Uganda introduces Islamic Banking and Bancassurance

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Driven by the need for a progressive and globally appealing financial sector as well as ensuring greater financial inclusion, Uganda recently enacted the Financial Institutions (Amendment) Act, 2016 (the Amendment) to amend the Financial Institutions Act, 2004 (FIA). The FIA was originally enacted to address a bank failure crisis borne out of practices riddled with weak governance structures and a deficient regulatory environment..

In a significant improvement to the FIA, whose emphasis was on prudential regulation and supervision of financial institutions, the Amendment is more commercially focused, introducing global products, practices and solutions to the Uganda financial services market.

Islamic Banking

Among the key developments is the expansion of financial institutions business to include Islamic finance, a system of banking compliant with Shariah. Islamic finance was previously absent from local laws, and banks faced restrictions on trading, commerce and real estate business. As such, certain Shariah compliant products like profit sharing (Mudaraba), joint venture (Musharakah), and cost plus (Murabaha) remained a grey area.

Under the new Amendment.existing bank and non-bank financial institutions can now freely venture into Islamic banking products within defined parameters. Alternatively, business may be conducted through an Islamic bank whose sole business comprises of Islamic financial business.

To provide guidance on internal Islamic banking systems, the Amendment mandates the creation of a Shariah Advisory Board independent of the bank directorship. It also establishes the Central Shariah Advisory Council to provide regulatory oversight for banks engaging in Islamic financial business.


Another significant change under the Amendment is the removal of the prohibition against banks engaging in insurance business. The law now permits bancassurance where banks can provide insurance services and products to customers. This integration of insurance and banking services should see a boost in both industries.

Agent Banking

In a deliberate move to eliminate blockages affecting delivery of financial services throughout the country, the Amendment also introduces agent banking. Agent banking allows banks to conduct their business using persons who are outside the banking system, especially in areas where banks lack presence. In Uganda, where only 20 percent of the population is banked, this innovation is likely to have positive effects.

This banking channel will ultimately ensure penetration of the banking sector to persons who had previously been locked out of the banking system, at presumably lesser costs for both customers and banks. This move is likely to involve further regulation of the current mobile money services that are akin to agent banking and are presently provided by telecom companies.

Other Amendment highlights include:

  • Separation of the deposit protection fund in respect of financial institution depositors from the Central Bank to create an autonomous body. The fund for financial institutions has been merged with the similar fund relating to institutions accepting micro finance deposits, streamlining the deposit protection system and ultimately reinforcing deposit protection in Uganda. As a result, if a bank fails, a common occurrence before the FIA, depositors should have a fair expectation of receiving back a substantial amount of their deposits.
  • Increased circumstances under which a financial institution may deal in immovable property
  • The creation of free access to and use of credit reference bureau services for non-regulated institutions like credit and service/utility providers.

These reforms to the financial services sector are a welcome and relevant addition. The Amendment harnesses previously existing barriers to product development and innovation, presenting tremendous opportunity for investment by local and foreign businesses as well as ensuring greater participation in the banking industry by persons who were previously locked out on account of geographical barriers and religious incompatibility.

Although the Amendment became effective on 4th February, 2016, the regulations required to operationalize changes to the financial institutions regime have not yet been passed.

Inside Africa would like to thank our guest authors Andrew Kibaya and Hellen Nakiryowa of Shonubi, Musoke & Co. for their contributon.


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Our understanding of Africa’s markets stems from extensive experience on the ground. Through our Inside Africa blog, we aim to apply this insight to provide you with timely commentary on the latest developments across Africa, as well as insight into the many nations that make up this vast continent.

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