Three years after legalising Islamic banking, the system had yet to take-off in Uganda.
The country is yet to register a single application from lenders in this segment of the business.
This leaves Uganda’s financial sector behind its peers in East Africa.
“We are waiting for applications … we have not received any application from any financial institutions interested in Islamic banking,” said Bank of Uganda Deputy Governor Dr Louis Kasekende at a recent financial inclusion dialogue and get-together.
Finance Minister Matia Kasaija had asked why Sharia lending had remained on paper for more than three years since the law made a provision for it.
Unlike conventional lending that takes collateral from borrowers and charges interest on loans, Islamic banking is an interest-free system that finances business ventures in which the lender takes up equity and participates in their management to ensure their viability.
Kenya and Tanzania have for years had a number of banks that are Sharia-compliant, giving product options to customers averse to interest-driven growth.
In 2016, the Uganda parliament amended the Financial Institutions Act to introduce new products such as bancassurance (insurance provided by banks), agent banking and Islamic banking, to encourage more people from the unbanked population to enter the formal money economy.
Accordingly, section 1 (a) of the Financial Institutions (Amendment) Act, 2016, provided for “an Islamic financial business, subject to any restrictions specified by the central bank.”
The amendment was based on a report by the Parliamentary Committee on Finance, which highlighted the fact that “provision of Islamic banking and financial products is growing rapidly in many countries.”
The report recommended the establishment of a central Sharia Advisory Board in the Bank of Uganda to regulate Islamic banking as it was deemed to be a viable product in Uganda.
At the time, half of the 22 licensed conventional and commercial banks in the country had expressed interest in providing Islamic banking products to their customers.
Thereafter, the Ministry of Finance went to work on the regulations that would support Islamic banking and make it operational. In June this year, Junior Minister for Finance David Bahati told Parliament that the regulations were ready.
Deputy Secretary to the Treasury Patrick Ocailap said these regulations paved the way for Sharia-compliant banking to start in October.
Although some economists cast doubt on the viability of Islamic banking in Uganda, citing its low impact in Kenya and Tanzania, the amendment brought some excitement, with it financial experts arguing that this was a game changer.
However, the delays mean Uganda is missing out on several capital inflows, according to Abubaker Mayanja, a financial economist with ABL Dunamis, a finance and investment advisory firm.
Mr Mayanja argues that Islamic banking in Uganda could lead to an increase in capital inflows of $600 million over the medium term, driven by international banks that include Sharia lending in their offering elsewhere, introduced with special capital rather than conventional deposits.
There will also be inflows from regional players and Middle Eastern financial institutions that possess substantial capital and knowledge, but are currently experiencing business shrinkage due to turmoil in their markets.