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Introduce Islamic banking to curb exploitation


Article Summary: Islamic banks do not give loans to customers based on pre-determined fixed interest rates.  Under Islamic banking both profits and losses are shared by both parties. 

Author Biography: Gen. Moses Ali is third deputy prime minister of Uganda and deputy leader of government business in Parliament

Today is a great day to the Muslim brothers and sisters, marking the successful completion of the holy month of Ramadthan and the celebration of Eid El-Fitri. 

It is a day when the Bank of Uganda Muslim Community joins the entire world to underscore the importance of the holy month of Ramadthan; and, I feel greatly privileged to be associated with the Bank of Uganda.  This is the first time I am celebrating Eid El-Fitri with the Bank of Uganda Community.

As most of you know, my close association with the BOU started in 1977 when, at the age of 38, I was appointed Minister of Finance.  Since then, I have closely followed the progress of this noble institution and I must say that it has recorded many outstanding achievements mostly over the last 10 years. 

On this note, ladies and gentlemen, allow me to appreciate the immediate-previous Governor, Deputy Governor, Board of Directors, Management and staff of BOU for all its accomplishments over the last 10 years.

Perhaps the most evident accomplishment of BOU in the recent past is the demonstrated zeal and ability to control inflation.  Last October when the inflation rate went over 30 percent, many critics were up in arms against the Bank.  Matters were not helped by the introduction of a new monetary policy framework, which uses the Central Bank Rate (CBR) as the policy rate. 

But in less than one year, core inflation has fallen from over 30 percent to 11.5 percent.  The CBR has been significantly reduced over the past 12 months as well.  This is commendable and we believe that by the end of this year inflation will be in single-digit. 

However, it is a pity that despite the fall in inflation rates and the CBR, commercial banks lending rates are still high.  Attempts to advise commercial banks to reduce interest rates so as to make loans more accessible seem to be of no avail.  Therefore, I request the Governor, through the Uganda Bankers’ Association, to use the concept of moral suasion to ensure that the reduction in CBR is reflected in the commercial banks’ lending rates.  If this is achieved, it will definitely spur economic growth.

The Bank should introduce other forms of banking systems that will entail justice and fairness.  BOU should play a leading and an encouraging role in the introduction of Islamic Banking, which is a banking system that has been embraced by both Muslims and non-Muslims because of its unique characteristics. 

As one scholar has noted, in contrast with conventional finance methods, Islamic financing is not centered only on credit worthiness and ability to repay the loans and interest; instead the worthiness and profitability of a project are the most important criteria of Islamic financing while the ability to repay the loan is sub-segmented under profitability.

In my opinion, perhaps the most crucial feature that forms the basis for the development of Islamic banks, is the relationship with depositors. The banks do not give loans to customers based on pre-determined fixed interest rates.  They consider each case individually and invest depositors’ money in projects that give significantly high return on investments.  I need not to emphasize that under Islamic banking both profits and losses are shared by both parties. 

I am confident that under the leadership of Professor Emmanuel Tumusiime-Mutebile, the BOU is up to the task of fully executing its mandate of ensuring price stability and a sound financial system.  Last year’s Holy Month was observed under a period of heightened economic uncertainty because inflation was at 21.4 percent.

But this year, the Holy Month has been observed amidst hope.  I believe the economic situation will get better with time, especially if we do not experience any further external shocks.

In closing, let me wish you all Happy Celebrations.

Asalaam Aleikum

Eid Mubarak, Eid Mubarak, Eid Mubarak

Gen. Ali delivered this speech Friday 7, September 2012, on the occasion of Eid-El-Fitri celebrations at the Bank of Uganda.