Uganda: Here Is Reason for You to Embrace Islamic Banking

25 October 2023
Nile Post (Kampala)
opinion By Hatmah Naluggwa

Assalaam alaykhum wa rahmatullahi wa barakaatuh...

Islamic banking is a system of banking which is consistent with Islamic principles such as, the prohibition of interest or ribba as it is called in Islam, prohibition of speculations or gambling, mutual risk sharing, and non-engagement in any prohibited activities.

Islamic banking can be conducted either through fully fledged Islamic financial institutions, or through Islamic windows operated by the existing conventional banks.

Banks intending to operate as fully fledged Islamic financial institutions will require a license from Bank of Uganda, and likewise, the existing conventional financial institutions intending to operate Islamic banking windows will too, require approval from Bank of Uganda.

All financial institutions conducting Islamic banking are required to appoint a Shariah Advisory Board, to assist the bank in ensuring compliance of its operations with Islamic principles.

You can open up any of these 3 accounts in an Islamic banking institution;

  • The non-interest-bearing account: This type of account is akin to current accounts and ordinarily it does not earn you any return.
  • Profit earning investment account: Similar to savings accounts in conventional banking, except that the depositor is paid a profit and not interest. The amount of profit paid to the depositor is agreed upon at the onset.
  • Profit sharing investment account: This is like fixed deposit accounts. The depositor shares profits arising from projects financed by the financial institution, using a pool of funds. The profit-sharing ratio is agreed upon at the time of signing the contract, but the amount of profit payable may not be guaranteed.

So why should one embrace Islamic banking?

  • Financial Inclusion. Islamic banking brings in individuals previously underserved or excluded from traditional banking due to religious or ethical reasons.
  • There is risk-sharing in Islamic banking. This promotes more equitable distribution of risk, and also encourages prudent risk management, which potentially contributes to greater stability and reduced systemic risk in the economy.
  • The prohibition of interest aligns well with Islamic teachings, and removes the burden of compounding interest, which makes financial products more transparent and affordable for the customers.

Like Humayon Dar, the director general at the Cambridge institute of Islamic finance says, Islamic finance is Business as Usual: An ongoing and unchanging state of affairs despite difficulties or disturbances.

Enjoy Islamic banking and finance!

Shukran...

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