ISLAMIC FINANCE IN UGANDA: Transcending Religious Beliefs To Becoming A New Business Paradigm And The Evolving Legal Regime With the 2016 amending of the Financial Institution's Act (2004) to provide among others, for an alternative Islamic Financial System, Uganda has progressed to align the related regulatory and policy environments such as tax laws, to this growing alternative to conventional banking. Sophia.N.Kigozi, an Islamic Finance expert and Partner- Commercial Law, Projects and an Alternative Finance Practitioner at MESA Advocates, breaks down what Islamic Finance is, and the numerous alternative opportunities therein for Uganda and makes a case for accelerated implementation.

Many people are interested in the phenomenon of Islamic Finance, particularly in how it differs from conventional banking. Islamic Banking and financial systems exist to provide a variety of Sharia-compliant financial services without religious discrimination with a view to fostering economic growth, socioeconomic justice, equitable distribution of income and wealth, stability of the value of money and the mobilisation and investment of savings for economic development in a way that ensures a just return to all parties involved.

The introduction of Islamic Banking and Finance in Uganda followed the assent to the Financial Institution’s Amendment Act (Act 2 of 2016) by the president of the Republic of Uganda on January 19^th 2016. This amendment allows all financial institutions to carry on Islamic Finance business pursuant to an application to the Central Bank and eventual licensing whether through an Islamic window or as a fully-fledged Islamic Finance bank. The Amendment saw the Central Bank retain its supervisory role over both Islamic and conventional banks seeking to operate Islamic windows but provided for the central Sharia Advisory Council in the Bank of Uganda to advise the Bank of Uganda on matters of regulations and supervision of Islamic Banking systems in Uganda as well as approve any product to be offered by financial institutions conducting Islamic Banking. 

The Central Bank, in consultation with the minister of finance, is mandated to make regulations in respect of the Sharia Advisory Council and Boards which are tasked with the advisor’s approval and review of activities of Islamic Financial business in order to ensure that the financial institutions comply with Sharia laws and rules and these regulations are underway. Seven years on and the journey to formulate the Financial Institutions (Islamic Banking) Regulations 2018 still goes on. Which will provide for Deposits in the Islamic financial business, profit earning and sharing, capital adequacy, liquidity, Sharia advisory board, Central Sharia Advisory council, Remedial measures, and sanctions among others.

In May 2023, a further legal milestone in the evolution of Uganda’s financial services industry in Uganda was reached. The Micro Finance Deposit-taking Institution Amendment Bill, 2022 was assented to into law and the Amendment also provided for Islamic Microfinance business, aligning the MDI Act, 2003 with the Financial Institutions Act, 2004 (as amended in 2016).

Recently, four finance bills have been gazetted and tabled before parliament and they are;-

• The Income Tax (Amendment) Bill No.2, 2023 whose objective is to amend the Income Tax Act Cap 340 to provide for equivalent tax treatment of Islamic financial business and takaful business to conventional financial services or insurance business. 
• The Value Added (Amendment) Bill No. 2, 2023. The objective is to amend the Value Added Tax Act Cap 349 to provide for the equivalent tax treatment of Islamic financial business to conventional financial services.
• The Stamp Duty (Amendment) Bill 2023 whose objective is to amend the Stamp Duty Act 2014 to provide for equivalent stamp duty treatment of instruments under Islamic financial services.
• The Excise Duty (Amendment) Bill No. 2, 2023 whose objective is to amend the Excise Duty Act, 2014 to provide equivalent tax treatment of Islamic financial business to conventional financial services.

In his address during the reading of the FY2023/24 Budget, Hon. Matia Kasaija, the Minister of Finance, Planning and Economic Development (MoFPED) confirmed that the government would move to implement Islamic Banking and Finance in this financial year.

Islamic banking and Finance⏤ endless opportunities

The modern Islamic Finance industry dates back a few decades ago even though the concepts of Islamic Finance date as far back as the 6^th century. Islamic Finance is evolving rapidly and continues to expand as one of the fastest growing financial opportunities in the world today, outpacing conventional banks in most systems in which Islamic banks have been embraced due to proactive governments, high demand for Shariah-compliant products within the growing population of Muslims as well as conventional and non-Muslim investors. It has transcended religious beliefs to adopt a business paradigm. Islamic Finance (banking and insurance), also termed as Shariah-compliant finance, alternative finance or ethical finance describes the section of banking and insurance which follows Islamic tenets dedicated to the elimination of the payment and receipt of interest in all forms.  If the paying and receiving of interest are prohibited, the question is how do Islamic banks operate. The answer is in the substitution of profit and loss sharing for interest as a method of resource allocation. In addition to this, a strict code of ethical investments operates for Islamic financial activities. For example, Islamic banks cannot finance activities or items forbidden such as the trade of alcoholic beverages, prohibition of games of chance and all business activities that have an element of gambling, and economic transactions that have elements of speculation.

Today the global Islamic financial assets stand at around USD 2.2 trillion and experts anticipate this could grow to USD 4.94 trillion by 2025 fuelled by capital inflows into Islamic exchange-traded fund (ETF) products. Modern Islamic banks have been founded on the banking model that existed in Europe and North America, with regard to their main layout, departmental structure and their basic functions of mobilizing financial resources and using them to finance those who are in need of investible funds-the difference lying in the area of modes of financing that are in the case of Islamic banks, derived from the Islamic system and structured within the Islamic legal framework.

On financial products, the basic principles of law are laid down in the four root transactions of sales (bay), transfer of ownership or corpus of property for a consideration, hire(ijara), transfer of the usufruct (right to use) of the property for a consideration, gift(hiba), gratuitous transfer of the corpus of the property and loan(ariya), gratuitous transfer of the usufruct of the property. 

The basic principles are then applied to the various specific transactions of, for example, pledge, deposit, guarantee, agency, assignment, land tenancy, waqf foundations (religious or charitable bodies) and partnerships, which play an important role in Islamic financing and form the backbone of Islamic banking practices.

There are certain basic types of financial contracts, which have been approved by various Sharia boards as being in compliance with the principles of Islamic Finance which briefly are; –

• Musharaka (partnership): This is often perceived to be the preferred Islamic finance mode of financing because it adheres most closely to the principle of profit and loss sharing partners contributing capital to a project and sharing its risks and rewards. Profits are shared between the partners on a pre-agreed ratio, but losses are shared in exact proportion to the capital invested by each partner.
• Mudaraba (finance by way of trust): Mudaraba is a form of partnership in which one partner (rabb al-mal) finances the project, while the other partner ( mudarib) manages it. This mode of financing does not require that a company be created. The financial institution provides all the capital and the customer is responsible for the management of the project. 
• Murabaha (cost-plus financing): In a Murabaha contract, the bank agrees to buy an asset or goods from a third party and then resell the goods to its client at a markup. The client buys the goods against either immediate or deferred payment. 
• Ijara (leasing): Ijara is the sale of the right to use goods) for a specific period. Here, the bank buys and leases out an asset or equipment required by its client for a rental fee. Responsibility for the maintenance/insurance rests with the lessor.
• Salam (Advance purchase): This is the purchase of specific goods for forward payment. This contract is regularly used for financing agricultural production. 
• Bai bi thamin ajil (deferred payment financing): Involves a credit sale of goods on a deferred payment basis. At the request of its customer, the bank purchases an existing contract to buy certain goods on a deferred payment schedule and then sells the goods back to the customer at an agreed price. The bank pays the original supplier upon delivery of the goods.
• Istisnaa (commissioned manufacturer): This offers greater future structuring possibilities for trading and financing. One party buys the goods and the other party undertakes to manufacture them according to agreed specifications. Islamic banks usually use istisnaa to finance construction and manufacturing   projects 
• Sukuk: These were introduced recently for the same reasons that led to the establishment of interest-free banking, which was to meet the requirements of those investors who wanted to invest their savings in Sharia-compliant financial instruments. Recognizing that trading in bonds is an important element of the modern financial system, Muslim jurists and economists have focused on developing Islamic alternatives, and the Sukuk have generated the most attention among these financial innovations. The difference between conventional bonds and Sukuk lies in the way they are structured and floated.

Governments too, do seek Sharia-compliant ways to mobilise financing for two reasons namely;-there is a growing popular demand in some countries to convert the financial system to conform to Sharia, especially in the Muslim dominated countries and governments in OIC member countries may like to tap extra resources from that part of the population that remains excluded from the financial markets because of their faith and belief in the prohibition of interest through government money market instruments, mobilizing resources from the capital market, fixed return instruments in an Islamic framework, trading based financing, leasing financing, trading based securities, variable return securities, participation securities among others.

In a nutshell, the legal and business environment in Uganda is embracing the phenomenon of Islamic Banking and Finance and as some financial institutions hasten to prepare their future Islamic finance operations, more demand-driven initiatives ought to be swung into motion to enlighten and prepare the populace for this long-awaited financial system.