Bank of Uganda has taken a significant step by granting a license to the first Islamic banking financial institution, marking the end of a 20-year wait. This development paves the way for Ugandans to engage in a hybrid banking system that offers access to both conventional and Islamic banking products. The institution, known as Salaam Bank, already has a presence in Kenya, Somalia, and Djibouti, and it is expected to commence operations within the next 12 months.
Under the regulatory oversight of the Bank of Uganda as a tier one financial institution, Salaam Bank’s entry brings the total number of commercial banks in Uganda to 26. During the license handover event in Kampala, Bank of Uganda Deputy Governor Michael Atingi-Ego acknowledged the inherent risks in any new venture but expressed confidence in Salaam Bank’s capabilities to manage these risks.
Islamic Banking operates based on the principles of Sharia law, which prohibit the payment or receipt of interest, require the sharing of profits and losses, and restrict the use of derivatives due to their inherent uncertainty. Dr. Atingi-Ego emphasized that the absence of interest charges in Islamic Banking makes it a more sustainable banking model and aligns with the financial needs of many Ugandans who have been burdened by high average interest rates of approximately 26 percent. Implementing Islamic Banking is viewed as a significant milestone in promoting financial inclusion in the country.
As the pioneer in this field, Salaam Bank is expected to set the benchmark upon which other financial institutions can develop their Islamic Banking products. Previously, some banks had expressed interest in offering Islamic Banking services but were hindered by the lack of supporting structures, such as the Central Shari’ah Advisory Council.
The Finance Ministry Permanent Secretary, Ramathan Ggoobi, highlighted that the 2016 amendment to the Financial Institutions Act had paved the way for Islamic Banking in Uganda, but the absence of a Central Shari’ah Advisory Council had been a constraint to its commencement. Islamic Banking is expected to provide Ugandans with a broader range of financial services and contribute to the diversification of the country’s banking sector.