Uganda takes a leaf from Malaysia’s Islamic banking regulations

New regulation calls for Central Shariah Advisory Council at central bank level and Shariah Advisory Board at individual bank level


Uganda’s newly released Islamic banking regulations seem to have taken a leaf out of Malaysia’s books, including the establishment of a central Shariah body at the apex level.

The 18-page regulation, known as the “Financial Institutions (Islamic Banking) Regulations 2018”, calls for the establishments of a Central Shariah Advisory Council (CSAC) at the central bank level and a Shariah Advisory Board (SAB) at the individual bank level.

Both requirements are present in the regulations that govern the Islamic financial institutions licensed in Malaysia.

When it comes to the apex Shariah council, there are a couple of differences when comparing Uganda’s CSAC to its counterpart at Bank Negara Malaysia (BNM).

To begin with, the governor of Bank of Uganda (BoU), the nation’s central bank, chairs the CSAC. In Malaysia, BNM’s Shariah Advisory Council (SAC) is chaired by an outsider who is not an official of the central bank.

“I suppose they are still in their formative years when it comes to Islamic banking. This may change as the sector matures,” an Islamic finance observer told The Malaysian Reserve.

The newly approved regulation allows Uganda — the third-biggest landlocked economy in East Africa — to join peers Tanzania and Kenya in making available Islamic finance products and services to the nation with a population of 44 million, with Muslims accounting for 13%.

Comparisons between Uganda and Malaysia

Uganda’s CSAC is basically controlled by the central bank. Aside from the governor, it is made up of the central bank ED responsible for supervision, the central bank’s legal department head and two Shariah scholars appointed by the bank’s board.

In contrast, BNM’s SAC members are appointed by Yang di-Pertuan Agong, the nation’s constitutional monarch, on the advice of the finance minister after consultation with the central bank. This requirement is spelt out under Section 53 of the Central Bank of Malaysia Act 2009.

BoU is helmed by Prof Emmanuel Tumusiime-Mutebile (main picture), while his Malaysian counterpart is Tan Sri Muhammad Ibrahim.

As for the Shariah scholars who make the cut for the council, the Uganda legislation states that they should have knowledge and experience in Shariah, Islamic banking or such related disciplines as the central bank may specify.

On top of that, they must also have experience in the financial services industry; good standing, reputation and recognition in Uganda or any other country; and experience in serving on the SAB of any reputable institution conducting Islamic financial business.

This leaves it open for the Uganda central bank to tap Shariah advisors from abroad to bolster the standing and the knowledge depth of its newly formed Shariah outfit.

Published in the Uganda Gazette in February and available at the BoU website, the new piece of legislation

also states that the regulation is intended to provide for the “regulation of financial institutions conducting Islamic financial business” as well as provide “a regulatory framework for Islamic financial business”.

It also intends to provide for the licensing and operation of Islamic financial business and to ensure that financial institutions conducting Islamic financial business conduct their operations in accordance with Shariah.

Malaysian Experience

The 18-page Uganda document is less voluminous compared to the Islamic Financial Services Act 2013 (IFSA) which runs into 187 pages.

Uganda does mention a few Arabic terms, though not as many as in the Malaysian document, with terms like musyarakah, mudarabah, al-ijarah, istisna and wakalah.

Malaysia’s IFSA came into effect on June 30, 2013, along with the Financial Services Act 2013.

Both legislations — replacing the repealed Payment System Act 2003 — were meant to strengthen provisions to regulate payment system operators and payment instrument

issuers in order to promote safe, efficient and reliable payment systems and instruments.

Prior to that, another major regulatory milestone for Islamic banking in Malaysia came in the form of provisions embedded in the new Act governing BNM. The 2009 Act mentioned above had replaced the Central Bank of Malaysia Act 1958.

One key area of difference between the old and the new Act for BNM was the reference to the SAC, the body set up under the central bank itself to bring about order and consistency in the Shariah rulings for Islamic banks and takaful operators operating in Malaysia.

Another key area was the introduction of the “dual banking” concept.

In the old regulation, Islamic banking came into play by virtue of Section 16(b) which states that the SAC “shall be the authority for the ascertainment of Islamic law for the purposes of Islamic banking business, takaful business, Islamic financial business, Islamic development financial business, or any other business which is based on Shariah principles, and is supervised and regulated by the bank”.