H.E President Yoweri Kaguta Museveni recently (Wednesday 27, March 2024) launched Salaam Bank; Uganda’s first-ever licensed Islamic Banking institution.
In 2016 the government of Uganda amended the Financial Institutions Act (FIA) 2004 to make provision for Islamic Banking.
In September last year, the Bank of Uganda granted its first Islamic banking license to Salaam Bank Uganda, a subsidiary of a Djibouti-based bank after parliament passed legislation authorizing Islamic banking, which was signed into law.
Uganda is a big market with a population of 48 million, and in the next 27 years, the population will have grown to 106 million.
Therefore, Islamic banking has the potential to make a significant contribution to the development of Uganda’s financial sector by bringing more Muslims to the money economy.
The introduction of Islamic banking creates an opportunity for Ugandans to access a wider range of financial options and choice of banking products and services; this will ultimately contribute to the financial inclusion agenda.
At the Inauguration of Salaam Bank, the President urged Muslims to engage in income-generating activities to fight poverty and improve their livelihoods through the four sectors for wealth and job creation, which are commercial agriculture, industries (big or small), services (hotels, transport, professional services, shops, etc.), and ICT (Business Process Outsourcing, or BPOs), which the government has been preaching to Ugandans since 1995 and aligns with the ultimate purpose of financial inclusion explicitly stated in the Uganda National Financial Inclusion Strategy, 2017-2022, reducing poverty.
Islamic banking presents Ugandans not only a wide selection of banking services and products to choose from, but also some special benefits such as lowering the effects of harmful products and practices, promoting financial justice, stabilising investment returns, and speeding up economic growth.
Islamic banking, or non-interest banking, is a system based on Shari’ah law and Islamic economics. It allows for proportional sharing of net profit and associated risk between lenders and beneficiaries, allowing financial institutions to make profits through equity participation rather than interest.
The Islamic banking system, unlike the conventional banking system, encourages financial organizations and clients to share risks.
Despite the slump in the economy, S&P worldwide Ratings projects that all over the world Islamic finance sector will increase by almost 10% in 2023–2024, continuing its growth from 2022.
The Central Bank of Uganda regulates Islamic banking products and services, covering licenses, deposits, capital adequacy, liquidity, profits, credit provision, and macro prudential metrics. A Central Shari’ah Advisory Board advises the Central Bank on Islamic banking regulation and approvals. The Ministry of Finance, Planning, and Economic Development implements policy regulations for taxation of transactions based on Islamic banking through consultations with stakeholders.
Islamic banking companies aim for profit creation and growth by investing in promising businesses and outperforming competitors to attract depositors, resulting in high return on investment for both financial institutions and depositors.
Uganda is not the first secular state to implement Islamic banking, so it’s important to keep that in mind. As a result, this is an excellent chance for peer learning. Alongside traditional banking, several nations have embraced Islamic banking, such as the United Kingdom.
