Uganda is not ready for Islamic Banking law - Tax expert cautions Parliament

Birungyi interrupted the decision of the Parliament’s Committee on Finance, Planning, and Economic Development together with the Bank of Uganda to ask them to reconsider a cautious approach in implementing the proposed legislation on Islamic Banking. The two financial bodies are currently working to ensure that legislation enabling the introduction of Islamic banking products in Uganda is enacted.

While appearing before the Committee this week, Birungyi, highlighted that the Uganda Revenue Authority (URA) staff have not yet been comprehensively trained in Sharia Law and Sharia law taxation which possess potential risks when the new tax bills are introduced.

Risks, challenges and solutions

He explained that the portals of URA for Electronic tax require adjustment of software to conform to the prevailing provisions. Without this adjustment, implementing the legislation would be premature and legally challenging.

Birungyi asked for a thorough examination and separate legislation to govern Islamic Banking. According to him, implementers need extensive and proper training to come to grips with the Sharia Law which was developed over a long period of time. He added that this training will inform implementers to make correct decisions on whether to implement it at all.

Birungyi also raised concerns about Section 75A of the principal Act under the Commissioner General of the URA arguing that incorporating Islamic Banking into the tax system would create a situation where the interpretation of not only tax but also religion becomes necessary.

Dividing domestic law from Sharia law

Furthermore, he cited challenges in implementing Sharia Law alongside domestic law. He revealed that corporating Islamic Banking into the existing tax system may complicate compliance in the financial sector, and proposed the establishment of a distinct tax regime dedicated to Sharia Law to avoid confusion.

In response, Amos Kakunda, the Committee Chairperson said that although they recognized the potential economic benefits of Islamic Banking, there is a need for balance between providing new financing options and thoroughly assessing the implications of such legislation.

Background of the law

Bank of Uganda issued the Financial Institutions (Islamic Banking) Regulations in February 2018 to cater for the technical aspects unique to Islamic financing, and to operationalize the amendments related to Islamic Banking in the Financial Institutions Act 2004.

One of the key requirements of the Regulation is the establishment of a Shariáh Advisory Council (SAC) at the Bank of Uganda to be in charge of ensuring that all Islamic financial products presented and marketed as such, meet Shariah based criteria.

Prospects

Recently, Dr. Tumubweinee Twinemanzi, the Executive Director of Supervision at the Bank of Uganda said various entities have expressed interest in establishing Islamic Banking entities in Uganda and three applications are being processed.

If passed into law, Uganda will join other African countries such as South Africa Kenya, and Rwanda, among others, that have adopted Islamic banking but are non-Islamic states.