The Bank Scene Newsletter of the Uganda Institute of Banking and Financial Services October 2019 BANK OF UGANDA MONETARY POLICY Editorial STATEMENT FOR OCTOBER 2019. Dear our esteemed readers, Here is the October issue of the Bank Scene. We appreciate all our Members and Stakeholders for Participating in the 20th Edition of the Annual Bankers’ Sports Gala - 2019 at both Lugogo Indoor Stadium and Nam- boole Stadium. Congratulations to 37/45 KAMPALA ROAD, P.O. BOX 7120, KAMPALA Telephone: 256-414-258441/6, all the winners in the different cat- 258061, 0312 392000, 0417 302000. Telex: 61069/61344; egories. Fax: 256-414-233818, Web site: www.bou.or.ug Kindly note that we are receiving applications for all our Professional and Academic Programmes for the January - May 2020 intake. We en- courage you to take up these pro- grammes to enrich your skills, aca- demic and professional credentials. Have a fruitful and blessed October! Bank of Uganda (BoU) has in the October global economy. Moreover, a combination of 2019 Monetary Policy Committee (MPC) widening fiscal and current account deficits, meeting decided to reduce the Central Bank coupled with public sector domestic financ- INSIDE Rate (CBR) by 1 percentage point to 9per- ing needs, could exert pressure on the lending centin response to the expected path of mac- interest rates leading to further moderation of Financial Services Industry news and high- roeconomic indicators and the international economic growth. lights economic environment. The Consumer Price Index (CPI) data for Highlights from the Registrar’s Office The economy continues to grow but at a September2019, released by UBOS, indi- and Training Department slowing rate. Economic activity seems to cates that inflation remained subdued. An- have slackened in the first half of 2019 com- nual headline and core inflation declined to pared to the second half of 2018. Indeed, the 1.9percentand 2.5percent, respectively from Professional Trainings at the Institute recently released quarterly GDP estimates by 2.1percent and 2.7percentin August2019. Upcoming Short skills Courses for Uganda Bureau of statistics (UBOS) indicate The decline in inflation was in part driven November 2019 that GDP growth slowed in the second half by a relatively stronger shilling, moderation of Financial Year (FY) 2018/19. In addi- of domestic demand and lower food prices. UIBFS Library Services and how to tion, the BoU’s high frequency indicator of Food crops inflation declined from minus become a member of UIBFS economic activity, the Composite Index of 1.4percent in August 2019 to minus 3.0per- Economic activity (CIEA), points to a mod- cent in September 2019. However, Energy eration of economic activity in the first quar- Fuel and Utilities (EFU) inflation rose to ter of FY 2019/20. The outlook is uncertain, 2.5percent in September 2019 from 1.0per- particularly as a result of the unfavorable cent in August2019. The E - Learning platform can be accessed at http://elearning.uibfs.or.ug The Bank Scene October 2019 The inflation outlook has been revised downwards compared Who regulates Islamic Banking in Uganda? to the August 2019round of forecast. Annual core inflation is All financial institutions offering Islamic Banking products now projected to remain below the 5 percent target until the and services are regulated by Bank of Uganda. Islamic Bank- fourth quarter of 2020. The risks to the inflation outlook in the near term (12 months ahead) are assessed to be largely on the ing regulations were gazetted in February 2018 and these cover downside and inflation is forecast to converge to the target of 5 license to conduct Islamic financial business, deposits in Islamic percent in the medium-term (2-3 years). Demand side pressures financial business, capital adequacy, liquidity and profits, credit remain subdued. In the absence of shocks, the relative stability provision in Islamic financial business, Shari’ah advisory board, of the exchange rate is expected to continue. central Shari’ah advisory council as well as remedial measures and administrative sanctions, and other macro-prudential met- The BoU believes that the benign inflation outlook provides room for a reduction in the policy rate to support economic rics to ensure stability of the financial system. growth. The economy still has spare capacity and lower inter- est rates will help reduce the output gap. Against this backdrop, Because Islamic financial institutions are required to follow Is- the BoU has decided to reduce the CBR by 100 basis points to lamic or Shari’ah commercial laws, the Central Bank is to es- 9 percent. The band on the CBR will remain at +/-3 percentage tablish a Central Shari’ah Advisory Board to advise the Central points and the margin on the rediscount rate and bank rate will remain at 4 and 5 percentage points on the CBR, respectively. Bank on matters of regulation and supervision of Islamic bank- Consequently, the rediscount rate and the bank rate have been ing systems in Uganda and to approve any product to be offered set at 13percent and 14percent, respectively. Going forward, the by financial institutions conducting Islamic banking. On the fis- BoU will continue to monitor emerging price and output devel- cal side, the Ministry of Finance through consultations with vari- opments to ensure that monetary policy decisions remain con- ous stakeholders, including the Uganda Bankers’ Association, is sistent with price stability while being supportive of sustained to put in place policy regulations and guidelines that will aid the non-inflationary economic growth over the medium term. Source: Bank of Uganda taxation of transactions based on Islamic Banking. Who qualifies to carry out Islamic Banking? A financial institution already licensed by Bank of Uganda and Islamic Banking provides for Sharing intending to carry out Islamic Banking will apply to the Central of net profit or loss Bank to carry on Islamic financial business through an Islamic banking window. A financial institution approved to conduct Is- lamic Banking shall appoint and maintain a Shari’ah Advisory In 2016, the government amended the Financial Institutions Act Board whose function, among others, will be to approve and re- (FIA) 2004 to make provision for Islamic Banking. Financial view the Islamic business of the financial institution to ensure it institutions then embarked on strengthening both their techni- complies with the Shari’ah. cal and operational capacity to roll out this initiative within the sector. Staff of supervised financial institutions continue to par- ticipate in capacity building/training programmes on Islamic An Overview of Islamic Banking Products Like the traditional banking system, Islamic banks shall operate Banking. Regulators and policy makers continue to facilitate the two sides of the balance sheet, namely the asset side and the li- creation of an enabling environment that is supporting the opera- ability side. However, these products shall be based on Islamic tionalisation of Islamic Banking in Uganda. The introduction of contracts as illustrated below: Islamic Banking creates an opportunity for Ugandans to access a wider range of financial options and choice of banking products • The liability Side: This side includes the demand deposits, and services and this will ultimately contribute to the financial which are risk-free and provide no fixed return to the deposi- inclusion agenda. tor apart from the bank discretionally gift (hiba) and the in- What Islamic Banking is about? vestment deposits, which expose the customer to the risk of losses from investments made by the bank. Contracts com- Islamic Banking, also known as non-interest banking, ‘is a sys- monly used on this side include benevolent loan (Qardh) and tem based on the principles of Islamic or Shari’ah law and guid- guaranteed safe custody ( wadi’a yad dhamanah). ed by Islamic economics. Islamic banks offer financial services without using the conventional interest-based system, provid- • The Asset Side: After obtaining funds from the liability side, ing for the sharing of net profit/loss and the risk involved in a Islamic banks use these funds in different channels, including proportional manner between the lender and the beneficiary. As retail and corporate sectors by offering a broad spectrum of such, a financial institution not only expects to claim a propor- products such as Islamic financial intermediation and Islamic tion of the profits of a project, but also carries proportional share leasing, and Islamic Bond (Sukuk) among others. of the loss of that project. Thus, in Islamic Banking, financial institutions make a profit through equity participation, which re- quires a borrower to give the bank a share in their profits rather Difference between Islamic Banking and than paying interest. Conventional banking system The Islamic Banking system promotes risk sharing between financial institutions and their customers whereas the conven- The E - Learning platform can be accessed at http://elearning.uibfs.or.ug The Bank Scene October 2019 tional banking system operates on predetermined rate of interest. to work. They want to know they are contributing to the organ- With Islamic Banking system, functions and operating modes are isation. The company must therefore have a worthy mission and based on Shari’ah law. Financial institutions have to ensure that they will feel good working toward the fulfillment of the mis- all business activities are in compliance with Shari’ah require- sion in whatever they are assigned to do. Mr. Pius Wandiembe, ments whereas with the conventional banking system, functions a human resource consultant says: “As an employer, ensure that and operating modes are based on secular principles and not you give your millennial employee a compelling reason to work based on any religious law or guidelines which render them miss for your organisation to help him see that he is worth working an ethical ground. Under the profit and loss sharing arrangement, for your company.” Also, try to find out what their goal is and Islamic banks assume returns only if there is a profit by customer ensure to help them reach it.