Bureaucracy and controversies surrounding delivery models have delayed the adoption of Islamic banking and bancassurance in Uganda, almost a year since amendments to the Financial Institutions Act of 2004 were passed. 

Islamic banking that includes interest-free loans would be a relief to borrowers in a market burdened by expensive credit. Prime borrowing rates charged by commercial banks ranged between 21 and 25 per cent last year, as lenders responded to soft monetary actions pursued by the central bank in an effort to restore strong economic growth

Bancassurance on the other hand allows banks to sell insurance products on behalf of service providers for a commission.

Parliament passed the amendments to the Financial Institutions Act 2004 in January 2015, paving the way for the introduction of Islamic banking and bancassurance, agency banking and inclusion of anti-money laundering clauses. Contradicting provisions contained in the Act of 2004 and the Anti Money Laundering Act of 2013 reportedly rendered full compliance with the latter difficult for many banks, and also prompted a review of the mainstream financial sector law, industry sources say.

READ: Uganda banks on bancassurance to grow business

But red tape has delayed the rollout of the products. Financial sector players are still undecided on the outcome of draft documents compiled by industry regulators.

“There have been a lot of consultations between the central bank and industry players. Draft agency banking regulations have already been submitted to the First Parliamentary Counsel for panel beating while draft regulations for bancassurance and Islamic banking are to be submitted to the Minister of Finance for approval before end of this month,” said Bank of Uganda director of commercial banking, Benedict Sekabira.

“We expect all these regulations to be approved by end of March.”

Studying Kenyan market

The executive director and chief of business at DFCU Bank, William Sekabembe said that one of the contentious issues was hiring principal bancassurance officers with long service, which would create unnecessary expenses for banking operations. The other critical issue was sharing of risks in cases of failed settlement of insurance compensation claims.

“We have also been studying the Kenyan market with the aim of drawing up vital strategy lessons for the rollout of these products on the local market,” said Mr Sekabembe.

The assistant director for market research and development at the Insurance Regulatory Authority of Uganda said that it would be best if a bancassurance officer were deployed by a commercial bank and licensed by the regulator.

“This would ensure that the people selling these products in the bank are qualified for the job. Nevertheless, new regulations come with added costs and many businesses are less willing to bear them,” said Protazio Sande, adding that the regulator anticipates strong growth in the insurance industry three years after the implementation of the proposed bancassurance regulations.

Data from the Financial Stability Report for June 2016 shows that the insurance industry penetration rate stood at 0.76 per cent in 2015 compared with 0.86 per cent in 2014, and 0.65 per cent in 2011.

On the other hand, the deployment of agency banking channels by commercial banks could widen access to banking services through outsourcing of distribution points to areas such as supermarkets, fuel stations, hotels and restaurants. Currently, there are 4-5 million bank accounts out of a total population of 34.6 million Ugandans according to the final 2014 Census Report.

READ: Bank of Uganda clears Islamic bank products for business

Which model to use?

But the debate over the appropriate delivery model for Islamic banking products has contributed to delays in approval of the draft regulations.

Whereas a conservative Islamic banking model requires the central bank and commercial banks to establish Shariah compliance committees, use of dual Shariah and macro prudential supervision frameworks plus alignment of contract and tax laws with Shariah rules, the liberal Islamic banking model deemed popular among English speaking countries, requires all commercial banks to form Shariah compliance committees but does not require local contract and tax laws to be aligned with Shariah rules, experts say.

The latter model is more suited to Muslim minority countries — a category that fits Uganda’s demographics. The final 2014 Census Report showed Catholics account for 40 per cent of Uganda’s population followed by Anglicans with a 32 per cent share and Muslims with a 14 per cent share.

“Banks are risk averse and are not willing to venture into these products without formal regulations. But Tropical Bank and Centenary Bank seem ahead of their peers in the development of Islamic banking products in this market. Kenyan banks appear more equipped to provide agency banking products in the Ugandan market after testing  them in their native market,” said Abu Mayanja, a financial analyst.