Dr Sulaiman Lujja, manager Islamic Investments at the Microfinance Support Centre. Islamic Banking is about buying assets, selling assets, investment in commodities, not just selling money. PHOTO/ISMAIL MUSA LADU
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Islamic Banking is all about fairness, says Lujja
What you need to know:
Islamic Banking, according to banking industry players is long overdue. It essentially ensures that banking or commercial transactions are done with a human face. In an interview, Dr Sulaiman Lujja, manager Islamic Investments at the Microfinance Support Centre, an experienced banker and a Shari’a scholar (Islamic Law), explains to Prosper Magazine’s Ismail Musa Ladu why Islamic Banking aims at serving the humanity and not the various beliefs.
What are the benefits of Islamic Banking?
There are enormous benefits. This is why European countries, including the United Kingdom (UK) have taken to Islamic Banking without any qualms. UK is trying to position itself as the global gateway for Islamic Banking. This is because of the benefits it provides to the economy and the society. This kind of finance system is beyond religion. I can also tell you it has nothing to do with promoting Islam or sharia (law). This is typical business with human face.
This is because, it promotes the culture of sharing risks and losses. The conventional banking as we know it seems to shift risks to the side of the customers all the time. With Islamic Banking, the banks will instead be in partnerships with customer/clients and do business together. You will share profits and losses. As a customer, you will not shoulder the loss alone, if any. This, we believe, will raise the level of financial institutions responsibility in the sector.
Then, with Islamic Banking there is hardly room for market speculation. Movement of assets which also creates jobs and puts to use the factors of production are real. Additionally, the flow of foreign direct investments, emanating from our association and partnership as members of OIC, is set to increase. Islamic Development Bank and OIC are going to attract FID from their home countries as well from Asia based investors to invest in our country, creating jobs and generating revenue to government. Islamic Development Bank has already attracted Shs85 billion in microfinance investments. Out of the five countries in the region, we have been chosen to host the regional office. This speaks to the confidence and attractive environment our country offers.
We anticipate deepening financial uptake, thanks to the transparency that Islamic Banking provides for customers. We believe many government programmes will be funded without having to incur huge fees and capital costs. For example, government can now launch a sovereign bond for construction of government infrastructure using resources from the Arab world.
Is Islamic Banking meant for Muslims alone?
Not at all. This is something for humanity across the globe. This is why Parliament, Ministry of Finance, Bank of Uganda, all support this legislation. I urge the public to embrace this new venture of Islamic Banking because it has a record of helping economies develop. Islamic Banking has been adopted in UK, Canada and France. The issue should be the benefits we can get from Islamic Banking rather than the sharia or the Islamic law aspect. The benefit comes in handy to anybody regardless of your beliefs.
So what is the differences between Islamic and conventional banking?
Islamic Banking is about real economic sector – it is about buying assets, selling assets, investment in commodities, not just selling money. Money in Islamic Banking is not a commodity but a legal tender and a store of value. When you lend money, you have used it as a commodity.
Islamic Banks are required to establish a sharia advisory board which is not a requirement in conventional banking that follows a board of directors.
This ensures that they are compliant with sharia principles. Just in case some of the activities are not compliant with sharia principles, an Islamic Bank will not consume such income, and it will not treat it as income to the bank which would then be channeled to charitable causes. Penalties are not treated as income.
Importantly, Islamic Banking is about partnership where profits and losses are shared between the partners – the bank and the customer.
How does Islamic banking operate?
Conventional banking changes just a little bit to allow for sharia compliance but it will still be banking. In conventional banking for example when you want financing of Shs10m, the bank will exchange with you money and you will bring back that Sh10m plus an interest of say 20 percent, and this is not acceptable in Islamic Banking.
In Islamic Banking, you will be asked what you want to do, for instance, if you want a plot of land for Shs10m, you shall be asked to identify the seller of the land with the most reasonable quotation because this is a debt owed to you. You then provide invoice to the bank who will purchase the land for you directly from the vendor/seller. The bank will then sell to you that land. This is because in Islamic Banking only what it owns is what is allowed to be sold. So the bank takes the risks before selling it to you.
When Islamic Banking likely to be up and running?
Now that Parliament has passed the bill into law, what is left is for the President to assent to it. Since 2019, studies and engagement with different stakeholders have been done. Once the President assents, Banks, including international ones will be given licences by Bank of Uganda to operate.
Note that the discussion on Islamic Banking started in Uganda in 2008 when the Organisation of Islamic summit of 56 member countries happened in Uganda.
Then government started the process by amending the Financial Institutions Act 2004, then it established the financial institutions regulations 2018 to guide operations of Islamic banking.
On 27th June, 2023, the second reading was tabled and passed by Parliament. There were concerns regarding its operation under the current tax regime which needed amendment.
The amendments like income tax amendment bill 2023, VAT tax bill 2023, stamp duty amendment bill 2023, and the excise duty amendment bill 2023 were all made and now should be ready to roll. Commercial Banks cannot wait to have Islamic Banking products. Everything is set once the President assents.
