Issues of taxation, manpower and marketing have hampered the rollout of Islamic banking products in Uganda, as technocrats struggle to finalise regulations for the new products.

While regulations to guide the use of agency banking have been finalised and are scheduled for issuance after April 19, issues surrounding taxation of Islamic banking products remain unresolved.

Under Islamic banking rules, no interest is charged on loans to borrowers; profits and losses realised from a business are shared equally between lenders and borrowers, and lending is restricted to morally acceptable ventures: Lending to alcohol firms, tobacco producers and gambling companies is prohibited.

Concerns over how much tax should be applied to Islamic financial products and the elimination of double taxation have slowed consultations on the matter.

For example, a mortgage transaction arranged between a bank and a client under Islamic banking would require the two parties to make equity contributions towards the deal without charging the home buyer any interest.

The client would instead be obliged to buy out the bank’s equity share in order to achieve full ownership of the house or piece of land in question. Recent proposals in favour of taxing the banks’ contribution have raised questions about the competitiveness of Islamic banking products when compared with conventional financial offerings.

In contrast, mainstream mortgage products require clients to make reasonable equity contributions towards the purchase of real estate, disbursement of a bridging loan facility by a commercial bank, and repayments that carry annual interest charges. Withholding tax is levied on interest earned from the mortgage, while the value of the loan is exempt from taxes.

A shortage of specialised Islamic banking professionals has also slowed down the rollout of Islamic financial products. Due to the sensitive nature of Islamic banking operations, use of qualified Shariah professionals is considered essential in regulation, selling and distribution of financial services.

However, according to research data, there are only 10 qualified Shariah professionals on the local market.

This is in a business environment with 24 commercial banks and a small pipeline of specialised Islamic banking players who have shown interest in the market but are yet to obtain commercial licences.

“Taxation of Islamic banking transactions seems complex because it is difficult to determine the exact point of taxation, and also minimise the risk of double taxation. But the UK has already come up with useful tax guidelines that define the degree of taxation for Islamic banking transactions, involving both physical assets and direct cash, which would be compatible with our environment. The human resource gap experienced among local Shariah professionals in Uganda could be filled by foreign manpower previously nurtured by big banks like Standard Chartered, Barclays and KCB in their native markets. In addition, there are overseas players in big Shariah markets like Malaysia that are capable of providing outsourced compliance services for Shariah boards,” said Abubaker Mayanja, the managing director of ABL Dunamis Ltd, a financial advisory services firm.