Uganda will now operate a hybrid banking system through which customers will be able to access both conventional and Islamic Banking products.
Speaking at the license handover in Kampala at the weekend, Bank of Uganda Deputy Governor Michael Atingi-Ego, warned that there were risks associated with any new venture, but noting that the selected bank, "has the expertise and resources to manage these risks.”
Islamic Banking is governed by principles of Sharia law and forbids payment or receipt of interest, decrees that profits and losses are shared and restricts financial institutions from using derivatives because they are riddled with excessive uncertainty.
According to Atingi-Ego, the elimination of interest in the financial process, "makes it a more sustainable form of banking and it is well-suited to the needs of many Ugandans."
Uganda's interest rate averages at about 26 per cent making it hard for Ugandans to break into conventional banking for their business needs.
Finance Ministry Permanent Secretary Ramathan Ggoobi said Islamic Banking will provide Ugandans with a broader range of financial services, noting that the 2016 amendment to the Financial Institutions had provided Islamic Banking but the absence of a Central Shari’ah Advisory Council constrained the commencement.
However, he said, the passing of relevant tax bills including Income Tax, Value-added Tax, Stamp Duty and Excise Duty between 2022 and 2023, and the repealing of the requirement of the Central Shari’ah Advisory Council, had enabled the implementation of Islamic Banking.
Ggoobi also noted that Islamic Banking should not be viewed as a faith drive to Islamise Ugandans, noting that “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”.
Salaam Bank, which already operates in Kenya, Somalia, and Djibouti, has 12 months within which it is expected to start operating.
As the pioneer, Salaam Bank is expected to provide a benchmark on which other financial institutions will build Islamic Banking products.