By Dayo Yussuf
The concept of "Islamic banking", a term denoting Sharia-compliant institutional practices in the world of finance, has been knocking on the doors of African countries in recent years.
In Uganda, the National Bank announced earlier this month that it had issued the country's first licence for Islamic banking services.
This immediately sparked a debate, especially on social networks, between those advocating a switch to banking practices that conform to Islamic Law and others who believe in the importance of the conventional financial order.
So, what makes Islamic banking, or banks that provide services regulated by Islamic values or laws, different? The primary objective is to service customers at the bare minimum establishment cost, which entails doing away with interest on capital.
Not zero-cost
For six years, Mohammed tried various services of the Islamic bank in which he holds an account, only to be surprised by having to pay some charges on borrowings.
"They say that they don't have the concept of 'interest' – that if you take a loan, you won't be charged interest," he tells TRT Afrika.
"But if you read between the numbers, you will find that there is a fee they charge for the service, which they call profit.’’
Mohammed is among many customers seeking a way out of the labyrinthine maze of banking service charges.
People worldwide have lost faith in banks, which are often seen as part of a profit-driven financial caucus designed to squeeze profits out of them by any means.
Experts warn that even banks built on the foundation of Islamic values shouldn't be expected to be like charitable institutions. Rather than being cheaper, the main goal is to be "halal", which is acceptable under Islamic law.
"People go for these banking services expecting they won't be charged interest or any other fee, which in their eyes are not halal in terms of Islamic values," says Mohammed Issa, an economist in Tanzania.
''These customers want cheaper or free services and believe bank deductions won't exist. This view needs to be corrected. Banking services are not for charity." Islamic financial principles prohibit charging and receiving interest in the conventional sense.
Another caveat is clarifying what is entered into the contract between the bank and its customer. It strictly prohibits any transaction that doesn't comply with Islamic laws and principles, including in the investment domain.
Global Acceptance
Islamic banking services are officially recognised and approved by major institutions such as the World Bank, the International Monetary Fund, the United Nations Development Fund, and the European Union.
Many countries have ratified this system, which isn't meant only for Muslims. Contrary to uninformed opinion, Islamic banking as a service is open to anyone who prefers it.
"You will notice that countries such as the UK have made greater strides in providing Islamic banking services than any other nation outside the Arab world," Issa tells TRT Afrika.
"In 2009, the late Pope Benedict XVI encouraged banks to use Islamic banking services so that they could regain the trust of their customers, which they lost primarily due to charging excessive interest on loans," the analyst points out.
Issa also mentions Malaysia, where 30% of the customers of Islamic banks until last year were non-Muslims. The pattern is similar in South Africa, Tanzania, Kenya, and Uganda.
"Islamic banking services offer certainty. When you agree with the bank that the profit charged will be a certain percentage, it never changes – even after five, 10 or 20 years," explains Issa.
Operating mechanism
For the uninitiated, the element of surprise in Islamic banking is how such institutions stay afloat.
Profits, as opposed to interest, come through a fee levied on customers for services, taking into account the financial changes that could happen in a country at a given time, such as the currency's value and other factors.
In some places, the banks also invest in joint businesses with customers and share the profits or losses based on an agreed percentage.
Issa points out that almost all countries north of the Sahara have an Islamic banking system. "Nigeria, Senegal, Mali, Gambia and Niger also have this system. South of the Sahara Desert, Sudan was the first."
East Africa has also warmed up to the concept, starting with Kenya in 2005, followed by Tanzania, Burundi, Rwanda, and now Uganda. Zambia and Zimbabwe have shown interest in trying out the system lately, and more countries may join.
The introduction of Islamic bonds, which require certain associated financial services to be implemented, has added to the growing acceptance.
Although Islamic banking is spreading rapidly, it is still far from being a parallel system.
Experts say that the big challenge is its implementation in non-Islamic countries, mainly because of conflicting principles about how the financial system should function.
"There needs to be a major change in financial policies and changes in financial regulations and even tax laws so that these services can be used," says Issa.
In line with this requirement, Uganda's latest move to amend its financial law was geared towards removing the obstacles that stood in the way of implementing Islamic banking services.
