Islamic banking potential stressed as awareness remains a challenge

Banking experts say there is still huge untapped potential regarding the service, which can be used as a tool to bridge the gap in financial inclusion in Tanzania.

They are, however, optimistic that there will be a much more deliberate effort by the government to engage stakeholders in the Islamic finance industry to develop the regulations needed to enable the growth of the sector. Tanzania has five banks that so far provide Islamic banking services, including one fully fledged Islamic bank and four conventional banks that have a window for Islamic banking services.

Speaking to The Citizen yesterday, KCB Bank head of Islamic Banking, Mr Amour Muro, said that while the overall trend of Sharia-based banking and finance in Tanzania remains positive, there are several challenges that need to be addressed to truly unlock the industry’s potential.

“Public awareness of how Islamic banking and finance operate remains very low, particularly among religious leaders within the Muslim community, with the majority having limited knowledge concerning Fiqh Muamalat, which refers to Islamic rules on financial, business, and economic activities,” he said.

Mr Muro added that such a tendency undermines efforts made by Islamic finance practitioners to gain acceptance from potential consumers who depend on the opinions of religious leaders to practice their faith.

“Concerted efforts by Islamic finance stakeholders are required to educate religious leaders and the public to achieve sustainable growth for the industry,” he said.

The legal and regulatory framework to create an enabling environment for Islamic banking and finance still lags behind the tremendous progress made so far in the industry, according to experts.

While the government continues to have a positive, open dialogue with experts, which has played an important role in the achievements so far, it has now become imperative to have clear policy frameworks that can guide the future of the industry amidst the growing demand, according to the experts.

“We expect that more players will consider offering these services as demand for them grows in all areas of the economy, including banking, insurance, and capital markets, and more products will be available to the public in both traditional and digital banking channels,” said Mr Muro. A financial and economic analyst from Ardhi University, Mr Rashid Aziz, said the concept of Islamic banking is asset-based finance, in which a bank buys the equipment the customer wants and hands it over as an exchange of goods for money.

“It is still at an infant stage in Tanzania compared to conventional banking. It needs resources, professional expertise, and specific regulation, including Islamic banking regulatory regimes in the whole financial ecosystem,” he said.

Mr Aziz said there are a number of opportunities for partnerships with Islamic banks for investing in various projects and sharing returns, depending on the agreement.

“This is an opportunity for those who find it difficult to manage cash,” he said, adding that the banks also give customers a return on deposits.

According to him, awareness is needed to target the whole banking segment, not only Muslims, but also to help clear misconceptions.

There is a need to increase the number of professionals and improve the regulatory environment to accommodate the needs of the industry.

On the other hand, the People’s Bank of Zanzibar Limited (PBZ) marketing manager, Mr Seif Suleiman, said the service provides a number of opportunities for both individuals and the nation.

“This service allows a bank to buy something for a customer, depending on agreement, instead of giving cash,” he said.

He added that awareness is needed to address misconceptions.

He said that PBZ started the service in 2010, and the feedback is positive, although it has gone through a rough road.

Islamic banking is part of the broader finance system, which follows the principles of the Islamic region in transactions.

Some other Islamic finance services available in Tanzania include the Islamic Insurance (Takaful) and Islamic Bond (Sukuk) which are gaining momentum locally.

Islamic banking is the provision of financial services based on the ethical principles of Shari’ah. Shari’ah refers to the Islamic principles and jurisprudence that govern the social, political, and economic relationships and actions of Muslims and Islamic institutions.

Islamic banking generally results in the Islamic financial service provider becoming a co-owner of the underlying assets, thereby assuming some risks and sharing in losses and profits.

Investment in illicit, also known as haram, activities such as alcohol or gambling is prohibited under Islamic banking. Other prohibitions include riba (interest), which are transactions on a risk-free basis such as conventional loans and bonds, and gharar, which are excessively speculative transactions such as future sales or swaps.

In essence, Islamic principles prohibit the collection and utilisation of interest for business purposes.

The main concern with respect to Islamic banking in Tanzania is that there is currently no specific legal framework to cater for Islamic banking as well as the resolution of legal disputes arising from Islamic banking.