New Islamic Banking Regulations To Increase Financial Inclusion In Uganda

Background

The Bank of Uganda recently released the Financial Institutions (Islamic Banking) Regulations (the "Regulations"), which were gazetted on 2 February 2018. The Regulations seek to operationalise Islamic banking in the country, which was introduced by The Financial Institutions (Amendment) Act, 2016 as part of its wider efforts to boost financial inclusion.

With this development, Uganda joins several African countries that have sought to develop the sector to expand financial access and inclusion among rural communities.

Islamic banking refers to institutions undertaking to make sustainable responsible investments ("SRIs"), with a focus on people over profit in which the institution becomes a partner in both the profits and losses suffered. They do this in accordance with the religious tenets of Islam. Notable is that these financial SRIs are interest free.

The purpose of the Regulations is to provide for the regulatory framework, licensing and operation of financial institutions conducting Islamic financial business and to ensure that it is conducted in accordance with the relevant Shari'ah principles.

Licensing of financial institutions seeking to undertake Islamic financial business

Persons seeking to undertake Islamic financial business may do so by applying for a licence to establish an Islamic bank, while conventional banks may apply for approval from the Bank of Uganda to operate Islamic banking windows.

The Regulations have maintained the same licensing criteria as conventional banks (provided for under the Financial Institutions (Licensing) Regulations, 2005) for institutions seeking to offer Islamic financial services.

Deposit structures under the Regulations

Under the Regulations, deposit accounts operated by financial institutions offering Islamic banking services may be held in profit-earning investment accounts, profit-sharing investment accounts and non-profit bearing deposit arrangements.

Credit provision structures under the Regulations

The Regulations classify the different credit provision structures for Islamic financial business into three structural arrangements as follows:

equity partnership financing, which includes Musharakah, Musharakah Mutanaqish, and Mudarabah; lease-based financing, where assets are acquired by the financial institution and leased to the customer, who may or may not have the option of acquiring the leased asset; and sale-based financing, where assets are purchased by the financial...