Tuesday, 19 April 2016

When Christian Church leaders in Uganda Protest Interest free Islamic Banking but keep silent about Neo-liberal capitalistic oriented banks in Uganda and Micro-finance institutions that charge interest of over 35 percent

Archbishop Stanley Ntagali and President Museveni

Any attempt of modesty was thrown out of the window the minute some religious leaders learnt that government had pushed through the amendments to the Financial Institutions Bill 2015, part of which paved the way for Islamic banking, saying the country was bound to face its most serious security threat if the Muslims had their way, writes ALON MWESIGWA.

A group of religious leaders has petitioned President Museveni, protesting the incorporation of Islamic banking into Uganda’s financial system.
In letter dated January 14, 2016, the authors, who describe themselves as “church leaders in Uganda” urge the president not to sign the amendments, arguing that Sharia law, the base on which Islamic banking operates, “will have far-reaching implications beyond the suggested purpose of finance.”
The statement, which The Observer has obtained, is signed by arch bishop of Church of Uganda Stanley Ntagali as chair of the Uganda Joint Christian Council.
Other signatories are Bishop Simon Peter Emau, the chairman of the Evangelical Churches of Uganda, Pastor Daniel Matte, the president of the Seventh Day Adventist church.
The Financial Institutions (Amendment) Bill 2015 was passed on January 6, 2016, paving way for inclusion of Islamic banking, agency banking, and bancassurance in Uganda’s financial sector.
The bill now awaits the president’s assent but the protest of some sections of the church leaders could prove a setback and an indication that not enough sensitization was done before the passing of the law. 
The church leaders noted that “we view the passing of this bill as one of the most serious threats to national security and stability with potential threats to future generations as well.”
One key feature in Islamic banking is that it enables a financial institution to lend without charging interest. According to the International Monetary Fund (IMF), it is a form of financial intermediation based on profit and loss sharing (PLS) and the avoidance of interest rate-based commitments and contracts that entail excessive risks and finance activities prohibited under Islamic principles such as alcohol.
“We regret to note that the introduction of Sharia law in the country opens door to the ultimate operationalisation of fully-fledged Sharia not only in the finance sector as contained in the bill but in all aspects of our national life,” reads the church leaders’ letter.
It adds that it would create a “legal stalemate with the Constitution of Uganda” and that all under this arrangement, all Muslims might be compelled to use only Islamic banking which may deny them the right to freedom of choice.”
The church leaders explained that the bill “creates two parallel financial and economic systems for the population of Uganda; for the Muslims, in conformance to the Sharia law, and the non-Muslims. This will promote economic discrimination, and will widen the already-existing income inequalities in the population.”
“Since in this bill the central Bank seeks to establish a separate regulatory body to oversee Islamic banking, there will be a serious challenge to harmonize this kind of banking with the traditional banking system. This is because Islamic banking will be run on Sharia law which is hinged on unique legal principles which are in many ways contrary to Uganda’s constitution,” they added.
Officials at the Bank of Uganda said they hadn’t seen the petition. Last month, the central bank informed journalists that they were working on regulations that would operationalise the new amendments. 
Meanwhile, some commercial banks had expressed their gratitude to the introduction of agency and Islamic banking.
In a statement in January, Standard Chartered bank said: “That’s great news, not just for Uganda’s Muslim population, but anyone keen to see a thriving Ugandan banking market based on choice for consumers.”
Uganda joins countries such as Kenya and Nigeria in accommodating Islamic banking.
“With the first licenses granted in Kenya just six or seven years ago, that would make Uganda’s leap into Islamic banking a competitive advantage,” Stanchart says. It is also present in Tanzania.
The market for Islamic financial assets has grown at an annual average rate of about 16 per cent since 2006, according to the IMF.
Starting with a handful of institutions and negligible amounts in the late 1970s, Islamic finance grew to about 350 institutions and global total assets of about $1.7 trillion in 2013, according to a 2014 IMF working paper.  
Islamic finance has expanded throughout the Middle East, Indonesia, the United Kingdom, North Africa, and, more recently, in some sub-Saharan African countries, said the IMF, adding  that this is despite the fact that Islamic financial assets make up less than one per cent of the world’s financial assets.

Islamic, agency banking to change face of industry 

Written by Alon Mwesigwa

The main Standard Chartered bank offices

The long-awaited Islamic banking is now accepted in Uganda. Also, the new law allows for agency banking. However, in a highly-competitive market such as Uganda, the new forms of banking could face a stern test, writes ALON MWESIGWA.

Amendments to Uganda’s Financial Institutions Act 2004 will change the way banks carry out business in the country and certainly set stage for major growth, Standard Chartered Bank Uganda has said.
Herman Kasekende, the CEO of the bank, told the press on Friday that Parliament’s passing of the amended Financial Institutions Bill, which opened the way for Islamic banking, among other things, would change the face of banking in the country.
“This is going to revolutionalise the way we do business here,” Kasekende said. “It’s been a journey of about four years pushing for these changes.”
The new law allows banks to engage in agency banking, a sector Standard Chartered bank remains keen on, Islamic banking and bank assurance. In particular, Islamic banking is based on Sharia law and does not allow interest rates to be charged on the loans or other products from the commercial bank.
Instead, the bank enters into an agreement with the other party to share profits or losses equally from the venture they are in.
“That’s great news, not just for Uganda’s Muslim population, but anyone keen to see a thriving Ugandan banking market based on choice for consumers,” said a statement from Stanchart.
Uganda joins countries such as Kenya and Nigeria in accommodating Islamic banking.
“With the first licenses granted in Kenya just six or seven years ago, that would make Uganda’s leap into Islamic banking a competitive advantage,” Stanchart says.
Meanwhile, agency banking allows a financial institution to contract, say a retail shop, supermarket chain, postal outlet or mobile network operator to process transactions on behalf of the bank.
The agent can receive deposits, offer cash withdrawals and sell other bank products. This allows the bank to reach more places without having brick and mortar presence. This massively cuts on the costs of operation for the bank.
“In a short time, we can have presence everywhere,” said Kasekende.
In Kenya, this sort of banking is already popular with large financial institutions such as Equity bank. In the first quarter of 2014, for instance, 14 Kenyan banks had appointed 24,645 agents. They had executed about 93 million transactions worth Ksh 500bn ($4.9 billion) since 2010, according to the Business Daily, a Nairobi-based newspaper.
Equity bank reported that its agents were carrying out more transactions in a day than its tellers and ATMs. Rwanda, too, has okayed agency banking. In Uganda, banks remain thin in some remote areas of the country, which they deem not commercially viable to have a fully-fledged branch.
This is where telecoms have taken advantage by recruiting more people on their mobile money platforms to support some financial transactions.
Agency banking could not have come in more handy. Less than five million Ugandans have bank accounts, out of a possible 14 million adults in the country.
However, the current law does not address the issue of one agent serving two banks at the same time. Already, there are clear-cut examples within the telecom sector where some companies do not prefer its agents to sign up to a second company.
Cecilia Muhwezi, the head of compliance at Stanchart, said she did not think one agent would serve more than one bank.
“That will be provided for in the regulations.”
In regards to bancassurance, banks will be able to offer insurance products in partnership with insurance firms. The banks would then earn a commission on policies or products sold.
The products can range from coverage for illness, funeral expenses, to education expenses. Insurance coverage in the country remains low, at less than one per cent of the population. The banks’ entry into the industry could re-energise the sector.
Banks made more money in the financial year to June 2015 compared to the year before, with the biggest amount of profit generated through earnings on lending out money to the private sector.
In the 2015 financial stability report, Bank of Uganda says the level of after-tax profits for the banking sector increased by 55.1 per cent, an improvement from the decline of 27.8 per cent experienced in the year ended June 2014.
The rise in profitability was driven by the increase on profits on loans, and falling operating expenses as a share of income, the central bank said. Money earned on loans increased by 9.8 per cent in the period under review, owing to the stock of outstanding credit and high interest rates.
Yet while interest earned on loans and advances continued to contribute the largest share of interest income, it was income from banks’ holdings of government securities that registered the highest rate of growth, at 22.7 per cent, boosted by a rise in interest rates during the year.
Government borrowed Shs 1.4tn from the domestic market between June 2014 and June 2015 and commercial banks remained among the biggest lenders to it.
“Between June 2014 and June 2015, interest rates on 91-day treasury bills increased by 3.8 per cent, compared to average lending rates on shilling loans which rose by 1.2 per cent,” BOU said.
On the other hand, over the same period, the banking system’s return on assets reached 2.5 per cent, while the return on equity increased from 14.2 per cent to 15.6 per cent.
The shilling depreciated by more than 24 per cent during the same period, which favoured banks. As the central bank raised its key rate to arrest inflation, interest rates and yields on securities – money earned on government debt – increased. Banks cashed in.
The economy is estimated to have grown at five per cent, more than the year before at 4.6 per cent. This was as a result of the growth in economic activity. In the 2015/16 financial year, the economy’s growth is expected to be slightly high owing to government’s huge investment in infrastructure.
On the stock market, there was a decline in activity, with the turnover of Shs 310bn in 2014/2015 compared to Shs 333bn the year before.
“The drop in equity turnover was driven by rising interest rates that have seen investors shift to the government bond market and a weak shilling that has seen off-shore investors’ scale down activity,” BOU says.
Going forward, BOU says the increase in interest rates in the US will enhance the appeal of US assets and this could create negative implications for Uganda’s economy due to capital outflows.
Also, the fall in commodity prices will lead to a decline in incomes of households and commercial farmers which in turn, affects government revenues. In addition, the slowdown in China may lead to the reduction in Chinese investment in the country.
This may translate to reduced economic activity with a negative impact on growth, BOU says.