Businesses in Uganda take up sharia loans

Monday October 23 2017

Interest-free loans from Islamic banks are now

Interest-free loans from Islamic banks are now on offer for companies in Uganda. FOTOSEARCH 

By HALIMA ABDALLAH
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Microfinance Support Centre Ltd (MSC), a Uganda government owned institution, is disbursing funds to interested saccos or businesses under Islamic microfinance.

So far, the institution has Ush3.3 billion ($910,781) from Islamic Development Bank to be disbursed, and more funds are expected from the Bank of Sudan.

MSC’s criteria for accessing the funds include demonstration by the beneficiaries of their ability to manage the funds, and business experience. The beneficiary should also be ready to comply with sharia requirements and provisions.

However, it seems compliance with sharia laws is not being fully adhered to. For instance, a community in western Uganda living near the Bwindi Impenetrable National Park secured a loan from MSC to construct cottages for tourists.

Although MSC officials said they signed a contract based on the Islamic form of business, they were non-committal as to whether the business will be operated as an Islamic facility where prohibited food and drinks will not be sold.

“It doesn’t mean we are going to have 100 per cent compliance,” said MSC executive director John Peter Mujuni at a training session for journalists.

Experts, however, argue that it is possible to attain complete compliance if governance systems are established by personnel highly qualified in sharia law, who can make pronouncements regarding banks and other financial institutions’ operations.

“The true Islamic finance system is determined by the robustness of its sharia governance system. The governance system is also effective when there is a strong advisory board that ensures end-to-end compliance of the bank operations,” said Lujja Sulaiman, the manager of the Islamic banking unit at Tropical Bank Ltd.

“Appropriate infrastructure should be put in place for governance,” he added.

Governance

In January 2016, parliament passed the Financial Institutions Amendment Bill, 2015, which provides legal regimes governing mobile money banking and transfers, agency banking, Islamic banking, and finance and bancassurance.

The legal regimes help the country to attract cheap funds from Islamic institutions or governments as it takes advantage of being a member of the Organisation of Islamic Co-operation.

Already, there are funds in place for investments in infrastructure projects and to provide interest-free loans to the general population regardless of religion.

A sharia advisory board is expected to be created under the central bank of Uganda to regulate all banks providing Islamic banking products.

Several licensed conventional commercial banks have expressed interest in providing sharia compliant products. Kenya, Rwanda and Tanzania also have Islamic banking.

Banks licensed to engage in sharia banking will also be given licences to operate sharia insurance.

“The best approach for the government is to benchmark the best practices from Islamic financial centres such as Malaysia or Bahrain. This will minimise costly and unnecessary mistakes. The good thing is that these countries are ready to share with us and with countries that are starters in this new field,” said Mr Lujja.