ISLAMIC BANKING IN UGANDA

 Islamic banking, also known as Sharia-compliant banking, is a system of banking that is based on the principles of Islamic law, also known as Sharia. The main difference between Islamic banking and conventional banking is that Islamic banking prohibits the charging or paying of interest, or riba.

The modern Islamic banking has been in existence for over four decades. Today, Islamic banking has continued to gain popularity in both Muslims and non-Muslim countries such Qatar, Saudi Arabia, Malaysia, UAE and United Kingdom, USA, German, South Africa respectively. Similarly, the products or services benefits and embraced by both Muslims and non Muslims. In Uganda, the Islamic Banking system is at an infancy stage where the stakeholders need to understand its concept and applicability. Few banks namely; Cairo International Bank and Finance Trust Bank have so far opened up the Islamic banking window.

What happens when you bank using Islamic Banking system?

Normally customer opens up either current or saving account under Islamic banking system (fully fledged or window).

A Shariah-compliant current account doesn't pay interest. Instead, in return for having ready access to your money, the deposit you give the bank is used as an interest free loan. This loan is known as a “qard”. If you open a savings account, the bank will invest the money you deposit into business or investment projects. This means you’re a partner in the investment. Profits and losses are shared between the two parties according to a predetermined ratio, agreed upon at the outset of the partnership. When customers deposit money, the banks select Shariah-compliant investments, then profits and risks are shared between the customer and bank accordingly. Islamic Banking is principally based on trading, therefore banks can profit from the buying and selling of Shariah-compliant goods and services.

Does Islamic Bank offer loans?

The answer is “YES”.

For Islamic Banks to a make profit and to satisfy the borrowers’ needs of cash, Islamic banks offer loans to clients in a way that is compliant with Islamic principles of finance, which prohibit charging or paying interest. Instead of charging interest, Islamic banks offer financing through a variety of Sharia-compliant products that are based on the concept of risk sharing.

Here are some of the common models used in Islamic banking to offer loan or financing to clients:

1.      Profit and loss sharing (Mudarabah): This is a partnership arrangement in which the bank and the borrower jointly finance a project or investment. Profits and losses are shared according to a pre-agreed ratio.

2.      Joint venture (Musharakah): This is a profit-sharing arrangement in which the bank provides the financing while the borrower provides the expertise and management. Profits are shared according to a pre-agreed ratio while losses are borne by the bank.

3.      Cost plus (Murabahah): This is a cost-plus financing arrangement in which the bank purchases an asset on behalf of the borrower and then sells it to the borrower at a marked-up price. The borrower repays the bank in installments over an agreed-upon period.

4.      Leasing (Ijarah): This is a leasing arrangement in which the bank purchases an asset and leases it to the borrower for an agreed-upon period. The borrower makes rental payments to the bank over the lease term and may have the option to purchase the asset at the end of the lease.

5.      Salam: This is a forward sale contract in which the bank provides financing to the borrower for the purchase of a specific commodity that will be delivered at a future date. The borrower pays for the commodity upfront and takes delivery of it when it becomes available.

It's important to note that; (1)   each Islamic bank may have its own specific approach of providing financing and the terms and conditions of each loan agreement may vary. Clients should carefully review the terms of any loan agreement and seek advice from a qualified Islamic finance professional if needed and (2)   borrowed money by clients to be invested in Shariah-compliant (Islamically allowed) investments. Islamic Banking is principally based on trading, therefore clients can profit from the buying and selling of Shariah-compliant goods and services.

 

Author

Ssonko Muhammedi

Email; ssonko65@gmail.com

Whats App +256754656089 

PhD. Candidate 

Islamic Banking and Finance

Universiti Islam Antarabangsa Sultan Abdul Halim Mu'adzam Shah (UniSHAMS), Malaysia

 

 

 

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