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Ugandan banks are unhappy with multiple Sharia boards requirements

Saturday July 14 2018
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A Bank of Uganda officer attends to clients at the BoU stand at the banking and insurance expo in Kampala. The central bank plans to review Sharia banking rules. FILE PHOTO | NMG

By BERNARD BUSUULWA

Ugandan bankers want a change in a clause in the Islamic banking regulations requiring each lender to establish a Sharia board, with a mandate to scrutinise and approve loan applications.

Bank executives say such a board will create extra costs if the appointees, like directors, are to receive retainers, sitting allowances, medical benefits and entertainment privileges. The lowest sitting allowance paid to directors of Ugandan banks is about Ush350,000 ($91.5) per meeting.

According to the regulations, a Sharia board comprises six members, three of whom must be Shariah experts, vetted and approved by the Central Bank. This means the 24 banks offering the service will require 144 Sharia board appointees.

The bankers say the requirement would lead to unnecessary compliance costs at a time of extensive cost cutting measures undertaken by industry players and growing appetite for shared infrastructure facilities.

They are, instead, suggesting a joint Shariah board to serve the entire industry under a cost-sharing arrangement.

“We are still talking to the central bank about the idea of having one joint Shariah board under the Uganda Bankers Association (UBA) that serves the entire industry and seems to be receptive towards our proposal,” said Patrick Mweheire, managing director at Stanbic Bank Uganda and current UBA chairman.

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Other clauses in the new regulations include uniform minimum capital requirements for Islamic banks compared with conventional banks and a dual Islamic and conventional banking supervision regime applicable to Islamic based lenders.

“That is an idea I intend to table before UBA and the industry regulator,” said Rakesh Jha, managing director of Barclays Bank Uganda Ltd.

Central Bank officials were not available for comment on this matter by press time.

Data compiled by Bank of Uganda (BOU) indicates the ratio of overall expenses against total assets recorded among Ugandan banks is roughly 11 per cent, a ratio comparatively higher than those in peer economies.

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So far, local banks have invested in a joint agency banking platform managed by Eclectics International, a Kenyan technology company, with 966 agents signed up to date.

An asset reconstruction company meant to absorb bad loans accumulated by banks for purposes of recovering outstanding balances from defaulters and generating revenues from its acquired portfolio is currently being set up with funding provided by UBA members.

Double taxation has been cited in relation to application of income taxes on Islamic banking transactions and implementation of Value Added Tax (VAT) on these products. Though some executives dismiss such worries as premature, urging patience, others are already looking at ways to handle them.

“But it is too early to discuss taxation matters related to Islamic banking products till the products are launched and Uganda Revenue Authority (URA) has tested their tax compliance standards. We are also looking at opportunities for infrastructure sharing in the market, and studying some areas," said Mr Jha.

“Islamic banking principles do not allow lenders to demand collateral from borrowers but such a model would cause double taxation problems under the existing tax regime. For example, a loan extended to a borrower under Islamic banking principles would be VAT exempt but subject to income tax.
In this case, the bank would be liable for withholding tax on income earned from the borrower’s business and corporation tax on income derived from the same transaction!” said John Jet Tusabe, a tax specialist at KPMG Uganda.

The way out of this, Mr Tusabe said, would be to treat the bank’s income from the loan transaction as a debt expense for the borrower that is exempt from income tax but subject to corporation tax charged on the bank’s income.

According to Denis Yekoyasi Kakembo of Cristal Advocates, a Kampala-based law firm, taxation would pose a headache.

Taxation of products

“Taxation of Islamic banking products is very different from taxation of conventional banking products. For example, conventional banking products do not attract VAT but Islamic banking products are subject to VAT though its application or computation is not clear. Take the case of a bank that offers an asset finance product to a client under Islamic banking principles. This scenario would render the bank and the client co-owners of the asset in question but how do you allocate the VAT burden between the two parties in this transaction? Failure to clarify such tax issues might trigger future tax disputes between the banks, their clients and URA,” he said.

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