Islamic banking. Clause 12 of the regulation states "Every financial institution which conducts Islamic financial business shall appoint and maintain a Shari’ah Advisory Board in accordance with section 115B of the Act." The act stipulates that SAB shall be appointed by the board of directors, answerable to them, they must be between 3 to 5 members, their qualifications, SAB main functions and must be vetted by the Central bank. Besides institutional SAB,the Central Bank shall establish central Shariah advisory board in order to approve products and advise CBU on matters of regulation and supervision. SHARIAH AUDIT. The regulation require establishment of Shari'ah audit function, it states "A financial institution carrying on Islamic financial business or a financial institution operating an Islamic window shall conduct a Shari’ah audit on a periodical basis." Besides, the regulation articulates the scope of the Shariah audit for IFIs. EVALUATION OF THE SHARI'AH GOVERNANCE Sharia advisory board and Shari'ah audit are the only two internal organs identified by the regulation for Shari'ah governance. Where as this minimalist approach is commendable, financial institutuins offering or planning to offer Islamic financial services must consider other critical functions in accordance with industry practices. This includes establishment of Shari'ah compliance unit that is responsible with day to day Shari'ah oversight, advisory and training for the entire bank staff. SUGGESTIONS TO IMPROVE THE REGULATIONS. It is also important to mention that the regulations have some weaknesses which need to be addressed. These are; 1. Clause 12 mention that appointment of SAB should be in accordance with section 115B of the Financial Institution Act. I have failed to identify this section in the Act as there is 115 but no 115B, thus making it difficult to understand fully section requirement with regards to SAB appointment. This section needs to be clarified. 2. SAB members are subjected to approval by Central Bank. In my view, Central Bank should limit itself to articulating qualifications of members of SAB and require banks to ensure those appointed meets those qualifications. This will reduce gov't bureaucracy or feeling of interference on this organ. Alternatively, vetting of members of SAB should be done by Central Sharia Advisory Council rather than Central Bank. 3. The regulation doesnot give any powers to the SAB on matters under its mandate. What if the management doesnot fulfill the advise or guidelines issued by SAB? 4. The functions of SAB have been extremely limited to "... advise, approve and review the Islamic financial business of a financial institution in order to ensure that the Islamic financial business of the financial institution complies with the Shari’ah." The regulation should borrow from AAOIFI on functions of Shari'ah Supervisory Board. 5. With regards to reporting of Shari'ah audit functions, it is recommended that they shouls also report to Board of Director's Audit Commettee since it has the power to enforce corrective measures. 6. Removal of member of SAB should not be left to BOD without Central SAC oversight. Hence it is recommended that such removal should be subjected to no objection from the Central SAC to ensure SAB independence and security of tenure. 7. The regulation is totally silent on who is responsible to ensure Shari'ah compliance in the banks. Is it the BOD? Is it the Management? is it the SAB? It is important to state that the management is fully responsible to ensure Shari'ah compliance. 8. Reporting on Shari'ah compliance should not be done by BOD as stated in clause 17. "The regulation requires BOD in respect of the financial statements of the financial institution, report at least once a year, on the Shari’ah compliance of the financial institution." This is not BOD mandate. It is only SAB that shoud have such mandate in order to provide assurance, promote transparency and gain public confidence. According to AAOIFI and the best practice, SAB is the one that must provide such a report annually. On Central Shari'ah Advisory Council, it is recommended that: 1. Clause 18 should have (c) to review on proposed members of institutional SAB members. Though as earlier stated it is good for Central Bank not to get involved with appointment. (d) Receive and review reports of outstanding Shari'ah audit issues not resolved within specified period of time. 2. Clause 19, it is a grave mistake to give chairmanship to the Governor of the Central SAC. Given what it is supposed to do under clause 18, it is extremely unprofessional to have Central Bank officials to constitute the majority in council. This is a Council of Shari'ah Scholars and must remain so. Such diffusion with Central bank official must be corrected. Central bank officials should only be invited guests but with no specific role neither voting power to the decisions of the Council. As it is now, out of 5 members only two are Shari'ah scholars. Is it central Shariah advisory council or it is another committee of the Governor? 3. It is not clear what relationship does the Central SAC have with the Central Bank Board of Director that is entrusted to appoint them? To whom does the council reports to? It is also not clear if non-Ugandan can serve in the SAB and in the Central SAC given that the qualifications required may be short in supply in Uganda. In conclusion, as earlier said, government of Uganda has taken examplary step in regulating Islamic banking in the region and thus sets an example for other neighbouring countries to follow. Therefore, it must ensure it gets it right and hence above suggestions aims to improve the regulation so that we operate within international best practices without ignoring our context. Note: I am oepn to support organs interested on setting up regulations for Shari'ah governance of Islamic Financial Institutions as well as help Islamic Financial Institutions to have robust Shariah governance framework. Those interested can contact me through: kmgeituff@gmail.com