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Islamic banking presents new opportunities

BoU’s Justine Bagyenda

Tropical Bank takes lead with more than 8000 customers interested in taking up Islamic banking services

The Secretary General of the Association of National Development Finance Institutions in Member Countries of the Islamic Development Bank (ADFIMI), Nuri Birtek says Uganda’s commercial banks and investors need to support small and medium enterprises (SMEs) once Islamic banking is rolled out.

He says SMEs contribute a lot to economic activities that lead to economic development. “This will help expand businesses and create jobs to Ugandans and thus improve on their standard of living,” he said on the sidelines of a two-day workshop organised by the Uganda Development Bank in partnership with ADFIMI in Kampala on April 19.

The workshop that attracted more than 50 participants from Uganda and abroad aimed at equipping bankers with basic essentials of Islamic banking.

Nuri said Uganda will also easily access financing from the Islamic development institutions like the Islamic Development Bank that rates highly Islamic financing principles.

The core element of Islamic banking as opposed to the popular conventional banking is that commercial banks offer support to businesses at no interest rates. The basic ultimate goal for the parties in this trade is to equally share profits, losses, risks that accrue from the business.

Experts say Islamic banking will become an alternative source of funding for businesses with new lines of credit especially asset financing that is largely referred to as most costly element for most businesses. In East Africa, only a section of banks in Kenya and Tanzania currently offers Islamic banking services.

BoU, banks moving fast

Justine Bagyenda, the executive director for supervision at the Bank of Uganda (BoU), and who represented Governor Emmanuel Tumusiime-Mutebile, said the financial regulator continues to undertake programs aimed at building capacity for its staff in the field of Islamic banking and finance.

She urged banks to do the same as the BoU and the Ministry of Finance, Planning and Economic Development concludes the legal processes for the operation of the Islamic window.

“Bank of Uganda will ensure that Islamic banking conform to the same regulatory and supervisory framework governing conventional banking with a few modifications to cater for the unique features of Islamic banking,” she said.

The Islamic committee chairman and deputy general manager at Tropical Bank Uganda Limited Idris Elahlafi told The Independent in an interview that they are already spearheading the rollout of Islamic banking.

“As Tropical bank we take Islamic banking seriously,” he said, “that is why we already set up a committee to spearhead this product within the bank and in Uganda.”

Apart from the committee, Elahlafi said they are already training staff (both Muslims and non-Muslims); prepared the risk policy; instituted the Shariah advisory board and designed the products and contracts.

Furthermore, the bank is using Malyasian banks and Ziraat, the largest commercial bank in Turkey models to plan for Islamic banking products, and so far over 8000 active customers of the bank out of the bank’s 40, 000 have already been engaged on the various products of Islamic banking.

Elahlafi said they are optimistic this would attract the Muslim community to the bank subject to approval from BoU.

Similarly, Fabian Kasi, the chairman of all Bankers under their umbrella body – Uganda Bankers Association (UBA) and Centenary Bank managing director said Islamic banking will provide new prospects for banking in Uganda.

“Banks are always in search of solutions to ensure a win-win situation with their clients,” he said.

He said Islamic banking will come in handy as banks continue to develop many solutions to promote financial inclusion.

This new development comes barely two months after the World Bank released a report indicating that only 16% of the 68% adult population in Uganda saves through formal financial channels. A section of the population without a bank account especially Muslims have cited absence of Islamic banking that is in line with Islamic finance.

Risks involved? 

Embracing Islamic banking means bank clients have to uphold high corporate governance principles related to transparency, trust and fine accountability that are critical for ensuring profitability in business.  The success of Islamic banking will also depend on how good the economy is doing for parties involved to benefit.

“As we embrace this banking solution we have to ensure that noncompliance with Shariah doesn’t happen to avoid loss of credibility of the sector and bank customers running away,” Taha Kasule from the department of Islamic Banking and Finance at Islamic University in Uganda told The Independent.

Kasule, however, said Islamic banking solution will boost financial inclusion since the product is largely asset based banking. He said the asset in this case is security meaning that those who do not believe in the concept of interest, which has landed a section of borrowers in trouble over the years, will be indirectly supported.

“The beauty with Islamic banking is that there is no concept of loaning and this promotes deeper financial inclusion that has a direct coloration with economic growth acceleration,” he said.

However, banks say they remain optimistic that BoU would deal with wrong doers in this trade. They also hope to work closely with businesses on a daily basis to overcome risks.

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