Prof. Emmanuel Tumusiime-Mutebile, Governor, Bank of Uganda has said Ugandans will soon enjoy the advantages of Islamic Banking, noting that the regulations have been approved and will soon be gazetted.
Mutebile made the remarks on January 31, 2018 at Uganda Bankers’ Association (UBA) Informal Dinner held in Kampala.
Islamic banking refers to a system of banking or banking activity that is consistent with the principles of the Shari’ah (Islamic rulings) and its practical application through the development of Islamic economics. The principles which emphasise moral and ethical values in all dealings have wide universal appeal. Shari’ah prohibits the payment or acceptance of interest charges (riba) for the lending and accepting of money, as well as carrying out trade and other activities that provide goods or services considered contrary to its principles.
Below are Mutebile’s remarks;
My remarks will focus on two issues: first the progress made in implementing Agent Banking, Bancassurance and Islamic Banking introduced in the Financial Institutions (Amendment) Act, 2016 and second on the banking sector’s preparedness for the implementation of the International Financial Reporting Standard (IFRS) 9.
The Financial Institutions Amendment Act, 2016 paved way for the introduction of Agent Banking, Islamic Banking and Bancassurance in Uganda. The Bank of Uganda (BoU) and the Insurance Regulatory Authority (IRA) drafted the regulations to guide the rollout of Agent Banking and Bancassurance respectively, which have since been published in the Uganda Gazette.
Following the gazetting of the regulations, several banks have obtained approval to conduct agent banking from the BoU, and approval and licenses to conduct Bancassurance from the BoU and the Insurance Regulatory Authority respectively. We believe this will enhance the population’s access to financial services in line with the objectives of the National Financial Inclusion Strategy (NFIS).
The Islamic Banking Regulations, drafted by the BoU, have been approved by the Ministry of Finance Planning and Economic Development and the Solicitor General and will soon be gazetted. The BoU will be open for applications from financial institutions to offer Islamic financial products once the regulations have been gazetted.
I now want to discuss the banking sectors’ preparedness in the implementation of IFRS 9.
The International Accounting Standards Board issued a new accounting standard on financial instruments, the International Financial Reporting Standard (IFRS) 9, which came into effect on 1st January 2018. This new standard replaced the International Accounting Standard (IAS) 39. One of the fundamental changes that IFRS 9 introduces is the concept of Expected Credit Loss (ECL) provisioning, which replaces the incurred losses model under IAS 39. The ECL model will materially change the way in which entities, and in particular banks, are required to approach, and account for, impairments for credit losses.
One of the main motivations for this change in provisioning methodology was the experience of, and lessons learned from, the global financial crisis of 2007-09. The Bank for International Settlements attributed some of the blame for the financial crisis on the delayed recognition of credit losses by banks and other lenders, and the application of the prevailing standards at the time was seen as having prevented banks from provisioning adequately for the credit losses that they were likely to incur.
These delays resulted in the recognition of credit losses that were widely regarded as ‘too little, too late’, and gave rise to questions of pro-cyclicality by spurring excessive lending during the boom and forcing a bust in the subsequent period.
The development of the ECL accounting framework is in line with the call by the G20 leaders in April 2009 to strengthen accounting recognition of loan loss provisions by incorporating a broader range of credit information. One of the consequences of this new framework is that the loss provisions are raised earlier and take into account not only past and present information but also look into the future. The International Accounting Standards Board envisages that the new standard will result in a more robust financial system that is more resilient and in a better position to withstand shocks.
The BoU issued a Circular to all supervised financial institutions (SFIs) on July 12, 2017 requiring them to submit reports on their preparedness to implement IFRS 9 as well as the impact of the standard on Capital Adequacy. The reports submitted indicated that SFIs were at varying stages of preparedness with regard to putting in place the requisite IFRS 9 Governance Frameworks, Policies, Procedures and Information System capabilities. The BoU will continue to assess the banks’ IFRS 9 implementation programs.