Uganda’s Islamic Banking Sector Takes Off with First License Granted
Kampala, Uganda - September 2023 - The Bank of Uganda has granted the first Islamic banking license to Salaam Bank Uganda, a subsidiary of a Djibouti-based bank. This milestone marks the entry of Islamic banking in Uganda, offering a new and innovative financial product that is expected to attract a significant portion of the country’s growing middle class.
What is Islamic Banking?
Islamic banking follows the principles of Islamic law, known as Shari’ah, which prohibits interest payments and transactions involving uncertainty or gambling. The new bank will offer a range of financial products and services that comply with these principles, providing a unique alternative to traditional commercial banks.
Benefits of Islamic Banking
- Provides a new and innovative financial product for the country’s growing middle class
- Complies with Shari’ah principles, offering a unique alternative to traditional commercial banks
- Expected to bring in new investment opportunities, create jobs, and increase economic activity in the country
New Regulatory Framework
In conjunction with the licensing of Salaam Bank Uganda, the Bank of Uganda has also introduced a new regulatory framework for the financial sector. The framework aims to provide greater clarity and certainty on key issues such as netting, consumer protection, and sustainability.
Key Provisions of the New Regulatory Framework
- Financial Institutions (Preference and Appraised Book Value) Regulations 2023: Provides clarity on the enforcement of close-out netting under international agreements in the event of insolvency
- National Payments Systems (Amendment) Regulations 2022: Introduces licensing fees and annual fees for payment service providers and payment system operators
National Payments System
Uganda’s National Payments Act, which came into effect in 2020, has facilitated digital transformation and the development of electronic payments in the country. The Bank of Uganda has licensed 26 institutions as payment service providers and payment system operators, including two commercial banks.
Key Provisions of the National Payments System
- Licensing fees and annual fees for payment service providers and payment system operators
- Promoting infrastructure development, interoperability, innovation, competition, consumer protection, and digital financial literacy through the National E-Payments Strategy
Sustainability Focus
The Bank of Uganda has launched its five-year strategic plan 2022-2027, which focuses on environmental, social, and governance sustainability (ESG), corporate governance, and developing tools for the analysis of climate change and policy interactions.
Sustainability Initiatives
- Sustainability Standards and Certification Initiative: Aimed at engendering sustainability in the financial sector
- Five-year strategic plan 2022-2027: Focuses on ESG, corporate governance, and climate change policy interactions
Waiver of Early Repayment Charges
The Uganda Bankers’ Association has suspended the practice of early loan repayment fees (prepayment penalties) charged on outstanding loans, effective from 1 December 2023. This decision is expected to provide relief to borrowers and promote loan buyouts.
Benefits of the Waiver
- Provides relief to borrowers
- Promotes loan buyouts
Conclusion
Overall, these developments are seen as a significant step forward for Uganda’s financial sector, offering new opportunities for growth, investment, and economic development.