Key features of Islamic banking in Uganda provided for in The Micro Finance Deposit-Taking Institutions (Amendment) Act 2023.
The Microfinance Deposit-Taking Institutions (Amendment) Act of 2023 amended the Micro Finance Deposit-Taking Institutions Act, 2003 and it inter-alias provided for Islamic banking in Uganda. Islamic banking is a financial system based on the principles of Shariah, which are the Islamic laws and guidelines.
Islamic banking operates on the morals, ethical, and religious beliefs of Islam. Islamic banking prohibits the charging and receiving of interest on loans because interest is considered exploitative and unjust. Instead, Islamic banks engage in profit and loss sharing arrangements with their customers, where the risks and rewards of investments are shared. The primary objective of Islamic banking is to promote ethical and socially responsible financial practices that are grounded in justice, fairness, and mutual benefit. Islamic banking prohibits the financing of harmful products and or activities to finance businesses such as casinos, nightclubs, or any such related activity.
Currently, the laws governing Islamic banking and finance in Uganda are the Financial Institutions Act of 2004 ( as amended in 2016), the Microfinance Deposit-Taking Institutions (Amendment) Act 2023, and the Insurance Act. The Microfinance Deposit-Taking Institutions (Amendment) Act of 2023 further shapes the legal framework of Islamic banking in Uganda.
The key features of Islamic banking provided for in the The Microfinance Deposit-Taking Institutions (Amendment) Act of 2023 are;
- Interest free loans. Licensed financial institutions shall not charge interest. One significant feature is that banks engaged in Islamic banking shall operate on the principle that earning interest from a loan is considered haram (taboo) in Islam. Banks that shall engage in Islamic banking shall be business partners with the borrowers and shall share the profits from the business in lieu of the interest they would have gotten from the loan. Islamic banking offers a range of products and services, including savings accounts, financing for businesses and individuals, investment options, and insurance, following Islamic principles.
2.Licensing of microfinance institutions to offer Islamic banking. Bank of Uganda is mandated to license all institutions that carry out microfinance business. The Act also outlines several provisions regarding the licensing of microfinance institutions involved in Islamic banking. This includes the licensing of companies that solely operate based on Shariah principles, as well as conventional microfinance institutions that have a dedicated department for Islamic microfinance business. Additionally, existing microfinance institutions can apply to conduct Islamic microfinance business through an Islamic window. Institutions already licensed to carry on microfinance business shall apply to Bank of Uganda to as well carry on Islamic microfinance business. An institution licensed to carry out microfinance business, whose entire business runs on Shariah, must have declared to Bank of Uganda that all its operations are to be conducted following Shariah.
- Islamic banking is for all. The Act states that Islamic banking services shall be open to all individuals regardless of their religious beliefs.
- Shariah Advisory Boards. The Micro Finance Deposit-Taking Institutions (Amendment) Act 2023, mandates all Institutions offering Islamic Banking in Uganda to have Shariah Advisory Boards. The Shari’ah Advisory Board has the mandate to monitor compliance and adherence to shariah by the institutions carrying out Islamic microfinance business. The Micro Finance Deposit-Taking Institutions (Amendment) Act gives power to The Central bank and The Minister to set regulations for Shariah Advisory Boards. Failure to institute a Shariah Advisory Board shall attract a penalty on the licensed institution.
As Ugandans look forward to embracing Islamic banking, discussed above are the key features of Islamic banking in Uganda provided for in The Micro Finance Deposit-Taking Institutions (Amendment) Act 2023.
Please follow us on our Social media platforms for the latest updates.