What to expect in Islamic banking as BoT introduces new regulations

Speaking on the intent behind the framework, central bank’s Governor Emmanuel Tutuba said the regulations are designed to expand financial access to people who have historically stayed outside the banking system because of faith-based concerns.

“The objective is to widen the space and accommodate stakeholders who could not access banking services due to their beliefs. Shari’ah-compliant banking follows Islamic principles and offers an opportunity for many more citizens to participate in the financial system,” he said.

Mr Tutuba noted that before the new framework, banks relied on regulatory waivers to offer non-interest products, a temporary arrangement that had limited scale and consistency.

“In the past, we issued waivers for institutions to offer non-interest products. That is how the Zanzibar government was able to issue Sukuk bonds. Now we are moving away from waivers and providing a proper legal framework,” he said.

According to the governor, the regulations create room for banks to diversify their offerings while stimulating savings, investment and capital market participation.

“This is an opportunity for banks to provide alternative products to customers and to attract more people to deposit, buy shares and invest in instruments such as Sukuk, or even borrow in a Shari’ah-compliant way,” he added.

Under the new rules, any conventional bank wishing to establish a non-interest banking window must submit a detailed feasibility study report to the Bank of Tanzania, including a three-year balance sheet and income forecast, a list of proposed Shari’ah-compliant products, a dedicated organizational structure and a written commitment to fully segregate non-interest funds from conventional banking operations .

Banks are also required to set up a specialized non-interest banking unit at head office level to oversee compliance, coordinate Shari’ah advisory services and ensure that funds are invested strictly in accordance with Islamic commercial jurisprudence.

Perhaps the most transformative provision is the mandatory establishment of a Shari’ah Advisory Committee for every non-interest bank or banking window.

The committee, composed of at least three qualified experts, will approve products, review compliance audits and oversee the treatment and disposal of non-permissible income.

The regulations also introduce rules on how profits from Shari’ah-compliant investments are shared with depositors, requiring banks to set aside reserves to cushion potential losses arising from profit-sharing projects.

Any income found to be non-compliant with Shari’ah must be isolated in a separate account and donated to registered charitable organisations under strict conditions, and cannot be treated as part of a bank’s corporate social responsibility .

Head of Islamic Banking at KCB Bank Tanzania Mr Amour Muro, said the new framework formalizes practices that banks have already been implementing in the market.

“What the Bank of Tanzania has done is to put into law what has effectively been happening in practice. The regulations have touched the important basics, governance, product approval, risk management and disclosures which are critical for the sustainable growth of Islamic banking,” he said.

Mr Muro added that the framework will boost investor confidence by signalling that Tanzania is serious about building a credible Islamic finance industry.

“It sends a strong message to investors that the country is committed to developing this space in an orderly and transparent way. That confidence is essential if we want to attract both local and international capital,” he said.

He also stressed that the new rules will support inclusive finance by enabling banks to reach customers who have remained outside the formal system because of religious considerations.

“We still have a long way to go, and as implementation progresses there will be areas that require refinement. But we are optimistic that as we move forward, many of the proposals we have submitted to the regulator will be taken on board and the framework will continue to improve,” he said.

Islamic finance consultant Abdallah Ndele said the regulations mark a turning point for Tanzania’s financial system.

“The regulation is one of the steps in the right direction. It is a good and timely response by the central bank,” he said, adding that while refinements may come later, the move deserves strong praise.

“Adjustments will continue as we move forward, but this is a commendable step by the Bank of Tanzania,” Mr Ndele said.

He pointed out that the new framework aligns with recent reforms across the wider financial ecosystem, including the Capital Markets and Securities (Corporate and Subnational Sukuk Bonds) Guidelines, 2023 issued by the Capital Markets and Securities Authority, and the Takaful Operational Guidelines, 2022 released by the Tanzania Insurance Regulatory Authority (TIRA).

“If you look at these regulations together, you can see that Tanzania is taking concrete steps to build a complete Islamic finance ecosystem,” he said.