Islamic banking presents new prospects for the banking industry

 By Fabian Kasi

The last couple of years have seen Africa undergo numerous changes in the banking sector; a rapid expansion of pan-African banking groups, a move in lending from the dominant wholesale and public sector to a growing retail, mobile banking replacing the traditional brick and mortar bank, to name but a few.

The changes the banking industry give me confidence that Uganda is in a favorable position to embrace Islamic banking which thrives on the principle of risk sharing rather than risk transfer. Under Islamic Banking, banks share profits and loses accruing from a particular investment, with their customers.

The banking industry in Uganda is thus excited about Islamic Financing because of the many opportunities it comes with and for the multitudes of stakeholders involved. In markets where it's entrenched, Islamic Banking is growing at double digit rates.

For instance, during the past decade, according to the IMF, Islamic Finance assets grew from about $200 billion in 2003 to an estimated $1.8 trillion at the end of 2013. During this period, Islamic Financing outperformed conventional banking by increasing its penetration by 15% in markets in the Middle East and Asia.

How prepared are we?

Let us note that South Africa, Kenya, Mauritius and Nigeria are some of the countries on the continent already with Islamic banking. We see steady progress in some of those economies, with the setup of laws governing Islamic banking, guidelines for non- interest banking, councils of experts for advisory services on Islamic banking, all intended to develop and expand the trade.

For Uganda's case, the Parliament of Uganda recently embedded Islamic banking into the Financial Institutions Bill, 2015. Beyond that, the central bank has begun sensitization drives as part of its financial literacy country wide initiative, and supporting banks in setting up required structures for Islamic banking.

As Uganda Bankers Association (UBA), the umbrella association for the current 26 banks in the country, we are working with all member banks to develop required products for Islamic banking and ways of operationalizing it.

Even with great prospects in sight, in our pursuit for growth and excellence in Islamic Financing, it's important to note that embracing new ways of doing business often comes with its challenges and risks.

One of the greatest challenges of Islamic Financing is the lack of high quality liquid assets and therefore liquidity. This is an issue arising from the lack of standardization of Islamic Financing services in the world.

Availability of credit is a critical asset for the banking industry. Without credit in its vaults, running a financial system will always be a toll order for players and the beneficiaries.

Such a bottleneck requires that the industry develops short term money market instruments to manage the liquidity challenges of the business model. In addition, it's also important to facilitate short term cross-border money transfers to manage the liquidity risks.

This will also require that the industry issues short term treasury bills and foreign currency denominated instruments. But these are only remedies. What is important is for us as business leaders to champion the standardization of Islamic Banking across Sub-Saharan Africa and to rally our governments to work with the rest of the world to come up with a central and acceptable point of reference for its operations.

The success of this banking model in further facilitating growth in SSA, will not only depend on how well we position ourselves to embrace it, but how well we educate our markets or customers to utilize the various products and services and how well we make use of the relevant technology infrastructure to deliver appropriate solutions to them.

It has been said and many continue to echo the fact that; this is Africa's time to prosper. I am certain that, many of us agree. Islamic banking is one of the channels to that shall propel us to that success. The call is that we work at it together for the benefit of our people, businesses and industry.

The writer is the chairman of Uganda Bankers Association and the Managing Director of Centenary Bank. (This is an abridged version of his key note address he gave at the Islamic Banking conference which took place in Kampala from May 10-11, 2016).