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ADVOCATES
 INAUGURAL
ISLAMIC
FINANCE
CONFERENCE
“What you need to know”
October 2023
Foreword by Dr. Humayon Dar
Islamic banking and finance is growing
rapidly all over the world, with its
global assets touching the historic mark
of US$4 trillion. This is remarkable.
An increasing number of countries –
both Muslim majority and the ones
with Muslim minorities – have been
increasing their engagement with the
industry.
In the West, the United Kingdom
is perhaps the best example of
engagement with Islamic finance.
Consequently, the country is benefitting
from the capital inflows related with
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Islamic banking and finance. London
Stock Exchange also attracts a large
number of listings of Islamic securities
like Sukuk (Islamic bonds). Other
two important European centres of
excellence for Islamic finance are
Luxembourg and Dublin (Ireland), which
continue to attract Islamic funds and
other related Islamic finance business.
The Gulf Cooperation Council area
is the global hub of Islamic finance,
followed by the Far East where Malaysia
and Indonesia are competing for their
global leadership role in Islamic banking
and finance.
Africa is considered as the future of
Islamic banking and finance. Despite
having significant Muslim population,
Africa has not in the past been able to
attract the required amount of attention
from the global Islamic financial services
industry. This is fast changing, as all
geographical locations of Africa are
now buoyant about Islamic banking and
finance. In North Africa, the countries
that have historically shown little
interest in Islamic banking and finance
(e.g., Libya) have started to emerge as
important players in this field. On the
opposite side of the continent, South
Africa has already established itself as
a centre of excellence for Islamic wealth
management, with a thriving Islamic
funds industry.
In the East of Africa, countries like
Djibouti, Ethiopia, Somalia (including
Somaliland), Kenya and Tanzania are
interesting markets with huge growth
potential.
In the West, Senegal has for long been considered as an important hub for Islamic
Development Bank from where it has contributed to economies of the West African
countries.

Central Africa has also seen emergence of new players in the respective markets.
Nigeria has arisen as a leader in the central region. With four fully-fledged Islamic
banks and a growing number of conventional banks offering Islamic finance
through window operations, Nigeria has a huge potential for growth of Islamic
finance.

The new countries like Uganda have a lot of examples of good practices to learn
from. As a new entrant in the market, Uganda will have comparative advantage for
growth, something similar to Oman in the GCC. The Sultanate of Oman was the
last GCC country to adopt Islamic banking and finance in 2011. In a span of only
12 years, its Islamic banking sector has captured nearly one-fifth of the banking
sector of the country.

One shouldn’t expect this kind of rapid growth of Islamic banking in Uganda.
Given that a lot of infrastructural developments for the industry have already taken
place around the world, Uganda will face only challenges in terms of adaptation
and adoption. This should make the task of the regulators, players and other
stakeholders relatively easier.

The Ugandan story of Islamic banking and finance has a good start!

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 Islamic Finance in Uganda
Islamic banking, also referred to as
Islamic finance or Shariah-compliant
finance, refers to financial activities
that adhere to Shariah (Islamic law).
Two fundamental principles of Islamic
banking are the sharing of profit and
loss and the prohibition of the collection
and payment of interest by lenders and
investors.
Islamic finance strictly complies with
Sharia law. Contemporary Islamic
finance is based on several prohibitions
that are not always illegal in the countries
where Islamic financial institutions are
operating.
Islamic finance in Uganda is a creation
of the 2016 Financial Institutions
Act Amendment. Consequently, the
Financial Institutions (Islamic Banking)
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Regulations 2018 that regulate Islamic
finance in Uganda, were enacted.
The regulations allow for the Bank of
Uganda to issue a licence to operate an
Islamic bank or for a conventional bank
to do Islamic finance business through
an Islamic banking window. The law
also created Sharia boards to allow for
product evaluation and compliance
with the Sharia.
Islamic bank, simply, is deposit-taking
institution, which provides all currently
known banking products, except for
borrowing and lending based on
interest. The Bank mobilizes funds
based on Islamic modes of financing
such as Mudaraba, Murabaha, and
Musharaka. The Bank may also accept
demand deposits from clients, which
are treated as interest-free loans and
are guaranteed.
Insurance laws were also amended to
allow for Islamic Insurance products.
The Tax Laws such as Income Tax Act,
Value Added Tax, Stamp Duty Act and
Excise Duty Acts in Uganda have also
been amended to create equity in the
taxation of the products.
The First Islamic Finance bank, Salaam
Bank is the first licensed Bank to
conduct Islamic finance in Uganda.
Principles of Islamic Finance
1. Paying or charging an interest
(riba)
Islam considers lending with interest
payments as an exploitative practice
that favors the lender at the expense of
the borrower. According to Sharia law,
interest is usury (riba), which is strictly
prohibited.
The products therefore do not envisage
charging Interest.
2.Investing in businesses involved in
prohibited activities.
Some activities, such as producing and
selling alcohol or pork, are prohibited
in Islam. The activities are considered
haram or forbidden. Therefore,
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investing in such activities is likewise
forbidden.
Islamic financiers shall evaluate each
business to ensure that they are halal
businesses before investments are
made in such businesses.
3.Speculation (maisir)
Sharia strictly prohibits any form of
speculation or gambling, which is called
maisir. Thus, Islamic financial institutions
cannot be involved in contracts where
the ownership of goods depends on an
uncertain event in the future.
4. Uncertainty and risk (gharar)
The rules of Islamic finance ban
participation in contracts with excessive
risk and/or uncertainty. The term gharar
measures the legitimacy of risk or
uncertainty in investments. Gharar is
observed with derivative contracts and
short-selling, which are forbidden in
Islamic finance.
In addition to the above prohibitions,
Islamic finance is based on two other
crucial principles:
Material finality of the transaction:
Each transaction must be related to a
real underlying economic transaction.
Profit/loss sharing: Parties entering
the contracts in Islamic finance share
profit/loss and risks associated with the
transaction.
No one can benefit from the transaction
more than the other party.
 properties. The bank and investor jointly
Products purchase a property. Subsequently, the
bank gradually transfers its portion of
1. Profit-and-loss sharing partnership equity in the property to the investor in
(mudarabah) exchange for payments.

Mudarabah is a profit-and-loss sharing Permanent musharkah: This type of

partnership agreement where one
partner (financier or rab-ul mal) provides
the capital to another partner (labor
provider or mudarib) who is responsible
for the management and investment
of the capital. The profits are shared
between the parties according to a pre-
agreed ratio.
joint venture does not have a specific
end date and continues operating as
long as the participating parties agree
to continue operations. Generally, it is
used to finance long-term projects.

MUDARABAH DIMINISHING MUSHARAKA

Cash Investment Cash
BANK Investment
INVESTOR
(MUDARIB) EVENTUAL
BANK
Agreed share of profits. OWNER
Investor bears the losses
Agreed share of
profits.
Investor bears the
losses
Managers Profits
Managers
COMMODITY
BUYER
ASSET
Diagram of a mudaraba transaction

Diagram of a diminishing
2. Profit-and-loss sharing joint Musharaka
venture (musharakah)
Musharakah is a form of a joint venture
where all partners contribute capital
and share the profit and loss on a pro-
rata basis. The major types of these
joint ventures are:

Diminishing partnership: This type of

venture is commonly used to acquire

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3. Murabaha
Murabaha (cost-plus financing) refers Delivery Payment
ASSET
to an Islamic way of banking where
PROVIDER
the lender and borrower sign a sales
contract for selling goods at a certain
profit margin by the lender. It has
become the keystone in Islamic banking
finance as it helps avoid riba or interest.
Contract

MURABAHA BANK’S ISLAMIC

CLIENT BANK
Cash Rent
Investment

BANK 110
CUSTOMER
5. Sukuk
Ordinarily, it involves the transfer of
the ownership or benefit/usufruct of a
100 Machine sale
tangible asset such as an aircraft from an
for immediate originator to an Special purpose vehicle
payement
(SPV) that issues sukuk representing
undivided ownership interests in such
GOOD an asset. The assets is then leased back
SUPPLIER to the originator by the SPV which acts
as lessor under a lease arrangement.
Diagram of a murabaha transaction Each sukuk holder is entitled to receive
the rentals generated under the lease
prorate to its ownership interest in the
underlying asset based on the sukuk
4. Leasing (Ijarah) held by it. The sukuk may resemble
In this type of financing arrangement, a Public Private Partnership (PPP)
the lessor (who must own the property) financing whereby investors finance the
leases the property to the lessee in assets, own them and then transfer them
exchange for a stream of rental and back to the government at maturity.
purchase payments, ending with the
transfer of property ownership to the
SELLER SERVICER PURCHASER
lessee.
Periodical
Sukuk Payments
Periodical
Proceeds Payments

ISSUER

INVESTORS
(Sukuk Holders)

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6. Takaful Insurance
Takaful, an Arabic word meaning Tax and Accounting treatment
“guaranteeing each other”, is the same
as insurance but approved under Islamic
of Islamic Finance products
jurisprudence or Sharia guidelines.
Accounting
Under the Accountants Act 2013, the
It represents the concept of insurance
Institute of Certified Public Accountants
based on mutual co-operation and
of Uganda (ICPAU) is mandated to issue
solidarity of people by participating in
and adopt internationally accepted
a takaful scheme.
accounting and auditing standards and
promote their usage in Uganda.
A takaful company does not have
policyholders. It has Contributors or
In August 2022, the ICPAU issued
Participants as they are participating
guidance on how financial institutions
jointly in a takaful fund for their mutual
dealing in Islamic finance products
benefit. They are owners of the fund and
should account for them.
the Company manages and operates
takaful fund on their behalf.
ICPAU guided that the primary difference
between financial reporting for Islamic
The company ensures that interests of
finance and that of conventional
the participants (the insured) are based
finance is not that of recognition and
on mutual co-operation and solidarity.
measurement, but merely, the extent
In the event a contributor suffers
of information that is needed to be
financial loss, he or she is paid an
provided to users. Therefore, in the
amount from takaful fund in accordance
absence of specific Shariah prohibition,
with the basis and underwriting
IFRS are suitable for Islamic finance.
principles of insurance. All the scientific
methods that are normally used in
insurance applications such as financial
Tax
and medical underwriting, mortality
The general understanding of the
and morbidity rates etc. are applied in
Islamic products is that they are “interest
takaful operations.
free.” Section 1(m) of the Financial
Institutions (Amendment) Act, 2016
In upholding the principles of co-
provides for islamic finance products
operation, participation in a takaful
such as ijara, musharaka, salam, wakala
system is deemed to be on a voluntary
and Murabaha.
basis.
It is often difficult to discuss taxation
without highlighting the basic tax
principles which include equity;
where taxes should equally burden
all individuals or entities in similar

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economic circumstances and neutrality
which means that taxes should not
favor any one group or sector over
another and should not be designed
to interfere-with or influence individual
decisions-making. These two canons
are important to consider when a new
product comes onto the market.
With the introduction of Islamic
finance/banking, there comes an issue
as to whether the taxation of these
products shall be equal to the taxation
of conventional banking products. The
laws have been amended align the
taxation of Islamic banking products to
those of conventional banking.
The law provides for a recharacterization
of arrangements under Islamic financial
business.
The URA Commissioner General was
granted powers to recharacterize an
arrangement under Islamic financial
business not provided for in the Act
to the equivalent arrangement under
conventional financial services to reflect
the equivalent economic substance
over form aimed at determining tax
liability.
Income Tax
The “interest” definition expanded to
allow the definition to include a share in
partnerships income derived in Islamic
Finance business, lease and premium
made or sale-based financing or lease-
based financing under Islamic finance.
Islamic Financial business has also been
defined under the Income Tax Act.
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The Income tax laws have also been
amended to provide for takaful
insurance. Non-recognition of gain or
loss is applicable to takaful participants.
The law has also modified the definition
of Partnership to include an equity or
partnership financing under islamic
Finance business.
Accrual basis accounting for diminishing
musharaka where the receivable
by a taxpayer when the taxpayer
becomes entitled to the installment
due in accordance with the partnership
agreement.
An amount of the portion of interest
of the person offering Islamic financial
business disposed-of, is payable when
the taxpayer becomes liable to pay the
installment due in accordance with the
partnership agreement.
Excise duty
Equivalent tax treatment of Islamic
financial business to conventional
financial services.
Excludes loans, or the equivalent
under Islamic banking-related charges
periodically charged by a financial
institution or micro finance deposit-
taking institution from a 15% excise
duty charge as an excisable service.
Value Added Tax
Goods supplied to a person offering
Islamic financial business for purposes
of sale-based financing to be treated
as successively supplied for successive
parts of the period of the agreement or
as determined by the law.
Rental agreement to include an
agreement for letting goods including
lease-based financing.
A credit is allowed for a taxable supply
to and import of goods by the person
offering Islamic financial business for
purposes of sale-based financing to the
taxable person.
Financial services exempt from VAT.
Stamp Duty
A manager of a takaful business is
required to file with the Commissioner
monthly returns of all sums received in
respect of contributions and stamp duty
on paid policies of takaful on behalf of
participants in each group of takaful
business.
Exclusion of instruments from duty
a. Agreement between a vendor or
borrower and a person licensed to
carry on Islamic financial business in
case of sale-based financing.
b. Articles of association of an SPV
incorporated for the purpose of an
Islamic bond.
c. Increase in nominal share capital
of an SPV incorporated for the
purposes of an Islamic bond.
d. Deed for establishment of SPV
as a partnership or trust for the
purposes of an Islamic bond.
e. Memorandum of Association of
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SPV incorporated for purposes of
an Islamic bond.
f. Partnership of SPV incorporated
for purposes of an Islamic bond.
g. Dissolution of a partnership of
SPV incorporated for purposes of
an Islamic bond.
h. Instrument of settlement from a
person licensed to carry on Islamic
financial business to a customer
under equity or partnership
financing.
i. Transfer of an asset or land from
the vendor to a person licensed to
carry on Islamic financial business
or a borrower in case of sale- based
financing, lease-based agreement
or currency exchange agreement
for purposes of facilitating Islamic
financial business.
j. Transfer of an asset from SPV for
the purpose of an Islamic bond to a
beneficiary in the case of sale-based
financing or lease-based agreement
for purposes of facilitating Islamic
financial business.
TRANSACTIONS IN ISLAMIC
LAW
The process of integration of Islamic
law into the present legal system for the
greater awareness and understanding
of the Islamic law itself is manifest
amongst legislators, judges, lawyers and
those involved in the legal discipline.
The Islamic law of transactions deals
with various kinds of transactions which
carry with them legal duties undertaken
by persons in relation to one with
another. It is a branch of Islamic law of
practical application regulating various
transactions including sales, leases,
hirings, carriage, gifts, services and
many others.
Islamic Sharia law, the word
‘aqd’(contract) in Islamic jurisprudential
usage means an engagement and
agreement between two persons in
a legally acceptable, impactful and
binding manner.
There are two pillars (rukn or support) of
a contract in shariah .
These are ijab (positive proposal) and
Qabul( acceptance). And a contract
stands on them and its impact does not
show except with reference to them.
Other conditions which are necessary
for a contract to be legally acceptable
and impactful are;-
a)The exsistence of two properly
and aptly qualified contractors
b)A format , and
c)A place of reference or subject
matter
The parties
Aptitude(Ahliyya) in Islamic shariah is
a condition of a valid contract that the
parties possess capacity and according
to Islamic jurisprudence is a condition
which makes a person qualified for
acquiring rights and undertakings
duties and responsibilities . People are
of three categories;
a) People with capacity
b) People without capacity
c) People with deficient capacity.
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The Format (sigha)
Means the utterances expressing the
will of the parties, the purpose of the
contract and bringing it into existence
after it had been a hidden and unknown
thing or intention. A contract can be
concluded in writing if the writing is
clear, readable and understandable.
Subject Matter of a contract in Islamic
Shariah
A contract has to have a place of
reference (mahal al ‘aqd).
The place of reference in a contract is
its subject matter which is the place
of application of its rules and which
does not go against its purpose. The
three conditions to be taken into
consideration according to Islamic
jurisprudence for the subject of the
contract to be correct are;
a) The subject matter of the contract
should in principle to be something
legal
b) The subject of a contract has to
be specified and defined in a way
to prevent ambiguity.
c) The subject of the contract has to
be existent.
Conditions for a valid contract include:
a) Conditions of en’eqad
(confirmation)
b) Conditions of nafath(execution)
c) Conditions of lozum(obligation) ,
and
d) Conditions of sehah(correctness)
The general conditions which have
to be met in each and every contract
include;-
 a) The exsistence of contracting
parties with capacity, format and
the subject in addition to secondary
related conditions.
Dissolution of a contract (Inhilal-
Faskh)
Islamic Shariah law views a contract as a
commitment which should be adhered
to. However, it is possible to dissolve a
contract on the following grounds:-
a)Non fulfilment of commitment by
one of the parties
b) Agreement on dissolution of
contract
c)Automatic dissolution due to
it having been impossible to put
it into execution due to external
reasons outside the control of the
parties
d)Plea of non-fulfilment of the
contract
e) Contract of mutual commitment
and reimbursement.
THE PARTNERSHIP IN ISLAMIC
JURISPRUDENCE.
(Aqd Al-Sharikah)
The Arabic word Sharekah (partnership
or company) means mixing two shares in
a way to make them indistinguishable.
Scholars have defined a partnership
as a contract between two partners on
both capital and profit.
Partnerships are basically of two kinds:-
A)partnership of ownership means that
the two people share the ownership
of a property either by their own
choice or without their own choice eg
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by inheriting. There are four kinds of
partnership:
a)sharekat mwal(financial company)
b) Sharekat wojuh(partnership with
eminent people
c)Sharekat sana;I (company of
workmanship) and,
d)Sharekat modarabah or qirad(
Capital-labour patnerships)
The conditions of a partnership contract
are two kinds;
a) General conditions for all kinds
of partnership
b) Special conditions applicable
to certain companies but not others.
The kind of partnerships can include;-
-Financial partnerships
-Unequal-shares partnership.
-Equal shares partnership.
-Partnerships with wojuh
(eminent people)
-Partnership of professions
(Sharekat sana’i
-Capital - Labour partnerships
( mudharabah)
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 PARTNERS

Sophia Kigozi Mable Kisaka

Kenneth Makanga John Jet Tusabe

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 PARTNERS

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Nurturing Growth, Offering Peace Of Mind

Ian Mutibwa

CONTRIBUTORS

Edwin Echiba Racheal Kembabazi

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