A new law has applied the brakes to the telecommunications firms’ offensive against the Ugandan banking industry.

However, the law has created new financing and investment opportunities for local businesses and entrepreneurs interested in Islamic banking products, bancassurance and agency banking channels.

Currently, telcos partner with commercial banks to provide mobile banking and money transfer services, but parliament voted to minimise the telecommunication sector’s role in provision of money transfer services.

The central bank is expected to come up with regulations capping the amount of cash that the telcos can handle. This will allow the regulator to exercise more control over mobile money transactions.

Mobile money transfer services serve more than 15 million Ugandans compared with banks’ at less than five million people, while total transaction values have grown to more than Ush18.6 trillion ($5.3 billion) per year according to Bank of Uganda (BoU) data.

“Telecom companies cannot be engaged in mobile banking and the money transfer services they offer have to be regulated by the central bank,” said Robert Kasule, chairman of the National Economy Committee of Parliament.

On January 6, Parliament passed the Financial Institutions Amendment Bill, which provides legal regime governing mobile banking and mobile money transfers, bancassurance services and Islamic banking.

READ: Uganda to change law, allow Sharia banking

This development is expected to enhance Uganda’s gains from the Organisation of Islamic Co-operation (OIC). The government has been benefiting from access to interest-free loans by virtue of its membership.

“Whenever Uganda is borrowing from Islamic countries, it borrows under Islamic banking where they only charge a service fee. With Islamic banking, both the bank and the customer share profits and losses, this does away with commercial banks that have become shylocks by charging interest even when businesses are not making profits,” said Syda Bumba, former finance minister.

It is anticipated that Shari’ah banking will help introduce new banking products, expand investment opportunities in agriculture, science and technology, agro-industries, and export and import trade, all of which are the major focus of investments by OIC members in countries that provide an enabling environment. One of the OIC’s biggest local investments is the Islamic University in Uganda, which was established in 1988.

“We have already made agreements with Islamic countries like Saudi Arabia and Sudan and Islamic Development Bank, who are expected to come in once the laws are in place. They will team up with local investors as they bring in expertise,” said Dr Ahmad Moses, a specialist in Islamic banking.

President Yoweri Museveni is expected to assent to the Bill within 30 days. The amendments repeal sections in the Financial Institutions Act of 2004 that prohibit Islamic banking but do not affect other provisions such as procedures for closing commercial banks, licensing of financial institutions and BoU’s vetting of directors and senior management of commercial banks.

According to the new law, A Shari’ah Advisory Board will be created under the central bank to regulate all banks providing Islamic banking products.

A report of the National Economy Committee of Parliament, which scrutinised the Bill, shows that 11 out of 25 licensed conventional commercial banks have expressed interest in providing shari’ah compliant products.

Uganda now joins EAC states — Kenya, Rwanda and Tanzania that have introduced Islamic banking.  

According to Seyed Mohammad Ali Mousavi, chairman of Iran Uganda Establishments Company Ltd, the Iran Export Development Bank has already shown an interest in investing in Uganda, but was limited by unfavourable banking legislation. Last month, the Saudi Arabian government expressed interest in investing in Uganda.

Also contained in the amended law is a provision for bancassurance, which will enable banks to partner with insurance companies to provide insurance services. This is a window for expansion of an insurance sector that is grappling with low penetration levels.

Uganda’s insurance industry penetration rate stands at 0.8 per cent of gross domestic product. Banks licensed to engage in shari’ah banking will also be given licenses to operate shari’ah insurance.

Agency banking, a system where banks appoint agents to operate banking services in areas where they lack presence, has also been introduced in the amendment. Combined with Islamic banking, this will increase the number of people with access to banking services to over four million.