Uganda is amending a law that will usher in Islamic banking, allowing banks to sell Sharia-compliant financial products in the country.

The country is a member of the Organisation of Islamic Cooperation (IOC), but it its domestic legislation does not allow for the establishment of Islamic banking and finance.

The Ministry of Finance has been blamed for delaying the enactment of amendments to the Financial Institutions Act of 2004 which would provide for Islamic banking and finance.

“Islamic banking is not provided for in the law, but we are working on amending the Financial Institutions Act. We have already done the groundwork and submitted our proposals to the line minister who is supposed to present it before Cabinet,” said Godfrey Yiga Masajja, the deputy director of commercial banking at the Bank of Uganda.

Once established, Islamic banking is expected to introduce new products, expand investment opportunities in agriculture, science and technology, agro-industries, and export and import trade. 

Islamic banking is emerging as a lucrative business for lenders in countries like Kenya, where the government has allowed a number of banks to roll out the products.

Islamic banks Gulf African Bank and First Community Bank outpaced their rivals by recording a triple-digit rise in profit in the full year to December 2012, helped by lending to peers, households and companies.

Gulf African Bank posted a 154 per cent growth in net profit in the year to December, while First Community Bank profits rose 238 per cent helped by lending and earnings from deposits with rival banks through a special window called Tawaruq.

Tawaruq refers to lending to other financial institutions with the money used to finance Islamic products only. The triple-digit growth came in a year when Kenya’s entire banking sector posted a profit growth of 20 per cent.

Uganda is the only East African Community partner state still locked out of these opportunities, as Kenya, Rwanda and Tanzania have incorporated Islamic banking and finance into their systems.

“I tried to bring Iran Export Development Bank to Uganda, but Bank of Uganda said it has no banking laws to help us. Uganda is a member of the OIC; why is it not helping us? As a member of OIC, Uganda has the best opportunity to get into the Islamic banking system,” said Seyed Mohammad Ali Mousavi, chairman of the Iran Uganda Establishments Company Ltd.

Left with limited options, Sharia compliant businesses are seeking credit from outside the country. For example, Halaal Meat Co received financial support from Iran Abattoir. Others businesses have started ventures to raise money, and some individuals are lending without charging interest.

Islamic banking does not charge interest on loans, fixed deposits or mortgages. The banks make money through fair trade. The clients are directly involved as they share in the profits and jointly take risks.

“Banks go where opportunities are. The delay in putting the law in place is delaying capital flow from the Arab world into our country,” said Abdul Nsibambi, the manager of agricultural lending at Centenary Rural Development Bank.