Despite calls to government to operationalise Islamic Banking, it has not yet done do so as it sorts certain for easy transactions, according to the Minister of Finance Planning and Economic Development, Matia Kasaija.
Islamic banking, also known as non-interest banking, is a banking system that is based on the principles of Islamic, or Sharia, law and guided by Islamic economics. Two fundamental principles of Islamic banking are the sharing of profit and loss, and the prohibition of the collection and payment of interest by lenders and investors. Islamic law prohibits collecting interest or “riba.”
In Uganda, lslamic Banking is provided for under the Financial lnstitutions (Amendment) Act, 2016.
Matia says his ministry is currently reviewing the tax regime with a view to establishing parity treatment for both lslamic and conventional products for tax purposes.
More, he says, The Bank of Uganda (BoU), has undertaken to conduct Workshops before the end of this financial year, to sensitize the public on lslamic Banking and also get stakeholders’ views pertinent to informing the formulation of regulations for establishing Sharia’ah Advisory Boards in financial institutions licensed to provide lslamic finance and the Sharia’ah Advisory Council in Bank of Uganda.
“The Shari’ah Advisory Council, once constituted, shall advise Bank of Uganda on matters of regulation and supervision of lslamic banking systems, and also approve lslamic banking products, as provided under section 1158 (2)of the Financial lnstitutions (Amendment) Act, 2016,” he says.
According to the minister, BoU has received an application from one of the existing conventional banks for approval to operate an lslamic Window and that the application is under consideration by the Central Bank of Uganda.
According to sources, commercial banks like Cairo International Bank, Tropical Bank and others are interested in running Islamic Window.
While an Islamic bank is one based on, and managed with, Islamic principles, experts say an Islamic window refers to the services provided by a conventional bank but based on Islamic principles.
Meanwhile he says BoU in consultation with his ministry issued the “Financial lnstitutions (lslamic Banking) Regulations on 2no February 2018. b) Early this year and that the ministry shall continue to work closely with BoU and other stakeholders to address all outstanding gaps with respect to implementation of lslamic Banking and finance in Uganda.
How Islamic Banks Make a Profit
To earn money without the use of charging interest Islamic banks use equity participation systems. Equity participation means if a bank loans money to a business, the business will pay back the loan without interest, but instead gives the bank a share in its profits. If the business defaults or does not earn a profit, then the bank also does not benefit.
For example, in 1963, Egyptians formed an Islamic bank in Mit Ghmar. When the bank loaned money to businesses, it did so on a profit-sharing model. To reduce its risk, the bank only approved about 40 percent of its business loan applications, but the default ratio was zero.
History of Islamic Banking
The origin of Islamic banking dates back to the beginning of Islam in the seventh century. The Prophet Muhammad’s first wife, Khadija, was a merchant. He acted as an agent for her business, using many of the same principles used in contemporary Islamic banking.
In the Middle Ages, trade and business activity in the Muslim world relied on Islamic banking principles. These banking principles spread throughout Spain, the Mediterranean, and the Baltic states, arguably providing some of the basis for western banking principles. From the 1960s to the 1970s, Islamic banking resurfaced in the modern world.