Why Uganda’s Islamic Banking needs stronger governance

Islamic banking is a growing part of the global financial system, but integrating it into conventional frameworks remains a complex challenge—especially for regulators and financiers.

While traditional banks operate on a creditor-debtor model, Islamic banks follow principles rooted in Shari’ah law, emphasizing shared risk and reward. This fundamental difference often makes applying global banking rules, such as those from the Basel Committee on Banking Supervision, feel like forcing a square peg into a round hole.

The tension is even more pronounced in Uganda, where Islamic banks must meet not only conventional banking laws but also religious compliance standards. These dual obligations create a tough regulatory environment for Islamic finance to thrive.

Countries like the US, UK, and South Africa have integrated Islamic banking into their systems—offering Shari’ah-compliant products through global giants like HSBC and Citibank. For them, it’s not just about faith but financial sense. Islamic banking’s foundation on fairness, accountability, and social responsibility offers the potential for more ethical and stable financial systems.

In Uganda, the Economic Policy Research Centre (EPRC) sees particular potential in agriculture. While commercial banks have long shied away from financing the sector—loans to agriculture grew from UGX 291 billion in 2009 to UGX 876 billion in 2014, largely due to the Agricultural Credit Facility—the momentum slowed after 2020. By 2023, lending had dropped from UGX 852 billion to UGX 840 billion. With rising non-performing loans in other sectors, banks became risk-averse, leaving microfinance institutions to fill the gap with limited resources.

According to Lujja Sulaiman, a veteran in Islamic finance, this is where Shari’ah-compliant banking can make a difference. “Islamic banking offers patient capital that can support farmers from seed to harvest. Its risk-sharing approach aligns naturally with long-term agricultural development,” he says.

Uganda has made bold moves to embrace Islamic banking, starting with the Financial Institutions (Amendment) Act of 2016 and the subsequent 2018 regulations. These legal changes allowed for licensing and operations of Islamic financial institutions. But the system hit a snag when the Bank of Uganda raised concerns about a potential conflict of interest—the same institution overseeing and approving Islamic products. Parliament responded in 2023 by removing the provision for a Central Shari’ah Advisory Council at BoU and shifting compliance oversight to individual bank-level Shari’ah boards.

To level the playing field further, Uganda also reformed tax laws—on income tax, VAT, stamp duty, and excise duty—to accommodate Islamic financial products. These reforms paved the way for the licensing of Salaam Bank in September 2023 after its acquisition of Top Finance Bank. Other applications are now under review.

At the international level, Uganda is also tapping into support. During the 2024 Islamic Development Bank annual meeting in Riyadh, Uganda secured a $295 million agreement for road upgrades and for strengthening Islamic banking regulations and access to Shari’ah-compliant finance.

“This is especially critical for agriculture,” Lujja says. “With strong Shari’ah governance, Islamic capital can drive long-term farm productivity.”

However, a regulatory vacuum remains. The 2023 reforms transferred Shari’ah governance to individual institutions, but this fragmented approach leaves no central authority to ensure consistency or resolve disputes. Shari’ah law, shaped by diverse interpretations across cultures and schools of thought, demands harmonization. Without a mechanism to align the rulings of various Shari’ah advisory boards, Uganda risks a fragmented and incoherent Islamic finance sector.

“There’s a credibility issue when products mimic conventional finance models but are marketed as Shari’ah-compliant,” Lujja warns.

He and other experts now argue for deeper reforms. Uganda must move beyond a hands-off model where each bank governs itself on religious compliance. Government should play a mentoring—not meddling—role, by recruiting or training experts in Islamic finance to guide institutions and bolster investor confidence.

One of the most urgent recommendations is the creation of a National Shari’ah Advisory Council (NSAC)—a central authority akin to a Supreme Court of Islamic finance. This body would set national standards, resolve disputes, and minimize inconsistencies (what insiders call “Shari’ah arbitrage”) between banks. Ideally, the NSAC could sit under the Ministry of Finance or Uganda Muslim Supreme Council.

Grassroots Islamic finance also needs attention. Islamic Saccos and microfinance institutions show promise, but remain stuck in a legal grey zone. Conflicting laws—like the Co-operative Societies Act and the Tier 4 Microfinance Act—do not clearly define how Shari’ah-compliant Saccos should operate. To fix this, Lujja suggests establishing a dedicated Islamic Microfinance Directorate. This body would professionalize Islamic lending in rural areas, protect communities from fraudulent schemes, and ensure Shari’ah isn’t just a branding term.

Another flashpoint is governance within banks. Currently, tensions can arise between boards of directors and Shari’ah committees over who has final say. “Let’s be clear: Shari’ah committees ensure religious compliance. Boards handle business strategy. No overlap, no drama—it’s corporate governance 101,” says Lujja.

Finally, Uganda doesn’t need to build everything from scratch. Countries like Malaysia, the UK, and Indonesia have developed robust Islamic finance systems. Uganda can leapfrog by adopting international best practices and regulatory templates. This would reduce legal uncertainty and speed up market growth.

In summary, Uganda’s embrace of Islamic banking is a bold and timely move—but without targeted reforms and strong governance, its potential will remain underutilized. The time is ripe to align ambition with regulation and turn ethical finance into a national asset.