Syda Bbumba
In her Financial Year 2010/11 budget, Finance Minister Syda Bbumba announced that due to demand from the private sector she would introduce new products, including Islamic banking.
“I will therefore be submitting amendments to the Financial Institutions Act 2004 to Parliament which will allow commercial banks to offer financial products under Islamic banking.”
Bbumba said this will allow banks to move into previously untapped markets.
Her announcement caps a decision by Bank of Uganda to allow Islamic banking.
Licensing of Islamic banking will follow the amendment of the bank of Uganda Act 2000, the Financial Institutions Act2004, and the Micro Finance Deposit Taking Institutions Act 2003.
These acts are the basis under which the Central Bank licenses commercial banks and micro finance institutions to take deposits. The amendments have already gone through the BoU board and are on Bbumba’s desk.
She is expected to take them to Cabinet from where they will be tabled before parliament. The BoU is said to have met the parliamentary committees on the economy and the statutory budget committee.
The amendments are being pushed to be formulated into law by the end of the year so that the central bank can license Islamic banking. A source in the financial sector told The Independent that Syda Bbumba is pushing for expeditious introduction of Islamic banking in the country.
According to the central bank, when Islamic banking is eventually introduced into the country it will operate under two categories; under the existing commercial banks which have indicated interest in opening what they have called the Islamic banking window which will provide Islamic products alongside the conventional banking and investors who wish to establish Islamic banking as a separate arrangement.
Juma Walusimbi
“We (BoU) have already received applications from the Middle East, from the Import and export bank of Iran, and from Bangladesh which is to partner with locals to establishing Islamic banking but we have deferred them until the law is in place,” said Juma Walusimbi, the Director for Communications at the Central Bank.
Walusimbi added, however, that there is not much Islamic banking is bringing apart from practicing ethical banking.
“Being based on the Quran there is no interest on money to money transactions but interest is acceptable on trade. Its principles are hinged around ethical banking where funding of businesses that promote sin is not allowed,” he said.
He explained that Islamic banking will offer credit to development projects like any commercial bank in the country basing on general banking guidelines. “Commercial banks that will offer windows on Islamic banking and even when a full-fledged Islamic bank opens shop, will still rely on applications based on sound economic financial and environmental considerations that require for any borrower to make a proposal which is acceptable and reflect that it will give good returns,” he said. Walusimbi said customers will still be required to provide security to access a loan.
“The bank will offer packages for Muslim and non Muslim borrowers once established in Uganda,” he said.
In East Africa, Islamic banking is already practiced in Kenya and Tanzania. The coming of the east African common market could have driven the central bank to open up to the system.
The International Monetary Fund Country Representative, Thomas J Richardson said they are watching the introduction of Islamic banking in Uganda.
“The IMF had helped some countries including Britain start Islamic banking,” he said.
According to the IMF’s latest regional economic outlook for the Middle East, which compares the performance of Islamic banks in the countries of the Gulf Cooperation Council (GCC) with conventional commercial banks during the global financial crisis, it was discovered that Islamic banks were less affected during the initial phase of the global financial crisis.
This reflects a stronger first-round impact on conventional banks through market-to-market valuations on securities in 2008. But in 2009, data for the first half of the year indicated somewhat larger declines in profitability for Islamic banks, revealing the second-round effect of the crisis on the real economy, especially real estate. Going forward, Islamic banks overall are better poised to withstand additional stress, according to the IMF analysis.
independent.co.ug
