After more than 20 years of waiting, the Bank of Uganda has granted a license to the first financial institution engaged in Islamic banking.
As a result of the decision, Ugandans will now run a hybrid banking system that will allow clients to access both traditional and Islamic banking products.
In the next 12 months, Salaam Bank, which is currently operational in Kenya, Somalia, and Djibouti, is anticipated to begin operations. With its regulation by the Bank of Uganda as a tier-one financial institution, Uganda will now have 26 commercial banks.
However, Bank of Uganda Deputy Governor Michael Atingi-Ego cautioned there were hazards connected with any new endeavour, stating that, “I am confident that Salaam Bank has the expertise and resources to manage these risks.” He said during his speech at the license handover event in Kampala over the weekend.
Sharia law-based Islamic banking prohibits the payment or receipt of interest, mandates that profits and losses be split equally, and bars financial organisations from employing derivatives since they are rife with excessive uncertainty.
Because Islamic banking does not charge interest, according to Dr. Atingi-Ego, “this makes it a more sustainable form of banking, and it is well-suited to the needs of many Ugandans.”
Ugandans still suffer from high loan rates, typically ranging from 26% to 28%. According to Dr. Ating-Ego, implementing Islamic banking is a crucial step that will encourage financial inclusion.
As the innovator, Salaam Bank is anticipated to set a standard for other financial institutions to use when developing Islamic Banking products.
Prior to this, several banks had expressed interest in providing products for Islamic banking, but they had been constrained by the lack of supporting institutions like the Central Shari’ah Advisory Council.
According to Ramathan Ggoobi, the Permanent Secretary of the Finance Ministry, Islamic banking will offer Ugandans a wider range of financial services.
He noted that while Islamic banking was made possible by the 2016 amendment to the Financial Institutions Act, its implementation was hampered by the lack of a Central Shari’ah Advisory Council.
Nevertheless, he said that adopting necessary tax legislation, such as income tax, value-added tax, stamp duty, and excise duty between 2022 and 2023, as well as the abolition of the Central Shari’ah Advisory Council’s mandate, had made it possible.
According to Ggoobi, “this addition to our current financial services menu will play a role in [transforming] Uganda [through] providing funding solutions to the businesses that have been reluctant to use conventional banking due to the charging of interest,” adding that Islamic Banking should not be viewed as a faith drive to Islamize Ugandans.