Uganda's banking industry performance weakened during the 2011-2014 period due to turbulent economic challenges, and now, due to the COVID-19 pandemic, traders are protesting against high-interest rates.
If both economic growth and lending growth, especially in the private sector, are low, there is no way the government will be able to solve unemployment because the general public will fear seeking loans due to the high interest rates - and the banks will be stuck with the money as there will be no investments coming up - hence leading to the closing down of businesses, which leads to low consumption and purchasing power, static or declining economic growth, high taxes, high prices, demonstrations, strikes, murder, theft, corruption, etc.
It's high time banks diversified their portfolio and embraced Islamic banking, reducing their risk exposure to sensitive sectors like oil and gas since the world is moving towards renewable energy. When oil prices fall, it becomes very risky to hold oil as a financial asset, which is why some countries are becoming less reliant on oil and gas production.
It's no longer in the interest of major oil-producing countries to restrain output as they seek to produce and export as much as they can because, in the near future, we see factors like climate change, new electric car technologies, clean hydrogen energy, solar and wind energy, and shale going to erode long-term demand for crude oil in the next decade as technology makes fossil fuels obsolete.
Saudi Arabia has come up with an ambitious yet achievable plan called Saudi Vision 2030, introducing a futuristic $500 billion NEOM development project among them called "The Line," showing how urban cities can look in the future with zero carbon emissions, which means no cars or roads.
The aim is to reduce Saudi Arabia's dependence on oil, diversify its economy, and develop public services such as education, infrastructure, health, tourism, communication, science, and technology. It's high time Uganda too increases local production in agriculture through Islamic banking agriculture business loan products that are suitable for farmers' needs, increases production in manufacturing, building materials, animal production, pharmaceuticals, tourism, communication, science, and technology, and also reduces costs on goods imported and encourages more exports.
As of 2018, the US surpassed Russia and Saudi Arabia as the world's top crude oil producers. This means that if the US or Russia increases production and there is a low demand for oil in China and Europe, combined with a steady supply of oil from OPEC, or if China automatically buys oil from Iran, there will be an excess supply of oil and oil prices will fall due to supply and demand laws.
As a result, non-OPEC countries will be discouraged from producing due to production hurdles and costs; for example, it is cheaper to extract oil in the Middle East than in Alberta, Canada; oil price volatility; sometimes high-interest rates impact oil prices; older wells that are less productive; and others experiencing high costs for new projects coupled with increased demand for oil in home countries due to increased demand for oil.
As we continue seeing Islamic finance as one of the fastest-growing segments of financial opportunity in the world today, growth in the Islamic banking sector largely outpaces that of conventional banks in most systems in which Islamic banks have been embraced due to proactive governments, high demand for Shariah-compliant products, and strong retail demand, which provides greater stability for their funding profiles and legislation for the industry, and this positions Africa as the third fastest-growing region after the Middle East and Asia.
According to Muhammad Zubair Mughal, chief executive officer of AlHuda Centre of Islamic Banking and Economics (CIBE), the total volume of Islamic finance is expected to hit more than $3.8 trillion this year, and global Islamic finance assets are projected to be nearly $5 trillion by 2025, proving that Islamic banking is no longer an alien in the global financial industry.
With this in mind, the majority of non-Muslim countries, including Uganda are working tirelessly to become the financial hub in their respective regions by introducing Shariah-compliant financial products into their markets to meet the demands of the Muslim population of 1.97 billion adherents, accounting for more than 25 per cent of the world's population and the second-fastest growing religion, growing faster than the world's population projected by the Pew Research Center.
It is, therefore, imperative for Ugandan educational institutions; colleges and universities to start adopting programs in Islamic finance that reflect the importance of the role of Islamic finance in our global economy. As Shariah-compliant banking is becoming very attractive within the East African region, in Uganda, people's perceptions are changing, public awareness is increasing day by day, and a large number of customers of conventional banks, insurance companies, and microfinance institutions are demanding its introduction as competition will automatically lower interest rates.
Uganda is best suited for Islamic finance because of its good regulation and legislation, economic stability, and mature open market that will accelerate economic growth if Islamic banking is developed. Global growth has slowed down due to the COVID-19 pandemic, the Russia-Ukraine war, disruptions from climate change, and trade and technological disputes between China and the USA. Therefore, nations that are suffering from low growth should adopt this segment in their banking sector faster.
Uganda's approach to adopting Islamic finance has been slow, cautious, and steady in order to avoid any shocks to its stable banking sector. To avoid volatility and an even banking landscape, the banking sector must be thoroughly studied before opening up to competitors and introducing new products into the market, as there is a huge prospect for growth in the Islamic finance sector, which is rising particularly in East Africa, as evidenced by foreign Islamic banks setting up branches and subsidiaries in these countries, as well as some banks applying for licenses from the Uganda Central Bank. This shows a continued surge in the banking sector's popularity with the general public, and we hope it grows immensely further.
Uganda is a member of the Organization of Islamic Cooperation (OIC), and Kenya is also looking to be a member, knowing the benefits that come with it. Given the high population growth rate in East Africa and Uganda, whose population is projected to reach 75 million by 2040 at a growth rate of 3 per cent per year and is the world's third fastest-growing population, and with large swaths of the population currently unbanked, potential customers may require new services in the years to come, some from Muslims who profess their faith to open up accounts.
Uganda being a strategic country for the Islamic Development Bank Group, it's advisable for both regional and international financial institutions to look for franchise opportunities here as an integral part of their ever-expanding global operations and to take advantage of the positive macroeconomic environment taking place. We are seeing international insurance firms enter the Ugandan market simply because of the good economic growth of 2019, with at least 6.1 per cent.
Still, it has slowed down due to the severe impact of the COVID-19 pandemic. Now with the discovery of oil fields, rapid real estate development, Uganda National Airlines, booming tourism, various minerals, a rapid population growth, and all their assets, people need to be insured.
With this in mind, we will be able to witness a good percentage of existing customers in conventional banks switch to Shariah-compliant banking services within Uganda, just as we have witnessed Shariah-compliant banking in Africa growing by leaps and bounds due to the continuous introduction of specific tailored products and services in addition to increased awareness among the general public.
THE NEED
With the high rate at which the Islamic finance industry in Africa is developing, it has gained the attention of stakeholder groups, including central banks and regulatory authorities, as well as leading international Islamic and non-Islamic financial institutions and investors who want to tap into the high growth opportunities on the continent.
In Uganda, a few authorities such as the Central Bank, Uganda Microfinance Support Centre, Insurance Regulatory Authority, Uganda Muslim Supreme Council, Uganda Insurers Association, Insurance Training College of Uganda, and other institutions and centres are helping in promoting and developing Islamic finance.
Uganda should take advantage of Islamic finance because it's already proven to be a strategic instrument to tap into the unbanked population and address the important issue of financial inclusion, as well as a catalyst for boosting foreign direct investment (FDI) and trade flows among Africa, East Asia, the Middle East, the OIC, and international markets. By offering low-income people digitalized banking services, they will be able to increase penetration.
Uganda can attract billions of dollars, including Shariah-compliant funds, to finance government-backed projects such as railways, oil pipelines, refineries, roads, domestic manufacturing, industrial parks like Namanve and others, vocational institutions, tourism, dams, mining, innovative agriculture, airport expansion, and interest-free loans (Qard Hassan). Uganda has poor infrastructure, so there is a substantial need for project financing. Sukuk (Islamic bonds) have emerged as a viable and strong source of attracting international funding for both commercial and development projects, and they could easily diversify funding sources, ensure better monitoring of fund deployment, and contribute to the country's private sector development.
There is a great increase in the standardization of legal documents and Shariah interpretation globally, which means the demand for Sukuk (Islamic bonds) is increasingly creating new opportunities in multiple economies that benefit the sector. If Uganda goes for sovereign and corporate Sukuk (Islamic bonds), it could attract investment funds from the Middle East and the wider world and also provide a useful instrument for liquid holdings of Islamic banks.
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According to the World Bank Group, it also decided to push for Islamic banking as a more sustainable alternative to conventional banking practices at the 2015 World Bank/IMF Spring Meeting in Washington, DC, USA.
According to the International Monetary Fund (IMF) in 2010, a new study compared the performance of Islamic banks and conventional banks during the 2007-08 financial crisis and found that Islamic banks, on average, showed stronger resilience during the global financial crisis. It looked at the effect of the crisis on banks' profitability, credit, and asset growth in countries where both types of banks had a significant market share.
The Vatican has put forward the idea that "the principles of Islamic finance may represent a possible cure for ailing markets." The Catholic Church has always forbidden usury (interest), but in recent centuries it has been forced to tolerate it due to non-Catholic dominance in the Western World.
Islamic Finance and Impact Investing Network (IFIIN), a non-government organization, promotes Islamic finance and impact investing as one of the best innovative avenues to finance the Sustainable Development Goals (SDGs) not only in Muslim countries but also in non-Muslim countries in Africa.
Having that in mind, Islamic banking is not only for Muslims; it's for all, and all the financial products that will be on the market will be for all Ugandans, both Muslims and non-Muslims, which is vital for sustained growth of the industry in the future. This message should be conveyed to the public as efficiently as possible because Islamic finance has proven to be a source of investment activity in both the Muslim world and the global financial market.
One of the advantages of Islamic banking is that it emphasizes moral and ethical values within its banking operations, which have a wide universal appeal. Shariah-compliant banking prohibits the payment or acceptance of interest since interest results in social effects and evils such as unrest in society, injustice, exploitation of the poor, and keeping money idle and unproductive, which is an economic effect.
ahmedruff@yahoo.com
The author is an Islamic banking and finance expert
