Islamic finance: Pioneers see hope despite legal challenges

Thursday October 07 2021
Islamic PIC

CIFCA chairperson Aref Nahdi speaks during a past event. PHOTO | FILE

By The Citizen Reporter

Dar es Salaam. From just a banking window to a full-fledged bank and, now, bond, Islamic financing is growing in Tanzania - with pioneers seeing a bright future despite challenges.

The Sharia-compliant system started in 2008 when KCB Bank introduced an Islamic Banking Window. But, today, there is a full-fledged Islamic Bank (Amana Bank), while some conventional banks like KCB Bank, People’s Bank of Zanzibar (PBZ) and the National Bank of Commerce (NBC) offer Islamic banking services.

More banks are expected to rollout the services.

The Islamic financial system is based in Islamic principles of financial transactions entrenched in commercial dealings that focus on human relations.

Among the principles are prohibition of interest, excessive speculations and uncertainties, gambling, lack of transparency, dealings in impermissible and unfair distribution of wealth.

Pioneers say the future is bright for the Islamic finance in general after issuance of the first ever Islamic bond called Sukuk.

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“Islamic banking and finance is set to grow in Tanzania just as the minister of Finance and Planning, Dr Mwigulu Nchemba, said during the 7th Islamic Finance Summit held in Dar es Salaam earlier this year that the government of Tanzania would like to see our country becoming the hub for Islamic banking and finance for east African countries,” said chairperson of the Centre for Islamic Finance, Compliance and Advice (CIFCA), Mr Aref Nahdi.

The non-profit organization fosters Islamic Banking and Finance in Tanzania and helps stakeholders in the industry to practice Sharia-compliant banking and finance.

CIFCA works with the government regulators such as the Bank of Tanzania (BoT) and Tanzania Insurance Regulatory Authority (Tira) as well as institutions offering Islamic Banking and Finance, academic institutions and the media to raise public awareness and create institutional culture for Islamic Banking and Finance in the country.

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 resolution of legal disputes arising from Islamic banking.

“This could be seen as hindering the progress of Islamic banking in Tanzania.

When the legal framework for this is set up, we anticipate an increase in Islamic banking customers,” said Amreen Ayub and Tenda Msinjili of a global law firm Clyde & Co in an article recently published on the company’s website.

“Islamic banking and finance in our country started without any financial act amendment, regulation or even guidelines. Nothing has changed so far. Therefore, the biggest challenges to Islamic banking and finance in Tanzania, in my view, is lack of financial act amendment to carter for these services or regulations as it has been done in other jurisdictions,” said Mr Nahdi.

“We believe there is a brighter future of Islamic banking and finance in Tanzania. What is require is a political commitment and regulatory mandate to make sure there are financial regulations in place for Islamic banking and finance,” he added.

The government is preparing the regulatory framework for the Islamic Banking and Dr Nchemba was quoted as telling a gathering of the industry stakeholders that the central bank will fast-track regulations to support Islamic banking in the country.

He also told stakeholders dealing with the industry to make sure that they abide by international regulatory, governance and supervisory standards.

Apart from increasing financial inclusion in a country, Islamic Banking and Finance can also attract direct foreign investment from various countries which like to invest in Sharia compliant manner.

Since its inception in 2008, Islamic banking and finance in Tanzania has seen a diversification from banking services into Islamic microfinance, Halal certification and recently Islamic bond called Sukuk.

The maiden Sukuk in Tanzania was issued in August and was oversubscribed by 36 percent, showing an apetite for the bonds.

Imaan Finance Limited which issued the bond to grow its loan portfolio under sharia principles, sought to collect Sh2 billion, but ended up receiving a total of Sh2.72 billion in bids. With a green shoe option of Sh1 billion, the company accepted all the amount as per the agreement.