Banking and Finance Reform becomes Law

The public and financial sector have welcomed the recent Cabinet approval of the Financial Institutions (Amendment) Bill 2015. The Bill to be tabled before Parliament soon paves way for the introduction of Islamic and Agent banking as well as bancasurance in Uganda. Also included in the reforms is the creation of a fully-fledged fund to compensate customers when their bank is closed. This will protect the savings of Ugandans and will ensure compensation higher than the guaranteed sh3m if a bank closes. The fund will be able to invest the money meant to protect customers of banks and micro-finance institutions. The ‘protected deposit’ shall be adjusted regularly by the finance minister, according to the Bill gazetted on July 31, this year.

The Bill will provide special access to information on loan borrowers held by the Credit Reference Bureau by other accredited credit providers and service providers. This will make it harder for defaulters to borrow from more than one financial institution and ultimately decrease the cost of borrowing for people that honestly borrow and repay on time. The Bill also restricts mortgage/based banks like Housing Finance Bank to devote at least 25% of their entire loan book to the real estate industry. The Bill also restricts unsecured lending to bank employees for more than six months. Banks will now have to get the approval of the Bank of Uganda before they change ownership and relatives will only hold up to 49% ownership of any bank.

Jim Mugunga, the finance ministry publicist, said the amendments in the Bill are intended to give effect to government policy of bringing financial services closer to the people and to achieve financial inclusion for all Ugandans with less cost. He noted that due to the passage of time, some aspects of the Financial Institutions Act, 2004 have become outdated due to technological developments, international obligations and globalisation. He added that the amendments will enable the financial sector to create innovative products which are less costly and more consumer-driven.

Mugunga noted that when passed into law, the amendments will propel Uganda’s financial sector on a basis fit for the 21st Century. “Sharia banking is recognised internationally and is here to stay. We cannot keep away from it. This will enable the Muslim community to play a more active role in the development of the country. It will also enable Uganda to tap into resources of international organisations like the Islamic Development Bank where the country is a member,” Mugunga explained.

h3. Agent Banking

When the Bill is enacted into law, it will be possible for banks to have a network of agents just like the mobile money system currently operates. It will also be possible for banks to sell insurance products. The Bill will empower the Bank of Uganda, in consultation with the finance minister to set regulations for agents, and agent banking. The agents will not necessarily have to be within the banking system. Reacting to the approval of the Bill, Birbal Singh Dhaka, the deputy president of the Uganda Bankers Association and the CEO of Bank of Baroda, said: “This Bill will certainly be good for the industry. Islamic banking has been pending for too long.”

h3. Bancasurance

The proposed new law will allow commercial banks to sell their own insurance products or to sell products of insurance companies. However, the commercial banks will have to seek written authorisation from Bank of Uganda. After banks get the authorisation, they then have to follow guidelines set by the Insurance Regulatory Authority (IRA). Bancasurance is one of the measures the insurance sector is banking on to grow penetration from 0.85% to 2.1% in five years’ time. Insurance penetration in Uganda lags behind in the region. Tanzania’s insurance stands at 2.3%, Rwanda 1% and Kenya at 3.8%.

Ibrahim Kaddunabi Lubega, the Insurance Regulatory Authority chief executive officer, said the enactment of the law will boost insurance penetration in the country through bancasurance and Islamic insurance. “Islamic banking goes hand-in-hand with Islamic insurance which will enable investment in the insurance industry to boost our figures,” he said. The Deposit Protection Fund If the Bill becomes law, the Deposit Protection Fund currently within the Central Bank will be transformed into a corporate body with perpetual succession. The fund will become an insurance scheme for customers of commercial banks and microfinance institutions.

At the moment, all depositors are guaranteed to receive sh3m compensation if their commercial banks were to close. However, when the fund becomes a separate entity, the “protected deposit” shall be regularly adjusted by the finance minister. The fund will pay customers of closed banks or micro finance institutions within 90 days of the closure of the institution. The minimum contribution to the fund shall be 0.2% of its deposits. For instance, if Stanbic Bank has deposits worth sh2 trillion, they will pay sh4b to the fund. A financial institution whose overall financial performance is unsatisfactory after quarterly shall be asked to contribute up to 0.2% extra or double the minimum contribution to the fund. The fund will collect contributions, and receive grants, fines of 0.5% of unpaid contributions, and incomes from investments to finance its operations.

h3. Change of Bank Ownership

In case a financial institution intends to transfer shares, the Bill seeks to restrict the registrar of companies from allotting shares of the financial institution without written consent of the Bank of Uganda. The Bill also authorises the Bank of Uganda in consultation with the finance minister to alter minimum capital requirements for financial institutions from time-to-time and to require institutions to create capital buffers. Furthermore, the Bill seeks to restrict control of financial institutions by relatives to 49% as a corporate governance measure to improve the entire financial system.

h3. Mortgage Banks

In order to promote the real estate sector, the Bill instructs mortgage banks to dedicate 25% of all loans for acquisition, construction, enlargement, repair, improvement and maintenance of real estate.

Henry Richard Kimera, the chief executive of consumer education trust (consent) welcomed the developments and said the Bill will protect consumers. “I like that relatives have been stopped from holding more than 49% ownership of banks since they do not own the deposits. This will ensure depositors are taken into account when decisions are taken. Overall, the Bill ensures more transparency and I support this form of consumer protection,” Kimera said.

h3. Islamic Banking

Islamic finance was started by Egyptian economist Dr. Ahmed Al Najjar in 1963. It consists of micro-finance, takaful (insurance), issuance of sukuk (sharia’h compliant bonds), and Islamic banking. Islamic or Sharia’h banks share profits and losses with depositors. They avoid interest rate-based commitments and do not finance activities prohibited under Islamic Law such as gambling and alcoholic beverages. Prof. Abdullatif Essajje, a Kenya-based finance consultant, pointed out during a recent conference at the Common Wealth Resort Munyonyo that though the Muslim population is the primary market of Islamic banking, it is capable of appealing to non- Muslims as well. He noted that there are only five Islamic Commercial Banks (ICBs) serving a population of 165 million people of whom over 52 million are Muslims in Djibouti, Eritrea, Ethiopia, Mozambique, Somalia and Zambia.

He added that Botswana, Kenya, Gambia, Guinea, Liberia, Niger, Nigeria, South Africa, Mauritius, Senegal and Tanzania also have Islamic banking. Essajje noted that assets of ICBs were approximately $1.8 trillion and are estimated to exceed $4 trillion by 2020 due to increasing awareness, confidence in Islamic financial institutions, and regulatory and political support.

“Although Islamic finance in East Africa is at a nascent stage, its potential arises from an increasing number of middle-class families, size and expansion of its Muslim population, mega infrastructure projects, and mineral and oil finds,” he said. The Bill authorises the Bank of Uganda to license commercial banks to carry out Islamic banking. Licensed commercial banks will then be able to operate an “Islamic window” and a sharia’h Advisory Board.

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