Noah Edwin Mwesigwa and Janet Ayesigwa of Shonubi Musoke & Co Advocates in Kampala look at the amendment to Uganda’s Financial Institutions Act
The Parliament of Uganda on January 6 2016 passed the Financial Institutions Amendment Act (Act 2 of 2016) (FIA Amendment Act) which amended the provisions of the very robust Financial Institutions Act 2004. The FIA Amendment Act was assented to by the President on January 19 2016 and among the key elements introduced by this Act is the concept of Islamic Banking in Uganda, bancassurance, agent banking and access to the credit reference bureau.
Although the introduction of Islamic banking in Uganda may be viewed by some as a late entry compared to its East African counterparts, Uganda possesses the advantage of membership of the Islamic Development Bank that is most likely to give Uganda an edge over non-member states.
The FIA Amendment Act allows both Islamic and non-Islamic financial Institutions to carry on the business of Islamic finance. Under the Amendment Act, conventional financial institutions that are already licensed by the Central Bank are allowed to apply to be licensed to carry on Islamic financial business in addition to their existing licensed business. However, the Financial institution must adhere to the principles of shariah law as pertinent to the Islamic banking system is the fact that all activities must be based on shariah.
Under the FIA Amendment Act, an already licensed financial institution which is permitted to carry out Islamic banking shall carry out that business through an Islamic window. An “Islamic window” is defined as the part of a financial institution, other than an Islamic financial institution, which conducts Islamic financial business. This effectively means that non-Islamic financial institutions will have to operate two divisions; that is, Islamic banking and the conventional banking in order to maintain the moral purity of all Islamic banking transactions.
Although there are arguments both for and against the use of Islamic Windows, in an economy like Uganda where there is an anticipated lesser demand for Islamic banking services, the Islamic Window is however the best option for providing such services as it also enhances competition in the market that would in turn lower the cost of finance notably for shariah – compliant products.
In order to ensure compliance with the shariah, the FIA Amendment Act mandates all financial institutions carrying on Islamic financial business to appoint and maintain a Shariah Advisory Board. This Board is tasked mainly with the advisory, approval and review of activities of Islamic Financial business in order to ensure that the financial institution complies with the shariah laws and rules. A member of the Shariah Advisory Board in any financial institution is prohibited from being appointed a director of a financial institution while he/she holds that position.
The Central Bank is, in consultation with the Minister for Finance, mandated to make regulations in respect of shariah Advisory Boards. The regulations to be made are inter alia to address the size, functions, duties and responsibilities, governance and conduct of Shariah Advisory Boards and the competency, interests and terms of engagement of members of a Shariah Advisory Board. However, these regulations are yet to be made to facilitate the operationalization of the Islamic banking platform.
Although the Central Bank has retained its supervisory role over both Islamic and non-Islamic financial institutions, the FIA Amendment Act also makes provision for the Central Shariah Advisory Council in Bank of Uganda to advise the Bank of Uganda on matters of regulations and supervision of Islamic banking systems in Uganda and approve any product to be offered by financial institutions conducting Islamic banking. As is the case with conventional banking, supervision of the Islamic financial institutions has to be done in a prudent manner thus supervisors need to understand the challenges inherent in Islamic Banks.
Although the FIA Amendment Act has been a very welcome and commendable development in the banking and finance sector and practice area, it should be noted that the provisions of the Act relating to Islamic finance are very limited and still appear to be a considerable work in progress. A lot more input, training and consultation will have to be undertaken to streamline, harmonise and effectively operationalise the Islamic Banking platform in Uganda.
Noah Edwin Mwesigwa
Shonubi Musoke & Co Advocates
About the author
Noah Edwin Mwesigwa is a partner practicing in the corporate and commercial department in Shonubi Musoke & Co Advocates. He is the managing partner of the firm and equally maintains an active practice.
Noah has honed his skills over 21 years of active and well regarded legal practice in a busy commercial law environment in one of the leading commercial law firms in Uganda. He has consistently been named as one of the Leading lawyers in Uganda by IFLR1000 and Chambers Global.
He has participated in and advised various local and international clients on routine and complex transactional and infrastructure work. Noah is still an active litigator, but has also developed a proactive and cost effective approach to developing practical and cost saving solutions for clients through alternative dispute resolution and mediation.
Shonubi Musoke & Co Advocates
About the author
Janet Ayesigwa is an associate with Shonubi Musoke & Co Advocates practicing in the corporate and commercial department. She specialises in banking and finance, securitization and property conveyance with experience in advising both local and international clients including various financial institutions.
She has worked on wide range of banking and finance related matters and routinely advises financial institutions in the area of loan facilities and structuring, security packages and perfection and recoveries. Janet has also worked on a number of large infrastructure assignments, including project finance.