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Law Society raises concerns over Islamic Banking

Law Society raises concerns over Islamic Banking

Lawyer Cephas Birungyi (R) appearing before the finance committee at Parliament House on Monday. Parliament Photo

By Our Reporter

Kampala: The Uganda Law Society has called for careful consideration and further deliberation before enacting laws related to Islamic Banking in Uganda.

Expressing concerns over potential ramifications, the society emphasised the importance of addressing various legal and practical challenges associated with the proposed legislation.

During an appearance before Parliament’s Committee on Finance, Planning and Economic Development, Cephas Birungyi, a Partner and Team Leader at Birungyi, Barata & Associates and a representative of the Uganda Law Society, underscored the need for a cautious approach in implementing Islamic Banking.

Birungyi, who appeared before committee on Monday, 26 June 2023, highlighted potential risks and the necessity for comprehensive understanding and preparation before introducing new tax bills.

“I have an understanding that the staff of URA [Uganda Revenue Authority] have not been trained in Sharia Law and Sharia law taxation, and players like us who practice tax have not had time with this. Remember the portals of URA for Electronic tax are set in certain terms, so it means you are going to change that software to conform to those provisions,” Birungyi said.

He expressed his belief that implementing the legislation without proper software development would be premature and posed implementation challenges.

“How are you going to identify those going by Sharia Law and those who are not? I think it should take some time, one year is not too much; we have had all the years without it. Sharia Law also took some time to develop, and people need proper training,” he added.

The society further recommended thorough examination and separate legislation to govern Islamic Banking, ensuring clear delineation from conventional financial regulations.

The tax expert further raised concerns about a proposed provision in Section 75A of the principal Act, which allows the Commissioner General of the Uganda Revenue Authority to re-characterise arrangements under Islamic financial business for the purpose of reflecting equivalent economic substance under conventional financial services.

He argued that incorporating Islamic Banking into the tax system would create a situation where the interpretation of not only tax but also religion becomes necessary.

Birungyi highlighted the challenges of implementing Sharia Law alongside domestic law, emphasising the need to apply solid Sharia principles in re-characterising tax laws and the complexity of extending it to financial institutions, ultimately complicating compliance and introducing a separate regime beyond the scope of URA and cautioned against burdening the tax body with the responsibility of interpreting religious matters, potentially deviating from its core tax-related mandate.

He also argued that incorporating Islamic Banking into the existing tax system may lead to complications in the financial sector. He proposed the establishment of a distinct tax regime dedicated to Sharia Law to ensure clarity and avoid confusion, drawing a parallel with other specialised tax regimes such as those governing mining or insurance.

While recognising the potential economic benefits of Islamic Banking, Hon. Amos Kakunda, Chairperson of the finance committee, emphasised the importance of striking a balance between providing new financing options and thoroughly assessing the implications of such legislation.

Hon. Gerald Nangoli, the Elgon County representative, expressed concern over the limited time given to the finance committee to process the bills, highlighting the difficulty of explaining the legislation to the public without adequate consultation time.

If passed into law, Uganda will join other African countries that have adopted Islamic banking but are non-Islamic states, including South Africa, Senegal, Botswana, Zambia, Eritrea, Mozambique, Kenya, Tanzania, and Rwanda.

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