East African Business Week

  In June 2008, the OIC (Organisation of Islamic Conference) Business Forum was held in Uganda.
It was announced that due to the growing increase of Islamic Finance in Africa the National Islamic Bank would be set up in Uganda.
Islamic banking refers to a form of banking that is consistent with the principles of Islamic law (Sharia). Under this form of banking it is prohibited to pay or accept specific interest or fees for loans of money known as riba (usury) in Islam. It further entails that investing in businesses that provide goods or services considered contrary to Islamic principles is also forbidden (haraam).
People need to understand that Islamic finance is not only for Muslims but a common financing mechanism available to all people irrespective of their religious beliefs. According to CIMB Group Holdings; Malaysia's second largest financial services provider, Islamic finance is the fastest growing segment of the global financial system.
 It is also a known fact that unlike conventional banks that were highly affected in the recent global financial crisis, financial institutions working along Islamic finance principles were not as adversely affected.
Some of the islamic financial products include Ijarah (Lease), Murabaha (deferred sale finance), Sukuuk (Islamic bonds), Wadiah (safe keeping), Musharak (joint venture), Ijarah thumma al bai' (hire purchase) and mudarabah (profit sharing).
For example, under Mudarabah, there is a special kind of partnership where the bank gives an individual money for investing in a viable commercial enterprise. The profit is shared in pre-agreed ratios, and loss, if any, unless caused by negligence or violation of terms of the contract by the borrower is borne by the Islamic bank.
Islamic banks and institutions that offer Islamic banking products and services (IBS banks) are required to establish a Shariah Supervisory Board (SSB) to advise them and to ensure that the operations and activities of the bank comply with Shariah principles something that Uganda should consider as we plan to introduce Islamic finance.
Currently, there is no provision for Islamic banking in the current Financial Institutions Act of 2004. However, it has been reported that Uganda is in advanced stages of introducing the legal framework to support Islamic finance. I therefore hope that the Minister of Finance will create a provision for this amendment in the 2011/2012 budget to be presented to Parliament next month.
Introducing Islamic finance will bring Uganda in line with some other EAC member countries like Kenya that have already opened their doors to this form of banking. Such new banking products will increase the depth, breadth and range of finance products bank customers can use to access banking services and as an alternative to the current interest bearing financial products under   the conventional banking system.

The writer is a tax consultant with Ernst & Young.
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