By Kisilwa, Zaharani1

A Dissertation Submitted to the Faculty of Law in Partial Fulfillment of the Requirements for the Award of the Degree of Master of Laws (LL.M (CL) of Mzumbe University, 2012


The author of this work is an Assistant Lecturer at the Institute of Accountancy Arusha (IAA), Advocate of the High Court of Tanzania and courts subordinate thereto, with the exception of the primary courts, and a founder of Legademic Company Ltd and a founding partner at the Law’s Empire Tanzania (Letan Advocates) both based in Arusha Tanzania. He has a master of commercial law and lectures on Commercial, Business, procurement and Banking laws. 1

CERTIFICATION We, the undersigned, do hereby certify that we have read and hereby recommend for acceptance by the Mzumbe University, a dissertation entitled: The Emergence of Islamic Banking In Tanzania: A Critical Analysis of Its Impacts to the Subsisting Regulatory and Supervisory Regime, the case of the B.O.T, in partial fulfilment of the requirements for award of the degree of Master of Laws in Commercial Law (LL.M (CL)) of Mzumbe University.


___________________________ Major Supervisor


___________________________ Internal Examiner

Accepted for the Board of

…………………… Signature _______________________ DEAN FACULTY OF LAW


DECLARATION AND COPYRIGHT I, Zaharani Kisilwa, do hereby declare that this dissertation is my own original work. That to the best of my knowledge and understanding it does not contain any material previously published or written by another academician except only to the extent where due references are shown herein, as such all sources used or referred to have been recognized; and lastlty that it has not been previously submitted in full or in partial fulfillment of the requirements for an equivalent or higher qualification at any other recognized education institution.

Signature: ……………………………………….



© This dissertation is a copyright material protected under the Berne Convention, the Copyright Act 1999 and other international and national enactments, in that behalf, on intellectual property. It may not be reproduced by any means in full or in part, except for short extracts in fair dealings, for research or private study, critical scholarly review or discourse with an acknowledgement, without the written permission of Mzumbe University, on behalf of the author.


B Bank. Further.B. Omar Shareef. help and encouragement. Head Islamic Banking Department at the N. who established islamic banking at the Stanbic Bank Arusha branch from whom 4 . Modesta. islamic banking scholar and lastly. perseverance where researcher went wrong and encouragement during the course of his research efforts charted a worthwhile directional course along which this study was undertaken. Arusha branch who connected him to Mr. many individuals played a role to ensure its success. IAA first for granting him a paid leave to pursue his LLM (C. Mr. Yassir Massoud.O.T. Dean Faculty of Law Mzumbe University. Lecturer and Research Supervisor to the researcher whose guidance. Head Islamic Banking section at the Arusha Branch who introduced him to Mr. Abdul Rahmaan. special recognition is directed towards God Almighty for keeping the researcher consistently healthy during the time of undertaking this research.O. First and foremost.C headquarters in Dar es salaam and. Special gratitude is directed to Dr.C. Bank Examiners in the Directorate of Bank Supervision at the B. Financial Analyst in the Directorate of Financial Markets at the B. Goodhope Mkaro and Mr. Honour and gratitude is conferred to them by the author through this acknowledgement in consideration of their support. extends appreciation to his employer.ACKNOWLEDGEMENTS To the completion of this dissertation. The researcher next. Mr. Veronica Mmanda. The significance of this assistance cannot be overemphasized. Researcher acknowledges those who unconditionally offered to him due assistance relating to the collection of data from their offices: Mr.T Dar es salaam. Specifically the following are acknowledged. Babu Joseph of K. Goodluck Herman. Dar es salaam. OPIYO. Mr. Mlekwa Kulwa.L) and second by granting a financial support that helped him to conduct this study.

organisation and compilation of this work. omissions and any anomaly relating thereto that might have impaired its quality. 5 . slip-ups. As it is not possible to give special appreciation to all of them individually. constant accelerators and reliable reference points to the setting. their honest contribution is truly appreciated.the researcher received an invaluable assistance on the general idea on how islamic banks operate. he wishes to express his gratitude to everyone who in one way or another has had a share in the general set up and organisation of this work from being nothing to what it is now. While all the persons mentioned herein to whom the author cordially bestows appreciation have significantly served as indispensable thrusts. the author fully retains responsibility for all errors. Further. It is not because their contribution did not suffice but because the author is a human being and human beings are always prone to imperfections.

M studies (course work) and in undertaking this research 6 .DEDICATION To my beloved kids Meddy and Maryam for their invaluable patience during my absence in pursuit of my LL.

therefore. 7 . including many of the muslims themselves. its significance to islamic banking. 2 from NBC. 3 of these from B. The researcher used interview guide as a tool to collect information from respondents at the BoT and NBC. The most significant being credit risks.ABSTRACT This study is about the impacts of Islamic Banking in Tanzania to the subsisting regulatory and supervisory framework. As amendments of existing laws would be so impractical and their dual application would rather complicate the systems. The study finds out that as islamic banking is new not many are aware of how it functions. As Tanzania adopts Islamic banking many issues arise. 1 Muslim scholar knowledgable on islamic banking and 5 banking lawyers. The study revealed also that there are numerous challenges that islamic banking poses to the country’s banking regulation and supervision systems.o. Banking regulation instils protection to the depositors’ funds and averts banking systemic failures. ultimately stabilising the economy. Muslim scholars and banking lawyers. Thus. Banking laws are not favourable to it. In this spirit out of a sample of 21 respondents chosen purposevely. KCB and Stanbic Bank. The study further found out that islamic banking has many risks unique to itself. commercial banks’ officials. The study is a qualitative study. 12 comfortably responded to interview questions. which included BoT officials. suggests that since islamic Banking operates under philosophical bases different from conventional banking. cannot be overemphasized. 1 from Stanbic Bank. which affect PLS transactions and market risks which affect sales based transactions.The author. new regulatory and supervisory laws should be enacted. The researcher undertook this study to find out the inherent risks and challenges that islamic banking practice brings forth against the Tanzanian regulatory and supervisory framework with the aim of suggesting what should be done to properly accomodate this type of banking.T.

2003 Judicature and Application of Laws Act no.E.E.LIST OF STATUTES Banking and Financial Institutions Act No. 2002] Sale of Goods Act. 12 of 2002 Cooperative Societies Act. Cap 358 [R.E. Cap 189 [R. Cap 214 [R. 2002] United Republic of Tanzania Constitution of 1977. 2002] Law of Contract Act. 5 of 2006 Bank of Tanzania Act No. 4 of 2006 Companies Act No. 2002] Stamp duty Act.E.E. 2002] Probate and Administration of Estates Act. Cap 352 [R. as am. Cap 345 [R. From time to time 8 .

A UK – Deposit Insurance Board – Innovation Diffussion Theory – Institute of Accountancy Arusha – Islamic Financial Services Board – International Monetary Fund – Judicature and Application of Laws Act – Kenya Commercial Bank – National Bank of Commerce – New York – Profit and Loss Sharing – Sale of Goods Act – United Kingdom 9 .S S. Asset quality.M.LIST OF ABREVIATIONS AND ACRONYMS AAOIFI – Accounting and Auditing Organisation for Islamic Financial Institutions ADB As am BFIA B.G.F JALA K.C NY P.B.B N.C.O. Management. Earnings capability and Liability management DIB IDT IAA IFCB I.L.T BoTA – African Development Bank – as amended – Banking and Financial Institution Act – Bank of Tanzania – Bank of Tanzania Act CAMEL – An acronym for Capital Adequacy.

..................... 6 ABSTRACT..................................... 26 1...3 The Practicability of Islamic Banking without interest (Riba) ................................1 Introduction ..................................6 Scope of the study .................................. 3 ACKNOWLEDGEMENTS ........................... 27 1.......................8 Research Methodology..........................................................................................9 Limitations of the Study ...... 30 CONCEPTUAL FRAMEWORK............... 41 ORIGINS AND DEVELOPMENT OF ISLAMIC BANKING............. 45 3....8.........................................8................8.. 25 1...... 13 1...................................................... 19 1....................................................................2 Islamic Banking Financing Modes ...............................................................................................................................................................................................2........... 30 2....1 Source of Funds .............8..............................................................................3........... 46 3................8......................7 Data collection Methods................2 Trade........................ 26 1........................6 Types of Data and Data Collection Methods ...................4 Sample Size ....................................... 53 CHAPTER FOUR ................................................. 8 LIST OF ABREVIATIONS AND ACRONYMS .....................................................................................................................................................................1 Early Development ... 52 3.............................................................. 30 2...................................... 13 1.....................4 Research Questions........................................7 Literature Review ....... 13 INTRODUCTION ......... 18 1... 41 3............3............................. 26 1.......................................................... 56 4.......................8...Based Financing Modes ........ 26 1.......... 9 CHAPTER ONE .............................................................................................5 Sampling Procedure ........................3 The rationale behind the Islamic Prohibition of interest (Riba) ..........................................................................................................................2 Islamic Banking Beyond Islamic Communities ... 19 1..................................8....................................................................................2 Statement of the Problem ............................................................................................................................................ 25 1.............................1 Partnership based Modes ...............................3 Target Population ......................................................................................................5 Significance of the Study ................................................................... 27 1.............................................................. 4 DEDICATION .............................2............................................... 33 2......... 41 3.8........... 17 1...................................................................................... 27 1...........................................8.............. ................................... 28 CHAPTER TWO .. 47 3........... 56 4...................................... 43 3....4 Development of Islamic Banking in Tanzania ...........................5 Status of the Tanzania’s Islamic Banking Practice ........3................................................................................................................................................................................................ 44 3.2 The concept of islamic banking .........................2 Area of Study ................................8....................................................................................................................................... ......... 30 2.....................................................................................1 Introduction .................................................................................4 Distinctions between Islamic Banking and Conventional Banking ..................................................................... 56 BANKING REGULATORY AND SUPERVISORY FRAMEWORKS IN TANZANIA ..............................6...............................................................................8................ 18 1...................... 2 DECLARATION AND COPYRIGHT ..................................................................................1 Research Design .............................8 Data Analysis Techniques ..1 Primary Data ................................. 15 1................2 Regulation and Supervision of Banks in Tanzania ................................ 27 1...........................6......................3.................................................1 Background to the problem...............................3 Research objectives .................................................................................... 36 CHAPTER THREE ............................................2 Secondary data ... 28 1...................................................................................................... 7 LIST OF STATUTES ................................................................ 45 3............. 56 10 ...................................................TABLE OF CONTENTS CERTIFICATION ............................................................

4.2.1 On-site inspection ................................................................................................. 56 4.2.2 Off-site inspection ................................................................................................. 58 4.3 Principles and Subsidiary Legislations over Banks Regulation and Supervision............ 58 4.3.1 Principle Legislations ............................................................................................ 59 The BoT Act, No. 4 of 2006 ................................................................................... 59 The BFIA Act, No. 5 of 2006 ................................................................................. 60 The Foreign Exchange Act, No. 1 of 1992 .............................................................. 60 The Companies Act, No. 12 of 2002 and the Law of Contract Act, Cap 345 of 2002 (RE 2002),......................................................................................................................... 61 4.3.2 Subsidiary Legislations. ........................................................................................ 61 Banking Regulations .............................................................................................. 61 Banking Circulars .................................................................................................. 64 4.4 The Rationale of Banking Regulation and Supervision .......................................... 66 4.5 Role of Supervision and Regulation ............................................................................. 67 4.5.1. Protection of Depositors’ Funds ........................................................................... 67 4.5.2 Maintaining Stability of Monetary and Financial System, ...................................... 68 4.5.3 Promoting an Efficient and Competitive Banking System. ..................................... 68 4.5.4 Protecting Consumer and General Public Rights. ................................................... 69 CHAPTER FIVE............................................................................................................... 70 THE RESEARCH FINDINGS .......................................................................................... 70 5.1 Introduction ................................................................................................................. 70 5.2 Response from respondents as regards the question on “what are the inherent risks in Islamic banking practices?” .............................................................................................. 70 5.2.1 Islamic Banking Credit Risks ......................................................................... 71 5.2.2 Islamic Banking Market Risks ........................................................................ 72 5.3 Response from respondents as regards the question on “what are the challenges Islamic banking practices engender to the regulatory and supervisory regime?” ........................... 74 5.3.1 Regulatory and Supervisory Challenges ................................................................ 74 5.3.2. Supervisory challenges ......................................................................................... 84 5.3.3 Judicial challenge.................................................................................................. 85 5.4 Response from respondents as regards the question on “does the existing regulatory and supervisory system call for any fine tuning as regards Islamic banking established in Tanzania?” ....................................................................................................................... 86 5.4.1 Islamic Banking Regulatory and Supervisory Regime needs change to accommodate Islamic Banking ...................................................................................... 87 CHAPTER SIX ................................................................................................................. 90 CONCLUSIONS AND RECOMMENDATIONS .............................................................. 90 6.1 Introduction .......................................................................................................... 90 6.2 Conclusions .......................................................................................................... 90 6.3 Recommendations ....................................................................................................... 91 6.3.1 Ammendment of the regulatory and supervisory systems ....................................... 91 6.3.2 Alignment of Regulatory and Supervisory Rules to International Best Practices .... 92 6.3.3 Intensive training to employees ............................................................................. 92 6.3.4 Amendment or enactment of certain banking laws ................................................. 93 6.3.5 Improve Corporate Governance............................................................................. 93 BIBLIOGRAPHY ............................................................................................................. 96 BOOKS............................................................................................................................. 96 PEER REVIEWED JOURNAL ARTICLES ...................................................................... 96 RESEARCH AND WORKING PAPERS .......................................................................... 99 INTERNET ARTICLES .................................................................................................. 100 WEB PAGES .................................................................................................................. 101

ANNEXTURES .............................................................................................................. 102 ANNEXTURE I .............................................................................................................. 102 INTERVIEW GUIDE FOR BoT OFFICIALS AND LEGAL PRACTITIONERS ............ 102 ANNEXTURE II ............................................................................................................. 103 INTERVIEW GUIDE TO THE OFFICIALS OF NBC, KCB AND STANBIC BANK .... 103


CHAPTER ONE INTRODUCTION 1.1 Background to the problem Banking forms an important part of any prudently functioning financial system. At the centre of banking business there is the activity of money lending upon taking interest. From the time when early forms of banking began to the present time, “interest taking” has been important for development of banking. This characterised old banking practices in Babylon, Genoa, Venice, Catalonia, and Barcelona as it characterised modern banking in its origin and development in England. For a long time until fairly recently and without any significant respite, the taking of interest by bankers has thus been viewed as being part and parcel of banking business. There is historical evidence to the effect that where interest was forbidden banking business succumbed to an impasse. In line with this fact it is reported in english history of banking that King Henry VIII, at the end of his reign in 1546, once repealed the usury laws which he viewed as constraints to development of banking in his country. Prior to this the Church to which England was allied had disallowed the lending of money with interest. It was this law that the King repealed. From this time onwards money was to be lent only upon interest according to the King's Majesty's Statute at 10 percent.2 It was after this that real modern progress in banking could be felt. To date, the taking of interest by bankers is a legacy that features banking as it is practiced by a majority of banks world wide.

Recently, however, there has evolved a form of banking which is charecterised as being interest free. This kind of banking is Islamic banking or alternatively known as shariah banking. Islamic banking is increasingly and unrestrictively, becoming significant all over the world. It has been reported that islamic banking has been developing at an explosive pace due to internatilisation of worlds financial markets and growth in significance of islamic economics.3 In 2001 it was reported that about forty-eight developing and emerging market countries that represent almost one2

For more information see British Banking History Society (BBHS). (2011, August 23). A History of English Clearing Banks Retrieved from 3 See Andilile, J. (2009). Viability and Challenges of Establishing Islamic Banking in Tanzania. The Accountant Journal, 24 (2), p.15. 13

imf. (2009). 8 It is a legally agreed Microfinance-Bank. International Monetary Fund. Islamic Banking: Issues in Prudential Regulations and Supervision (Working Paper No.6. 14 . J. In East Africa islamic banking has had the doors opened first in Kenya by the year 2007 which marks Kenya the first country in East and Central Africa to allow the operation of Islamic Banking when the Central Bank of Kenya approved First Community Bank (FCB) on May 29.third of all the International Monetary Fund (IMF) member countries.5 Recent studies report that Islamic banking is steadily moving into an increasing number of conventional financial systems and that it is expanding not only in nations with majority Muslim populations. are increasingly involved with varying intensity in islamic banking. The Accountant Journal. the Central Bank pays consistent attention to the significance of introducing islamic banks in the financial 4 See Errico. Jordan and Egypt. banks have either established islamic windows within the traditional banking regimes7 or licences have been granted for establishment of full-fledged and independent islamic banks. (2008). Introducing Islamic Banks into Conventional Banking Systems (Working Paper No. It is estimated that there are currently more than 300 Islamic financial institutions spread over 51 countries. Iran. 2007. a trend that is expected to continue. (2007). to operate as a full-fledged Shariahcompliant commercial bank. 4 This involvement is shared by both Muslim and non-Muslim countries. this industry has experienced growth rates of 10-15 percent per annum. & Farahbaksh.imf. but also in other countries where Muslims are a minority. was granted approval by the Commercial Bank of Kenya to become the second fullfledged Shariah compliant bank in for all (Muslims and non-muslims).pdf 7 These are like Malaysia. Viability and Challenges of Establishing Islamic Banking in Tanzania. In Rwanda already there is an islamic bank known as the Al Halaal Islamic International Monetary Fund.14 6 Solé.8 In Uganda. such as the United Kingdom and /ft/wp/2007/wp07175. Over the last decade. WP/98/30). 24 (2). plus well over 250 mutual funds that comply with Islamic principles. WP/07/175). L. 3. Retrieved from https://www. Later on another bank: Gulf African Bank (GAB). p. P. p. Retrieved from www.pdf 5 See Andilile. Bangladesh. J. M.6 In the countries where islamic banking is practised.

13 This has been true with the rest of the 9 For more information read Bank of Uganda. Kenya Commercial Bank. Stanbic Bank. These operate within the established conventional system. F. 13 See Reli.). July). (2009. Tanzania.bou. 2010.eastafritac. August 3). Retrieved from http://www.theislamicglobe. The oversight of islamic finance in Tanzania.system of that country and it has proposed necessary amendments to the financial institutions laws to close the gap occassioned by the laws as they exist today. A New Dawn Breaks for Tanzania The Islamic /images/uploads/documents_storage/Juma_Reli_Speech_Islamic_Banking. Bank of Baroda etc. Tanzania. logically. The presenter is the Deputy Governor of the Bank of Tanzania.spsvrtplsite. 12 Ibid. Furthermore. it has proved to be an area that is largely unfamiliar to legal practitioners. This can be done if the principles of islamic banking and the existing principles of conventional banking are harmonised. The oversight of islamic finance in However. Retrieved October 24. Retrieved from http://www. from http://bou. July).2 Statement of the Problem Islamic banking is gaining popularity and an ever increasing significance in the Tanzania’s financial circles. islamic banking can only be adequately accomodated if country’s policies and laws are aligned to reflect the nature of islamic banking. Dar es salaam. Islamic Banking in Uganda. J. Dar es salaam. there are many applications routed to the BoT for licences either to operate islamic windows or fullfledged islamic banks. These facts serve as a premise upon which the researcher builds the motive to conduct this study with the aim of finding out the challenges islamic banking poses to the existing legal and regulatory regime that would weigh down smooth operation of the banking sector.eastafritac. Paper presented at the High level Seminar.php?option=com_content&view=article&id =664:a-new-dawn-breaks-for-tanzania&catid=8:artcile&Itemid=40 11 See /bou/media/from_the_bank/archived_messages /islamic_banking 10 See Koyesiga. ( 15 . Paper presented at the High level Seminar. Many other banks have established islamic windows and these are such as the National Bank of Commerce. 9 In Tanzania Amana Bank is the first full-fledged islamic bank to have acquired a commercial bank licence from the Bank of Tanzania (BoT)10.11 In Tanzania.pdf. Retrieved from http://www. 1.or. (n. policy makers and financial markets regulators (emphasis added). J.H. (2011.12 Most of its implications still constitute a jungle less explored and known in the Tanzania’s legal context.

ruralfinance. p. J. the Core Principles for Effective Banking Supervision. April).org/. March). Retrieved from http://www. Islamic Banking and Prohibition of Riba/Interest” African Journal of Business Management. 16 The Basel Committee on Banking Supervision is an international body that provides a forum for regular cooperation on banking supervisory matters.pdf. For the same information see also Solé. Retrieved from www. Despite this significance islamic banking has a set of its own laws which Tanzania does not use. At times the committee develops guidelines and supervisory standards in areas where they are considered desirable. and the Concordat on cross-border banking supervision. In this regard. Risk Management : Islamic Financial Policies Islamic Banking and Its potential Impact.18 This. Core Principles for Effective Banking where islamic banking has been established. Islamic banking.pdf. for more information. (1997.pdf 15 See. This set of principles is collectively known as the islamic shariah/law which stems from the general body of islamic religious principles grounded in the Quran.17 commands an application of a system of principles that are quite different from those that apply to conventional banking. Tanzania’s regulatory and supervisory system on banking is based on a conventional banking infrastructure a large part of it imposed by the common law and core principles of banking supervision15 based on the model engeneered by the Basel committee16.A. (Consultative paper). 14 See Timberg. Basel Committee on Banking Supervision. /fileadmin/templates/rflc/documents/Islamic__Banking_pdf.japss. Paper presented at the International Conference on Best Practices case study. Indonesia. Retrieved from http://www.pdf. the Committee is best known for its international standards on capital adequacy.% 20Muneezaetal. WP/07/175). Further more the existing laws and the legal and supervisory framework are designed for conventional banking and not islamic banking. Switserland. makes islamic banking distinct and unique in its own right. Yet. 188-224.d).pdf 18 See Ahmad. 16 . the Muslims’ sacred book.academic journals. /images/uploads/documents_storage/Juma_Reli_Speech_Islamic_Banking. logically it is incapable to handle the peculiarities of islamic banking.. Visit http://www. 3. 1763-1767. International Monetary Fund. /bcbs30. (2007). (2010). Tanzania being a secular state.imf. Rehman & Safwan. Introducing Islamic Banks into Conventional Banking Systems (Working Paper No.14 In Tanzania islamic banking is a foreign creature and with respect to its inherent features it is apparently inconsistent with the existing laws of banking currently applicable in the country. (n. Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision /ft/wp/2007/wp07175. 5(5). Retrieved from http://www. The Paradox Struggle Between the Islamic and Conventional Banking Systems. among others. 17 See Muneeza. The presenter is the Deputy Governor of the Bank of Tanzania. Journal of Asia Pacific Studies 1 (2). Paving the Way Forward for Rural Finance. though may be established to operate within the same regulatory has a set of its own laws and does not follow islamic law. Retrieved from www.bis. (2011.

both of these are supposed to work within the same economic and regulatory framework which is likely to cause legal difficulties. [RE: 2002] See particularly section 11 (1) (c) (ii) of the Act. being interest free. Essentially. This application. inheritance. This will entail examining how it fits in the supervisory and regulatory roles of the BoT under the existing laws relating to banking and financial institutions. is exclusively in relation to members of a community which follows that law. divorce. wakf and similar matters. 19 20 Cap 358. The only official recognition of islamic law is by way of Judicature and Application of Laws Act (JALA). 1.3 Research objectives The overall objective of the study is to make a critical analysis of the impacts of the emergence of Islamic banking in Tanzania to the subsisting regulatory and supervisory regimes. however. there is neither any law specifically enacted to cater for islamic banking nor at least any relevant legal recognition of Islamic Shariah in the present legal system. 17 . guardianship.20 This practically shuts out of its realm of applicability the islamic shariah on banking which occassions a grievous legal vacuum to operations of islamic banking. islamic banking practices greatly differ from conventional banking practices which are rooted in ‘interest’. This study will analyse the regulatory and supervisory implications of islamic banking adoptability in the Tanzania’s banking industry with reference to the laws relating to banking as supervised by the Bank of Tanzania (BoT). Intrinsically. Specifically the study aimed. Conventional laws can thus not apply to islamic banking environment.19 This legislation allows application of islamic principles in Tanzania only in matters that relate to marriage. The fact that Islamic banking is inevitable and that it is a new and forciful development unknown in the present legal system brings about critical issues that dictate the need for a thourough research in the area.

1. It is also intended to find solution to these challenges and to enlighten financial sector regulators. does the existing regulatory and supervisory system call for any fine tuning as regards islamic banking established in country? 1.4 Research Questions. (c) To suggest the legal and institutional measures essential for effective regulation and supervision of islamic banking. This study was expected to answer the following research questions (a) What are the common types of risks that are experienced in islamic banking system? (b) What are challenges that islamic banking engender to the Tanzania’s banking regulatory and supervisory regime? And (c) Lastly. 18 . (b) To examine the challenges brought about by establishment of islamic banking to the Tanzania’s banking regulatory and supervisory structures.5 Significance of the Study This study is of vital significance in Banking industry as it is expected to uncover all the challenges that islamic banking engenders to the existing regulatory framework. both legal and institutional.(a) To find out inherent risks in islamic banking and asses the relation between the current system of banking regulation and supervision in the country and islamic banking. policy makers and the legislature on how best can these challenges be contained and come up with the best way of practice as regards both islamic banking and conventional banking.

jstor. 19 . Islamic Banking: Experiences in the Islamic Republic of Iran. M. Khan and Mirakhor (1990) point out that a central tenet of an economic system based on Islamic principles is the absolute prohibition on the payment and receipt of interest. it is expected to serve the researcher a realisation of his academic accomplishment in the field of a master degree in commercial Law. Retrieved from http://www. 1. this study is expected to be a worthwhile contribution to the existing knowledge in this area which for the case of Tanzania it does not have such a wide archival base given the novelty of islamic banking. do not directly relate particularly to the situation in Tanzania. & Mirakhor. Pakistan Economic Development and Cultural Change. 21 21 This explains the conception that Khan. Specifically. Literature Review Review of the literature reveals that most studies carried out on the subject. A. There is however. 38(2). It is this prohibition that makes Islamic banks and financial institutions differ in a fundamental sense from their Western counterparts.Moreover. a critical analysis of the impacts of the emergence of Islamic banking in Tanzania to the subsisting regulatory and supervisory regime. On the other hand the study exclusively covers the collection of data in Arusha and Dar es salaam. Islamic banks are expected to conduct operations only on the basis of profit-sharing arrangements or other modes of financing permissible under Islamic law. 1. The underlying significance of the study is that. As the use of the interest rate in financial transactions is precluded. the following are what the literature reveals.6 Scope of the study This study is confined to a critical analysis of impacts of Islamic banking system to the regulatory and supervisory system in Tanzania on the one hand. one study conducted in Tanzania which dealt with viability and challenges of establishing Islamic banking in Tanzania and this as the topic suggests was conducted before Islamic banking was actually established. There is no study done particularly on the present topic that is. (1990).S.

Asset quality (A). During supervision. Earnings Capability (E).22 This means the difficulties ensued by Islamic banking differ from one banking system to another depending on the law applicable. (emphasis added) should be encouraged by regulation and supervision that accommodate its forms while ensuring that their unfamiliarity is not exploited to defraud clients.islamic banking operations are more related to financing facilities which are only permissible under islamic law and logically which might differ from those that currently are employed in Tanzania’s legal context. The authors further argue.aspx?imagePath=UploadFolder1%5CJournal%5C10/10-Luca_01. 20 . 22 Errico. when it comes to supervision Islamic banking and conventional banking are quite distinct and thus the traditional approach to banking regulation and supervision can not necessarily be applicable to Islamic banking. thus. L. The authors specifically conclude that the CAMEL23 rating system of banking supervision does not automatically apply to Islamic banking.pdf 23 Is an accronym for Capital Adequacy (C). Significance of this literature is that. Retrieved from http://iaie. banking being a component part. Islamic finance. (2001). M. thus CAMEL. These include the prohibition of transactions based on fixed or predetermined rate of interest on the one hand and the requirement that bank’s operations be carried out according to certain procedures through the use of certain financial instruments. Review of Islamic Economics. these standards however are not always applicable in an Islamic banking framework in the same way as they are in other banking systems. 10. Management (M).6. Assets quality (A). Banks’ performance is rated by their Capital adequacy (C). & Farahbakash. They also point out that though in a majority of countries where Islamic banks operate the same regulatory framework applies to both conventional and Islamic banks. Islamic Banking: Issues in Prudential Regulation and Supervision. Errico and Farahbakash (2001) appreciate that Islamic banking differs from conventional banking in several important ways. and Liability Management (L). Earnings capability (E). and Liability management (L). p. Management (M).net/Common/Controls /DImage/DImage.

He further notes that though both islamic and conventional banking are the same on the basis that their ultimate focus being to provide liquidity to the deficit unit or investors in the economy and that they have many differences than this similarity. Thunderbird International Business Review. 3.imf. as well as the proper prudent conduct of individual institutions in the financial system remain as key. the Supervisor’s objective of ensuring safety. Ahamad (2007) argue that Islamic banking is facing challenges and problems but they are of the view that the cause of these challenges and problems is the fact that it is on the infant stage.pdf 25 Ahamad. in any country where islamic finance is introduced and keeps /ft/wp/2007/wp07175. stability and soundness of the banking system as a whole. they may affect the degree of success within which Islamic banking is introduced into a conventional system. (2007). if regulations are not well thought. 21 . pp.Sole (2007) in the same line of argument points out that. p. The regulators and supervisors are expected to undertake similar supervisory and regulatory functions regarding Islamic institutions as those performed on conventional banking institutions. the supervisory authorities will have to ensure that these new institutions become fully integrated with the rest of the financial system and that the integration process will not only entail allowing Islamic institutions to operate. 251-277. but also providing a comprehensive regulatory framework. (2007).49 (2). H. 25 Reli (2009) notes that though Islamic finance is becoming increasingly integrated into the international financial system many supervisory authorities and other policy makers in emerging markets remain unfamiliar with the key principles that are involved in Islamic finance and banking. International Monetary Fund. as well as developing a supportive financial infrastructure. WP/07/175). In this regard. In line with this however. Regulation and Performance of Islamic banking in Bangladesh. Retrieved from www.24 This means islamic banking must be harmonised to the financial system and work together with the conventioanl banking towards a common goal of intermidiating finances to the deficit units in the country’s economy. J. 24 Solé. Introducing Islamic Banks into Conventional Banking Systems (Working Paper No.

finance professionals.T and Abdullah. American Journal of Sociology 111 (5).1086/504662.). Lateral Reason.I. Eastern Europe. on the one hand. 26 Eldin and Abdullah (2007) report that Islamic banking has a smooth way of going successful but in order to be so there is a need to bring changes by policy makers. 22 . Change in a legal system is rarely comprehensible by reference to dynamics internal to that system 26 27 The author is the Deputy Governor Bank of Tanzania. S. that is. the boundaries between legal systems are by no means watertight. Retrieved from http://www. (2005).He further provides a metaphor. the European Union. are in a period of rapid legal change. and even by some of the Muslims themselves. Alternative Currencies. B. and in order to strengthen Islamic banking transactions there is a need to develop a strong legal framework. B. (Ed. (2006. as well as those of the Islamic world. Islamic banking is fastly growing in public prominence. makers cannot ignore the role of developing an environment where Islamic banking can offer a suitable response to customers’ demands for Islamic Retrieved from http://www. In Harrington. that Islamic banking is a new world that is poorly understood by Westerners.pdf 28 Maurer. Eldin.I. 225-249. (2007). 27 Maurer (2005) observes that like Islam itself. regulatory and supervisory concerns becomes important so as to prepare a financial system that reflects its demands. Limited: Islamic Banking. 28 Horowitz (1994) concluding in his study on associations of legal systems and laws of different countries articulates that many legal systems. Issues of implementing Hire purchase in dual banking systems: Malaysian experience. 49 (2).kantakji.jstor. including those of the United States. They further argue that Islamic banking is faced with a lack of a unified regulatory system for its products and transactions. and the former Soviet Union. March) Brown University. pp 1606-1608. Thunderbird International Business Review. This literature is significant in that the advent of islamic banking comes as a new thing which brings forth challenges unknown to the key banking functionaries’ experiences thus to be able to manage islamic banking familiarisation with and effective knowledge of all the policy. Mutual Life. on the other.

These clashes can not be avoided anywhere conventioanl banking operates.%20Muneezaetal. 30 Muneeza. Muneeza. 30 Balz (2004) observes that Islamic financing transactions today often are implemented in a non-Islamic legal environment.. Retrieved from in particular the 29 Horowitz.japss.Tanzania inclusive. R. The Qur'an and the Common Law: Islamic Law Reform and the Theory of Legal Change. (1994. Retrieved http://www.& Hassan. Wisham I. (2010). 42(2). and where islamic banking is introduced since the two function from two paradoxical grounds. D.alone. 29 The significance of this work sheds light on the fact that islamic banking and the legal principles within which they operate being innovations from other countries outside the Tanzania’s legal system are likely to impose challenges and thus influence change to the Tanzania’s legal system as long as this form of banking operates in Tanzania. Wisham & Hassan (2010) studying the functioning of the conventional and islamic banking systems in Malaysia conclude that systems which function on two different paradoxical statements but operating in the same pluralistic system are inevitably bound to open quarrels with each other in terms of its basis.e. The American Journal of Comparative 233-293.pdf 23 . A. i. They further observe that emergence of two systems within the same organism would predictably give rise to certain clashes and a need arises where these clashes and challenges are addressed if the effort to bridge the gap is to be effected at a useful level.L.jstor. Journal of Asia Pacific Studies ( 2010) 1(2). Spring). 188-224. operation and mind-set. The authors identify these clashes as they include those based on legislative grounds and those faced in the process of judicial adjudication in dispute as well as those which are relevant to alternative means of dispute resolution (ADR). pp. legal systems are brought into contact with each other and due to this change in one system can ultimately induce change in others. a jurisdiction that is not effectively bound by and does not give effect to the principles of the Islamic Shari'a. In the process of innovation. The Paradox Struggle Between the Islamic and Conventional Banking Systems. He further notes that by far most of the Islamic finance business is transacted in jurisdictions where the relevant Shari'a principles.

He notes issues this practice raises such as the questions of how Islamic legal principles that are the basis of Islamic financial transactions relate to the laws of the jurisdiction in which they are implemented and how traditional Islamic contractual structures are transformed when adjudicated in a court that does not necessarily share the parties' commitment to Shariah-rules. is a constitutional one. The biggest legal challenge islamic banking introduces to Tanzania. he highlights. Islamic Law and Society. (2004). Viability and Challenges of Establishing Islamic Banking in Tanzania.V. transactions guided by the principles of the Islamic Shariah are carried out in a nonIslamic legal environment.22. the business model of Islamic financial institutions is based on reference to Islamic legal norms that are not enforced as the (official) law of the state. Symphony Gems N. In these jurisdictions which include London and Geneva. 33 See Andilile. he however notes that it is not without challenges. 117-134.firstly. (2009). 32 As amended from time to time. He notes that these challenges stem from the fact that we live in the world economy where interest rate is a central balancing mechanism for demand and supply of financial resources. 24 (2). & OrsAuthor(s). 31 Andilile (2009) appreciates the benefits of islamic banking as it provides alternative banking products to customers. J. In the world financial any attempt to foster faith-based institutions by the government or its agencies is likely to be perceived by the public to be a violation of article 19 of the Constitution of the United Republic of Tanzania of 197732 which gives freedom of religion to all citizens but shuts out the state from participating in the affairs and management of religious bodies. p. A Murābaḥa Transaction in an English Court: The London High Court of 13th February 2002 in Islamic Investment Company of the Gulf (Bahamas) Ltd. the newness of islamic banking also poses several challenges to both regulators and practitioners. that is. 33 The reviewed literature suffers from two shortcomings. That is non of this 31 See Balz. K. 11 (1). Retrieved from http://www. are no longer enforced and may never have been enforced as the law of the land. it does not directly and sufficiently relate to the Tanzania’s context particularly. He is of the view that Tanzania being a secular state. pp.jstor . he further notes.prohibition of riba. v. The Accountant Journal. 24 .

12 25 . The researcher employed interview guide as the tool for collecting information from the BoT and from some financial institutions which offer some form of islamic banking such as the NBC.literature has attempted a comprehensive study particularly on the impact of islamic banking on the regulatory and supervisory framework subsisting in Tanzania. Publisher.1 Research Design Research design is the conceptual structure within which research is conducted.35 Since this study is a qualitative study the researcher used a case study design with which he collected information regarding the impacts of Islamic banking to the Tanzania’s regulatory and supervisory regime. program. Research Methodology (2nd Edn). CA: Sage. J. It focuses primarily on providing help with the tools and techniques used in the research process. Research Designs: Qualitative and quantitative approaches.8 Research Methodology This section sheds an insight on the methodological issues in research. W. Further there is only one study carried out in Tanzania34 fairly on subject but again this study suffers from being incomprehensive as it was intended to only study viability of establishing islamic banking in Tanzania at a time before the same was established. institution.R. See Kothari. (2010). Stanbic Bank and KCB. (1994). 1. New Delhi: New Age International. process. it constitutes the blueprint for the collection. As such the design includes an outline of what the researcher will do from writing the research questions and its operational implications to the final analysis of data.36 This study is one that concerns narration of facts about a situation which is brought to the fore by the 34 35 The one by Andilile. C. ibid. Creswell (1994) points out that in a case study. 1. a single person. Thousand Oaks. p. organization. This study intends to investigate on the impacts islamic banking brings forth onto the regulatory and supervisory framework of banking industry in Tanzania and at a time after its establishment. measurement and analysis of data.8. using a combination of appropriate data collection devices. social group or phenomenon is investigated within a specified time frame. P 31 36 See Creswell. event.

These banks included National Bank of Commerce (NBC).8.. It is a kind of sampling in which a researcher has an opportunity to select.8. Mzumbe Book Project Morogoro-Tanzania. Data was collected also from commercial banks offering islamic banking services in Arusha but from their Headqurters in Dar es salaam. (2008). and Kenya Commercial Bank (KCB).8. the researcher targeted also the persons who have knowledge of the functioning of Islamic banking. F. 1. management and daily operations relating to Islamic banking. the most useful representatives to be observed. selected commercial banks and banking lawyers who specifically deal with supervision. The researcher collected data from 12 respondents who included 3 BoT officials in the Bank Supervision Directorate.37 The researcher employed this kind of sampling because he wished to ensure that respondents selected were particularly informative and that data required was feasibly attained in a limited 37 Adam. Research Methods for Business and Social Studies. J. 1. On the other hand.8.2 Area of Study The study was conducted mainly at the BoT in Arusha but from its Headquarters in Dar es salaam. on the bases of his own judgment in each unit. 4 members of staff in commercial banks engaging in issues of islamic banking and 5 banking lawyers appropriately knowledgable on the functioing of islamic banking. 1.advent of islamic banking as it impacts upon the existing regulatory and supervisory regime in Tanzania. Stanbic bank.3 Target Population The targeted population of this study involved banks’ officials from the BoT’s Directorate of Bank Supervision. Kamuzora.5 Sampling Procedure Researcher of this study used purposive sampling.4 Sample Size A sample of 21 respondents was drawn from the target population. 1. 26 . on the one hand.

7 Data collection Methods. academic and scholarly articles. relevant books. declarations and other documents. International Instruments.8. The instrument designed to extract information from respondents was well formulated and tested. Due regard was given to various domestic legislation and subsidiary legislation that relate to banking. Hence it was the one that was more appropriate in this study. various documents relating to the topic were thoroughly consulted.8. interview guides were drawn to comprise of open ended 27 . As such respondents were selected basing on the researcher’s perception of their knowledge on the matter under investigation regard being had to the nature of the study itself. Interview guides were distributed to respondents before hand and later telephone interview was conducted.1 Primary Data As for collection of primary data researcher used interview guides administered to selected officials identified in the sample of respondents depending on their availability.period of time. These were important in highlighting the theoretical base relating to Islamic banking and regulatory and supervisory principles used by the BoT. In formulating the questions regard was had on their ability to give explanatory details as per objectives of this study. 1. As this study mainly required qualitative data. 1. Simplicity and flexibility in the form of the questions was adopted by the researcher for allowing easy of self expression for the respondents.2 Secondary data Here documentary sources were used.8.8. 1. 1. In this. journals. In data collection the major data collection instrument employed by the researcher was interview.6. policies.6 Types of Data and Data Collection Methods The researcher intends to collect the following types of data.6.

The researcher also interviewed 5 other persons from the legal fraternity who were conversant with Islamic banking. The exercise also involved collection of secondary data. The major concern of the researcher in setting up the categories was on their variety of meanings. 1. This makes a total of 12 respondents. The questions asked in this interview were structured. Previously. the researcher had distributed interview guides to all respondents sampled i. and 1 being Financial Markets Analyst from the BoT’s Directorate of Financial Markets. from which various useful materials were provided. Dar es Salaam). Then the researcher set up a number of categories basing on the information obtained from the previous steps.questions with the view to acquiring opinions and critical presentation of the ideas of the respondents on the subject. a total of 3 officials of the BoT were interviewed: 2 being Bank examiners under the BoT’s Directorate of Banking Supervision.g. The researcher first gathered all the information obtained from the respondents. and interpretations found within each category.8. Generally the data collection exercise involved mainly telephone interview. Then items of data (e. 1 from KCB and another 1 from Stanbic Bank. interpretation of the data was then done basing on information obtaining from categories set up.e. 21 but the mentioned 12 only were interviewed and they responded positively. In interview. were there in included.8 Data Analysis Techniques The researcher used qualitative data analysis technique.8.9 Limitations of the Study Limitations that the researcher faced include difficulties in obtaining data within the area of study as islamic banking practiced by banks within Arusha is centrally 28 . statements) were arranged into various groups in a preliminary way. 1. attitudes. Also 4 officials from commercial banks that practice Islamic banking were interviewed: 2 from NBC (1 from Arusha Branch and the other from NBC Head quarters. by answering the questions asked both orally and by supplying various documents relevant to the study. then all items which were of relevance to certain groups.

consumers of Islamic Banking. This explains why out of the total population of 21 individuals. As it was difficult to identify Islamic banking customers because they used same tellers as conventional banking customers. information was collected from 12 respondents.managed from their headquarter offices all located in Dar es salaam. the researcher encountered strict issues of confidentiality when he asked banks under study to disclose profiles of their customers.14% of all the respondents. Another limitation that the researcher encountered arose from the novelty of Islamic banking discipline in the country. with the help of these profiles the researcher would identify and establish rapport with them prior to collecting information from them. permission to collect data depended upon respondents’ availability in their offices and or their convenience to respond to questions. This is true for all the commercial banks as well as the BoT. Further. This brought forth a considerable drawback to the researcher in relation to collection of data since only a few specified officials in these institutions were appropriately conversant with Islamic banking. Arusha branch which could not provide data because all the issues of regulation and supervision are done and controlled from the Directorate of Bank Supervison in Dar es salaam. 29 . which is 57. Heads of Islamic banking operations are all located in Dar es salaam. Moreover.

39 Secondly. Islamic Banking: Issues in Prudential Regulations and Supervision. relation between labour and wealth and the role of the state.CHAPTER TWO CONCEPTUAL FRAMEWORK 2. /Controls/DImage/DImage. 10.2 The concept of islamic banking Islamic banks are defined as banks whose operations are considered to be integral parts of complete islamic system based on codification of prohibitions outlined in the Quran and the traditions of the Prophet Muhammad (P. Retrieved from http://iaie.38 Islamic banks practices are characterised first. These are mainly devided into PLS modes and sales modes. by the restriction against payment and receipt of a fixed and predetermined rate of interest (Riba). The principle elements of islamic economic system include individual rights.1 Introduction In this chapter the researcher introduces Islamic banking and explains the key concepts that underlie it. namely investment deposit and demand deposits. Islamic banks in this aspect are regarded as bailees of the customers’ money and as such the money is entrusted to them for safe keeping.pdf 39 Ibid. by the requiremnt to operate by way of financing modes. L. a bank sustains loss customers may lose all or part of their investment deposits. Lastly. 30 . Interest is replaced by profit and loss Sharing arrangements where the rate of return on financial assets held in banks is not predetrmined until the transaction is done. however.. The deposits must be returned as they belong to customers whether there is sustenance of profit or loss. & Farahbaksh.H) that is shariah. property rights. Customers only enjoy an agreed ratio of profit distribution. 2. Investment deposits are not guaranteed in capital value and do not yield any fixed or guaranteed rate of return.40 Demand deposits are guaranteed in capital value but no returns are paid on them. M. (2001).U. If. 40 Ibid. contracts.B.41 38 See Errico. by two types of deposits of funds.aspx?imagePath=UploadFolder1%5CJournal%5C10/10Luca_01. Review of Islamic Economics. 41 Ibid.

In one ahadeeth the prophet Muhammad (P.bart.43 Muslims are prohibited by their religion from taking.50 Coming to the Hadeeth. Islamic Laws on Riba (interest) and their Economic Implications. Int.46 It is declared in another verse47 that disregarding the prohibition of riba is equal to wedging a war with God himself and His Prophet48 together. A central tenet of an economic system based on Islamic principles is the absolute prohibition on the payment and receipt of interest (riba).nl/¬abdul. M. Beginning with the Quran.H) is quoted enjoining upon muslims to refrain from riba. In another verse49 the act of taking riba is equalled to confiscation of other persons’ property.U.H) referred to in note 43 above. Further these 42 Noorzoy. Groningen. 43 Ariff.S. there is a string of hadeeths that prohibit riba. Institute of Southeast Asian Studies. Yet in another verse. 14(1).44 Thus Riba and interest are one and the same thing.Central to all these is the injunction against riba. Muslim. Retrieved from http://users. 49 Quran 4:161 50 Quran 30:39 51 This ahadeeth is reported by Bukhari. 44 Abdulgafoor. 46 Quran 3: 130 47 Quran 2: 275-281 48 The Word prophet here refers to prophet Muhammad (P. A. For the sake of this research the word riba shall be used throughout. 52 This ahadeeth is related by Jabir B. 45 Words of the prophet of the Muslims.U. the Quran stipulates that taking interest deprives wealth of God’s blessings. (1988).52 the prophet is reported to have cursed three groups of people: the receiver of interest and the payer thereof. Muslims have two levels of authorities which guide their actions: the Muslims Holy book. the Quran and the Hadeeth. 51 In another ahadeeth. Prophet Muhammad (SAW). 42 Islamic Banking principles posit that interest is strictly unacceptable. Aptec Publications. in one verse a stern instruction to all Muslims is ensued that they should stay away from taking riba. The word 'riba' means 'increase' which corresponds to the word 'interest' as defined by Webster's New World Dictionary.L. which he charecterised as being amongst most deadly things. February) Interest. 3-17. Abdullah and reported by Muslim. (1995. Islamic Banking in South-East Asia. Middle East Stud. Tirmidhi and Ahmad 31 .B.Free Banking Commercial Banking. (1982). M. the one who records it and the two witnesses thereof. giving or witnessing interest (riba) on loans regardless of the purpose for which such loans are made and regardless of the rates at which interest is charged.B.M. Abu Dawud and Nasai. Singapore. J.45 These authorities form the basis for prohibition of riba.

Jowett.people are all alike in guilt. but not to increase at interest. ( B. For money was intended to be used in exchange. which reads: “ You must not lend on interest (Neshekh) to your Islam's prohibition of interest is not new to itself. and not from the natural object of it.1.C. 23:19-20 57 See Exodus 22:24-25 32 .html. 55 For adeeper discussion under this part see Cornel.” 56 This passage is supported by another from Exodus: “If you lend money to any of my (i.E). which makes a gain out of money itself. Retrieved from http://classics. is quoted to have issued a condemnation on acquiring of wealth by the practice of charging interest on money when he said: The most hated sort.54 In judeo-christian philosophy interest is also abhorred:55 The fundamental ruling on usury for both Judaism and medieval Christianity is a Biblical statement found in the Book of Deuteronomy. Wherefore of an modes of getting wealth this is the most B. In the Shadows of Deuteronomy: Approaches to Interest and Usury in Judasm and Christianity. Politics: Book One Part X. (2008).”57 53 54 Reported by Ibn Majah Aristotle (350. The renowned Greek philosopher. whether the loan be of money or food or anything else that may earn interest. the least serious of them is equalled to committing adultery with ones own mother.e. Aristotle. Riba has also been said to have more than seventy grades of evil. Trans). and with the greatest reason.php/features /articles/ in_the_shadows_of_deutero nomy_approaches_to_interest_and_usury_in_judaism_a 56 See Deuteronomy. Retrieved from http://theamericanmuslim. And this term you must not play the usurer with him: you must not demand interest (neshekh) from him. The prohibitions receive credit even from the early Jewish and Christian traditions. Yahweh’s) people. to any poor man among you. The American Muslim (TAM) 1989. J. which means the birth of money from is applied to the breeding of money because the offspring resembles the parent. V. is usury.

2. those with higher incomes and. Int.The same can be seen as well in Leviticus as follows: If your brother who is living with you falls on evil days and is unable to support himself with you. and he must continue to live with you. Retrieved from http://www. you must support him as you would a stranger or a guest. government or private economic development project planning. Achieving equity among different levels of income and wealth is a fundamental aspect of the Islamic value system. Middle East Stud. for investment in a business venture. 14(1). 33 . Noorzoy. for consumption and. 6.jstor. (1982. is an act of charity. Feb). therefore. as discussed then. Loans acquisition can not be divorced from either micro or macro. second. Do not make him work for you. You are not to lend him money at interest (neshekh) or give him food to make a profit out of it. In islam Riba is unlawful on both of these types of loans. The prohibition of riba on consumption loans is clearly so aimed at the redistribution of purchasing power from the rich to the poor. 59 58 59 See Leviticus 25:35-3 7.58 It appears from this that interest. To make a loan to another without riba. The simple bases of the prohibition against riba on consumption loans is that those who borrow are assumed to be in need of such loans for purposes of maintaining some minimum standard of living. and let your brother live with you. The purpose why loans are taken may fall in two categories: first. Islamic taxation in the form of zakat is directed toward this end. Lenders usually lend on interest (Riba). Islamic Laws on Riba (interest) and their Economic Implications.3 The rationale behind the Islamic Prohibition of interest (Riba) Outside the islamic world interest is central to loans acquisitions in banking practice.S. M. fear your God. higher savings (surplus funds) are asked to make loans to those with lower incomes who are in need without having to extract riba from them. Thus. riba or usury which is at the root of traditional banking is rather a creature of capitalism and it is only entertained in the economic set up of capitalist ideology. do not take interest (tarbit) from him. J.

Money tends to be viewed purely as a medium of exchange. Guide to Why Islam Has Prohibited Interest and Islamic alternatives for Financing.62 Generally.In the case of loans for business investment it is generally argued that the basic reason for the prohibition of interest is that it generates income without "labor" (work) on the part of the lender. control and power over the issuing of artificial paper money. Islamic finance ensures the only way a financier can generate a profit is by purchasing an equity share in a business venture in exchange for his capital. By denying money the role of a commodity. p. Along these lines physical capital is clearly considered to be a factor of production in the conventional sense. removes from private banks. April). Interest can lead to injustice and exploitation in society. through proprietorships or active partnerships. machines. in essence. E L. 7. (1998. or inventories from their available capital funds. or indirectly through silent partnerships (mudaraba) and purchases of shares in corporations rather than hold idle cash balances. This in turn. The argument is aimed at encouraging capitalists to invest directly. money in Islam is not regarded as an asset from which it is ethically permissible to earn a direct return..files. 60 In line with this.pdf 34 . Retrieved from msmsoton. be clipping coupons from fixed interest earning assets. capital formation should proceed through the expenditures by any of these types of business on new buildings. This in turn enables economic growth rates to increase and the wealth generated to be shared more equally by society. Thus. (2005). Scheinkman J. 61 Islamic financing only permits the government to issue currency which must be backed by an underlying asset. Glaeser.wordpress. This one difference strikes at the heart of the evils of interest based banking by ensuring money is better able to flow to those projects which are viable and away from those projects which offer the greatest collateral. 1-36. But this reasoning also has the implication that money has no productivity per se. Neither a Borrower nor a Lender Be: An Economic Analysis of Interest Restrictions and Usury Laws. Islam does not view money as a commodity which can be bought and sold at a profit. The Qur’an 60 61 Ibid. Journal of Law and Economics 41. It seems that this prohibition is directed at those who would. 62 First Ethical.

i. Allocation of investable funds will be guided by the soundness of the project. This is because the interest mechanism makes feasible only those projects whose expected profits are sufficiently high to cover the interest rate plus added income. Second. iii. repayment of capital to the bank is diminished by the amount of loss. First.(2:279) characterises it as unfair. ii. iv. the new system will also ensure more equitable distribution of wealth. This filters out projects which otherwise would be accepted in the profit-sharings ystem. Islamic banking is an instrument for the development of an Islamic economic order. In principle. Many of these arguments are similar to those put forth in medieval Christianity to restrict usury. the shift to profit sharing may increase the volume of investments that translates into job creation. Some of the economic rationales for the superiority of profit-and-loss sharing over the use of interest are: If interest is replaced by profit sharing. exponents of Islamic banking also do have economic arguments to support a ban on riba. Wealth would bring more wealth to its owners only when its use has actually 35 . Thus in the profit-sharings ystem. investment. the return on capital will depend on productivity. some imbalances are expected to be reduced. oppressive and exploitative. these problems are avoided under Islamic markup contracts. Third. In case the enterprise loses. the creation of money by expanding credit will be created only when there is a strong likelihood of a corresponding increase in the supply of goods and services. Fourth. This will eventually curb inflationary pressures in the economy. the supply of money is not allowed to overstep the supply of goods and services. This will in effect improve the efficiency of capital allocation. While the above mentioned rationales for banning interest in Islam are unambiguously rooted in isalmic theology.

However.resulted in the creation of additional wealth. 36 . as prescribed by Shariah. Provision of general utility services including transfer of funds. pp. International Journal of Business and Social Science._2%3B_February_2011/20.jstor. There is no restriction on 63 Aggarwal. 2(2). (2011. 32 (1). 169. the abolition of interest. T. it is worthwhile noting before hand that Islamic Financial Institutions are operating in the same environment as do the conventional banks. that 64 Hanif.K._2_No. they do the role of intermediation of funds. R. Retrieved from http://www. (2000. together with the restriction of forward transaction. there will be a secondary market trading common stocks and investment certificates based on profit-sharing principles. safekeeping of valuables. 63 The above discussion has presented the dogmatic foundations of islamic principles as they apply to islamic banking. M. will curtail speculations measurably. Savings mobilization from savers to entrepreneurs and Second. and any other service for a fee. Retrieved from http://www. 64 Any financial system is expected to assist in running the economy by providing the following services grouped into two headings. Journal of Money. This would in time reduce the unjust distribution of wealth which continued for decades during the interest regime.ijbssnet. Feb).4 Distinctions between Islamic Banking and Conventional Banking In discussing how islamic banking differs from conventional banking. The differences are discussed below. These form the principle constructs for differences between islamic banking and conventional banking. Islamic Banks and Investment Financing. v. facilitation in international trades. 2. Yousef. Islamic banks assist the business world by providing all the services required to run the economy smoothly. But still. They also perform all those functions which are expected from a financial institution. the philosophy and operations of islamic banks are different. Credit and Banking. Fifth. 93-120. First. Differences and Similarities in Islamic and Conventional Banking. consultancy services.. This will bring sanity back to the market and allow raising of funds for enterprises and liquidity to equity holders. Feb).

It is also argued that it is relatively easier for interest-based commercial banks to borrow from the money market. The two are also distinguished on the aspect of paying and receiving interest (riba).provision of such services by Islamic banks since provision of such services is not against the shariah. there exist differences in mechanism of funds mobilization from savers to entrepreneurs as described below. While the functions and operating modes of conventional banks are based on fully manmade principles the functions and operating modes of Islamic banks are based on the principles of Islamic Shariah. Further. it has become one of the service-oriented functions of the Islamic banks: to be a Zakat Collection Centre. They have noprovision to charge any extra money from the defaulters. Participation in partnership business is the fundamental function of the Islamic banks. While in conventional banking the investor is guaranteed on a predetermined rate of interest. 37 . The shariah is contained in the Quran and in the hadeeth.65 Islamic and conventional banks are distinguished on the basis of their functions and operating modes. Borrowing in islamic banks must be based on a Shariah approved underlying transaction. This is prohibited in islamic banks. This may be fatal to islamic banks urgent 65 Ibid. However. They charge insted only small amount of compensation the proceeds of which must be given to charity and rebates (discounts) are given for early settlement at the bank's discretion. Farther distinctions relate to the fact that Lending money and getting it back with compounding interest is the fundamental function of the conventional banks. In another aspect convetional banks can charge additional money (penalty and compounded interest) in case of defaulters. The manmade principles are contained in laws of a particular country relating to banking. while conventional banks are not concerned with payment of a mandatory contribution charged on one’s income on a yearly basis commonly known as zakat in the modern Islamic banking system. islamic banking promotes risk sharing between the provider of capital (investor) which is usually an islamic bank and the user of funds (entrepreneur) who is usually the customer.

A conventional bank has to guarantee all its deposits. Being new. in relation to its clients. Diffusion of Innovations (5th Edn). E. Islamic banks deal with assets instead of cash as such they do not receive interest but rather finance the borrower by supplying to him an asset he requires by an agreement to share profit and loss. Credit-worthiness of a customer is of no concequence to islamic banks. Adopting any thing with new feature previously unknown by a system always proves to be problematic. customers have to share profit and loss and may lose all or part of their money as there is no guarantee. Islamic banking results in many issues such as policy issues. New York. The Free Press. however if the account is an investment account. The status of a conventional bank. its adoptability needs to be preceded by enough preparation of the banking system as a whole. a function which is shared by both types of banks. which give greater emphasis on the viability of the projects they agree to share profits and losses. A theory propounded by Rogers66 reinforces this fact. The theory is known as the Innovation 66 Rogers. investors and trader. in financial intermediation. Conclusively. Another aspect of distinction is the aspect of customers deposits guarantee. (2003). thus the depositors are guaranteed repayment of their funds. islamic bank can only guarantee deposits for deposit account. The status of Islamic bank in relation to its clients is that of partners. 38 . is that of creditor and debtors the customer being the former while the bank being the latter. Moreover. in advancing loans conventional banks give greater emphasis on credit-worthiness of its clients. legal issues. operational issues and systemic issues. Islamic banks and conventional banks are distinguished on their status in relation to their customers.needs of money. The researcher is concerned about the mechanics of its adoptability. islamic banks cannot provide finance for projects that are prohibited by Shariah regardless of how profitable they may be. It necessarily implies that islamic banking is a form of trading. which is based on the principle of al-wadiah. buyer and seller. With the mentioned differences.M. Islamic banking is completely a new creature in Tanzania.

getting a new idea adopted either by individuals or organisation. the key theoretical constructs concerned with IDT focus on adoption of an innovation.70 IDT is an apotheosis to be applied to the present study which seeks to research on the challenges brought about by adoption of Islamic banking in Tanzania. Ibid. to the time when they are widely adopted. 204-16 70 Rogers. In this regard Islamic banking is an innovation.B. In studying this. P. 39 . whose situation differs.. Cunningham. Diffusion is a mega process that relates with familiarizing and accepting an innovation and adoption is a mini process that comprises of various stages that a system goes through prior to accepting or rejecting that innovation. In this process adopters pass from awareness to a full acceptance of an innovation. Many innovations require a lengthy period of many years.Diffusion Theory (IDT). can be utterly difficult and considerably not without challenges. The IDT theory states that the process of diffusion and adoption are very closely related processes. Innovation refers to anything new that was not known before. International Journal of Bank Marketing. For this purpose Islamic banking is an innovation which rapidly diffuses into Tanzania. p. Generally. 69 Gerard. Islamic Banking: A study in Singapore. complexity. 15(6). as it comes with innovation. Op cit. from the time when they become available. J. 67 This implies that adoption of an innovation has to be done in two levels: acquiring it and adopting it either by individuals or organisations. observability and trialability. machinery. idea. practices and so forth. the study mainly deals with the diffusion of Islamic banking as innovation in view of one of the mentioned characteristics. 68 However. compatibility. Furthermore. It can be technology. The study finds out how Islamic banking practices are compatible with the currently existing regulatory 67 68 Ibid.69 Innovations are said to come with such characteristics as relative advantage. which is compatibility as above mentioned. (1997). despite the obvious advantages it may have. the same innovation may be desirable for one situation but undesirable for another potential adopter.

one dependent which is adoption of Islamic banking72 and another independent. (2003). However. New York. From that influence.and supervisory framework. does the existing regulatory and supervisory system call for any fine tuning as regards islamic banking established in Tanzania? Therefore. this study examines compatibility concerning adoption of Islamic Banking in the context of how it fits or does not fit in our current regulatory framework.M. the Tanzanian banking institutions have some long banking experiences from the conventional banking practices.71 Generally. This means acceptance and continued use of Islamic Banking. E. its banking functions and purpose are nearest to the functions and purpose of conventional banking. 40 . Diffusion of Innovations (5th Edn). Compatibility denotes the degree to which an innovation is perceived as being consistent with existing values. past experiences and the needs of potential adopters. 71 72 Rogers. which is compatibility of Islamic banking with the Tanzanian regulatory and supervisory regime prove to be of vital significance in fixing the focus of this study. The Free Press. the following research questions guided the researcher throughout this study: (a) What are the common types of risks that are experienced in islamic banking system? (b) What are the challenges that islamic banking engenders to the Tanzania’s banking regulatory and supervisory regime? and (c) Lastly. It determines how far application of Islamic banking principles is compatible with the conventional banking practices. the question is does the shariah law within which the functioning of Islamic banking is governed have any compatible dictations with the current regulatory and supervisory framework within which the conventional banking functions? Thus two variables. if or not it brings about any challenges which necessitate tuning up our regulatory framework. Comparably since Islamic banking is banking.

the Muslims’ holy cities in Saudi Arabia.78 In l969. The capital-owner contributed the money and the partner managed the business. the capital-provider lost his money and the manager lost his time and labour. E. These banks invested mostly in trade both singly and in partnership with others with whom they also shared profits. The origin of the modern Islamic bank can be traced back to the very birth of Islam when the Prophet himself acted as an agent for his wife's trading operations. 75 Ibid. The first Islamic financial institution in Malaysia was the Muslim Pilgrims Savings Corporation established in l963 with the view of helping people make savings for performing hajj. If there was a loss.1 Early Development The concept of Islamic Banking is as old as islam itself.CHAPTER THREE ORIGINS AND DEVELOPMENT OF ISLAMIC BANKING 3. Nov). 32-50. Interest was not charged.74 Such partnerships performed an important economic function. 1(1). 77 In spearheading advancement of Islamic banking one may not help not to mention Malaysia. Each shared in a pre-determined share of the profits. the latter two functions usually combined in one person. 77 ibid 78 Pilgrimage to Mecca and Medinah.75 The first most practical of modern forms of islamic banking grew its first roots in Egypt at the area known as Mit-Ghamr in 1963. Arab Law Quarterly. (1985. labour and entrepreneurship. Many savings banks were established during this time. They combined the three most important factors of production. 41 . known as Law 66 of 1971 was the first to be established which became the first Islamic bank in the urban and is still existent todate. Islamic partnerships73 dominated the business world for centuries and the concept of interest found very little application in day-to-day transactions. 76 The Nasser Social Bank (NSB) by a special statute. namely: capital. A. pp. 76 Mayer. this body evolved into the Pilgrims 73 74 In modern Islamic banking these are known as Mudarabah. Ibid. Islamic Banking and Credit Policies in the Sadat Era: The Social Origins of Islamic Banking in Egypt.

International Centre for Research in Islamic Economics. Monetary Policy in an Interest-free Islamic Economy . The Tabung Haji has been acting as a finance company that invests the savings of wouldbe pilgrims in accordance with Shariah. Islamic Banking: The Malaysian Experience. 81 Shariah Fortune. when it prohibited all banks from giving or taking interest. The first bank explicitly based on Shariah principles was established by the Organization of Islamic countries (OIC) in 1974.Nature and Scope. Jeddah 82 ibid 42 .81 During this time. Retrieved June 20th. 2012. History and Evolution of Islamic Banking. which represents a full fledged Islamic commercial bank in Malaysia. The Tabung Haji also contributed a substantial contribution to the initial capital directed toward establishment of of the BIMB. Monetary and Fiscal Economics of Islam. from http://shariah-fortune.). the Faisal Islamic bank of Sudan (1977) and the Bahrain Islamic Bank (1979). however. Its business model involved fees for financial services and profit sharing financial assistance for projects. no government had played a significant role in establishing most of these banks up to this time until 1985 when the first concrete government endevour was taken by the Iranian government. International Centre for Research in Islamic Economics. 80 Ariff. The success of the Tabung Haji. (1988). M. however. M.d).80 These include the Dubai Islamic Bank (first Islamic private commercial bank. formulated under presidential decree.). (Ed. (1982). This bank was primarily engaged in intergovernmental activities mainly for provision of funds for economic development of projects in member countries. called Islamic Development Bank (IDB).82 All these banks were a result of efforts by private institutions’ endevours. In Ariff. Jeddah 1982. 79 Zakariya. as it is a nonbank financial institution. M.Management and Fund Board or the Tabung Haji as it is now popularly known. Pakistan also had an established Islamic banking system at the time which unfortunately didn’t survive.79 In 1970’s many islamic banks flourished. Monetary and Fiscal Economics of Islam. 1975. M. Others from the Asia Pacific region include the Philippine Amanah Bank (PAB). but its role is rather limited. (Ed. provided the main impetus for establishing Bank Islam Malaysia Berhad (BIMB). In Ariff. (n.

83 3. 84 In these countries islamic banking is accepted. (2006). L’osservatore Romano. Shariah Banking Conquers Europe. A Vatican Newspaper comments that. Islamic finance grows faster than in other european countries. These banks are offering shariah-compliant financial services.brusselsjournal. M. In Thomas L. (2009. (2009). B. the general financial crisis facing the developed world. Financial institutions now present in the UK mainly manifest themselves in the form of either retail banking 83 84 ibid Mac forinstance.2 Islamic Banking Beyond Islamic Communities There is a good record of establishment of Islamic banks outside the countries with islamic influence just about the time when the countries with islamic influence were developing the concept of Islamic Banking.mondaq. Islamic finance has immensely found its way into the mainstream retail sector in the United Kingdom and in other European countries.Interests was replaced with service charges of 4-8% and guaranteed minimum profits. March). Islamic Finance has ceased to be viewed as only being the orbit of the specialist practitioner with strong links to the islamic 43 . Mondaq.asp?articleid=21512 85 See Giovanni. Retrieved December 23. 2012. and European governments are in a league to outcompete each other in licencing these banks. amid. Currently. from http://www. The first islamic bank in Europe. It is viewed by europeans now as being founded on more ethical principles comperatively. is said to have been established by the year 1978 in Luxembourg. Retrieved from www. all over Europe Islamic banks are establishing branches. Introduction to The Principles of Islamic Finance. Dalla Finanza Islamica Proposte e Idée per l’Occidente in Crisi. As of recent islamic financial institutions within nonMuslim communities practically are mushrooming exponentially. “ the ethical principles on which islamic finance is based may bring banks closer to their clients and to the true spirit which should mark every financial service”85 In the United Kingdom where particulary the government is making a concerted effort to turn London into a global hub for the islamic banking industry. The Brussels Journal.V.

from http://www. Islamic Banks and Investment Financing. the modern concept of islamic banking has been developed on the basis of profit sharing. This has come to be known as the UNB Islamic mortgage. T. S. Retrived from http://www. (2008). R. 2012. p. (1990. and Mirakhor.asp?articleid=21512 88 Aggarwal. On account of this. Pakistan Economic Development and Cultural Change. (2006). N. 354. alternative interest-free financing techniques have been developed by Islamic banks and monetary authorities in several 89 Mohsin. 93-120. and not an uncertain rate of return represented by profits. Feb). 38 (2). 32 (1). Journal of Money. HSBC was the first conventional bank to offer mortgages in the UK that comply with Islamic financial principles using the ijara structure. Islamic Banking : A Golden Opportunity for European Banks. the principal restriction under which the Islamic financial system must work is the prohibition against interest (riba).88 Mainly. 86 Islam. Jan). islamic banking is becoming ubiquitous and with a pertinent question money. this was followed by United National Bank Limited ("UNB") offering its first Islamic product in the UK based on the ijara model.. Credit and 44 . 87 In 2003. however.jstor. Retrieved December 23.and or investment banks. K. but in general the operations of a typical system would have the features discussed below.jstor.89 In the last few decades a variety of models of islamic banking have been proposed. Introduction to the Principles of Islamic Finance. Islamic Banking: Experiences in the Islamic Republic of Iran. Mondaq.K. Retrieved from http://dinarstandard.3 The Practicability of Islamic Banking without interest (Riba) As islamic banking advances and as nations issue more licences to banks and financial institutions. 3. pp. (2000.mondaq..86 The Financial services Authority (FSA) in the UK has only authorised one Islamic retail Bank known as The Islamic Bank of Britain (IBB) and about five islamic investment banks the most common of which being the European Islamic Investment Bank (EIIB) and the Gatehouse Bank. how does it function without riba? As already put clear. The 87 Mac Farlane. Retrieved from http://www. A. B. The instruments of commercial financing have been based on two principles: the profit-and-loss sharing (PLS) principle and the markup principle. it is important to note that what is forbidden by Islamic law is the fixed or predetermined return on financial transactions. However.

3. M. bai eenah. bai salam. 18(1).3. except by mutual consent. development charges.1 Source of Funds Besides its own capital and equity. parameter has to be agreed on in advance of the transaction between the bank and the depositor and cannot be altered during the life of the contract. bai mu'ajjal (bai bithaman ajil). made by the bank. Arab Law Quarterly.91 All these fall in three most 90 91 ibid Anwar. muzara'a. namely transactions deposits and investment deposits. bai istisna. Retrieved from http://www. or distribution. This pursuit has so far led to discovery of many operational modes to perform all types of banking transactions on an interest-free basis. would be treated as if they were shareholders and therefore entitled to a share of the profit. equity participation. qardhul-hasan. wakala.90 To make this possible the bank must acquire assets out of which profits are shared. (2003). The bank offering investment deposits would provide no guarantee on their nominal value and would not pay a fixed rate of return.3. ijarah waiktina. murabaha. ijarah. musharakah mutnaqisah. instead. sale on instalments. it would pay no return on this type of liability. the main sources of funds for an Islamic bank would be two forms of deposits. Transactions deposits are directly related to payments and can be regarded as equivalent to demand deposits in a conventional banking system. 62-80.jstor. These modes comprise: mudarabah. service charge. purchase of trade bills.2 Islamic Banking Financing Modes Declaring interest as riba intensified the search for interest-free modes to conduct banking business. or losses. musaqah. sale and purchase of shares. Although a bank would guarantee the nominal value of the stable/3382068 45 . The share. The following part shows modes of how assets are acquired. and financing through auqaf.3. Investment deposits constitute the principal source of funds for banks. Depositors. and they resemble more closely shares in a firm rather than time and saving deposits of the customary sort. musharakah. Islamicity of Banking and Modes of Islamic Banking. The only contractual agreement between the depositor and the bank is the proportion in which profits and losses are to be distributed.

This arrangement. effort and all that which is needed to make investment for return of profit.The borrower. time. loses only the time and effort invested in the venture. 92 93 ibid ibid 46 .92 A presigned contract in this mode is important as profit. as such. Musharakah is used in long-term investment projects. This financing method corresponds to a capital market in which shares can be acquired by the public.3. The loss to the borrower being the opportunity cost of his own labour which failed to generate for him any profit. effectively places human capital at par with financial capital. The islamic bank and the borrower invest in a business project in varying proportions pursuant to an agreemnt as to such investment. 3.93 Musharakah (Partnership) is a mode of islamic financing whereby there are more than a single contributor of funds. therefore. Financial losses are borne exclusively by the lender. and even the central bank and the government. banks. trade based modes and rental based modes. Mudarabah has been employed in investment projects with short gestation periods and in trade and commerce.2.common groups which are identified as partnership based modes. if any. the borrower provides skills. Surplus funds are made available to the entrepreneur to be invested in a productive enterprise in return for a predetermined share of the profits actually earned.1 Partnership based Modes Partnership based modes include mudarabah and musharaka. While the islamic bank provides capital. The profits and losses are shared strictly in relation to their respective capital contribution. Mudarabah is a contract between two parties: a capital owner known as rabb-al-maal and an investment manager known as the mudaarib. Traditionally. The Islamic bank in this arrangement may not have any right to interfere with how the borrower manages his investment. would be distributed according to what has been agreed in this contract.

the salam is “a forward sale for immediate payment. In Shariah. (1997) The Salam Sale Contract in Jurisprudence and Practice. While the seller may or may not have full knowledge of the cost of the item being negotiated. Bay'ah. The second is concluded between the bank and the client who placed the order.E. after the bank has possessed the commodity.Based Financing Modes Trade-Based Financing modes include Murabaha (cost plus sale contract). Retrieved from http://tadamonbanksd. musawamah and bai Salam a (sale contract).2 Trade. (n. Bai means to sell94 while Salam means advance.A. from http://en. Payment of Bai-Salam transaction is made in advance. It is thus a contract of sale whereby advance 94 Visit Wikipedia.3. Musawamah is the most common type of trading negotiation seen in Islamic commerce. the transaction consists of an order accompanied by a promise to purchase and two sales contracts. Murabaha is a cost-plus sale contract whereby disclosure of cost to the buyer is necessary."95 It is the selling of a specified commodity for exchange of a price paid in advance.2.3. the Free Encyclopedia.wikipedia.d).com/prints/publi/4. S. The first contract is concluded between the Islamic bank and the supplier of the commodity. Bai-Salam (forward sale) is a combination of two Arabic words Bai and Salam. they are under no obligation to reveal these costs as part of the negotiation process. Musawamah is the negotiation of a selling price between two parties without reference by the seller to either costs or asking price. It is a form of sale on delayed terms in which the money may be paid first and the goods delivered at a later date. Tadamon Islamic Bank. Thus. but at a deferred price.pdf 47 . Retrieved June 4. This difference in obligation by the seller is the key distinction between Murabaha and Musawamah with all other rules as described in Murabaha remaining the /Bay'ah 95 Naga. An essential feature of Murabaha is that IFI must purchase the required commodity from supplier first and then sell to customer. Under Murabaha arrangement customer requests the Islamic bank to purchase an asset for him (customer) and sell to him on deferred payment. The Fatwa and Research Department. that includes a markup. The deferred price may be paid as a lump sum or in installments. 2011.A.

there must be a proposal and acceptance. 99 Ibid. an act prohibited under shariah. the Free Encyclopedia. or currencies based on these metals. 96 In this contract. 2012. Barring this. and workmanship. which the seller undertakes to 98 Naga. For 96 97 Ibid. Validity is proved if certain conditions are satisfied. that there must be parties to the contract who are buyers and sellers and lastly that there must be the contracted item. 48 .97 There are three foundations or pillars of salam which are that.d). the transaction is considered salam if the buyer has paid the purchase price to the seller in full at the time of sale. silver. (n. Salam is an exception to three general rules of sale under islamic law which are: firstly that the purchased commodity must be existing. first. It validity is assessed against some conditions which are firstly that.98 It is logical that these pillars only prove that there ia a salam contract between parties but do not prove validity of the same. secondly that the seller should have acquired the ownership of that commodity and thirdly that the commodity must be in the physical or constructive possession of the seller.wikipedia. second. from http://en. It is necessary that the quality of the commodity intended to be purchased is fully specified leaving no ambiguity leading to dispute. Islamic Banking Principles. and the commodity. 99 Secondly that. the seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advance price fully paid at the time of contract. Retrieved May 25.payment is made for goods to be delivered later on. Visit Wikipedia. quality. Bai Salam covers almost everything that is capable of being definitely described as to quantity. The objects of this sale are goods and cannot be gold. op cit. which includes the capital paid by the buyer. salam cannot be effected on a particular commodity or on a product of a particular field or farm. This is necessary so that the buyer can show that they are not entering into debt with a second party in order to eliminate the debt with the first party. The idea of salam is normally different from the other either in its quality or in its size or weight and their exact specification is not generally possible.

The same rule is applicable to every commodity the supply of which is not certain. the simultaneous delivery of both is necessary for the validity of sale. also to help people meet the needs of liquidity problem and lastly to meet the need of traders for import and export business. Pakistan: Habib Metropolatin Bank.ppt 49 . Retrieved from www. salam cannot work. because there is a possibility that the crop of that particular field or the fruit of that tree is destroyed before delivery. as the price in 100 101 Ibid. according to Shari'ah. the delivery remains uncertain. its exact measure should be known. it is necessary.102 Fifthly that.d). and. If the commodity is quantified in weights according to the usage of its The salam contract is said to have the following purposes: To meet the needs of small farmers who need money to grow their crops and to feed their family up to the time of harvest in which case they can enter into agreement to sell even before they have harvested. And lastly that. if gold is purchased in exchange for silver. 103 Ibid. or the fruit of a particular tree. the salam will not be valid. Paper presented at AlHuda CIBE Workshop. Here. Therefore the contract of salam in this case is not allowed. M. if wheat is bartered for barley. that the delivery of both be simultaneous. given such possibility. as he receives the price in advance. if the seller undertakes to supply wheat of a particular field. Similarly.kantakji. its weight must be determined. (n. the exact date and place of delivery must be specified in the contract.example.104 Salam is beneficial to both the seller. salam cannot be effected in respect of things which must be delivered at spot. Salam. For example. 101 Fourthly that it is also necessary that the quantity of the commodity is agreed upon in unequivocal terms. 102 Ibid. All the possible details in this respect must be expressly mentioned. Another purpose is to help people meet the needs of working capital. and if it is quantified through measures. and to the buyer also. 100 Thirdly that it is necessary that the quality of the commodity (intended to be purchased through salam) is fully specified leaving no ambiguity which may lead to a dispute. 104 Khan. What is normally weighed cannot be quantified in measures and vice versa. Ibid.N.

promising. Istisna is a contractual agreement for manufacturing goods and commodities.Based Financing Modes Rental based modes include Ijara (Leasing) and diminishing Musharaka (diminishing partnership).3 Rental . Retrieved from http://www. Cap 215 (RE 2002).pdf 50 . The evidence from reasoning is that.3. The International Journal of Business and Social Science. this mode of financing includes a purchase order. 107 See Abu Ghuddah. plants. (2011. Istisna like salam istisna is an exception to general conditions of sale in islam which require that the goods. salam seems to be similar to a contract of sale under the Tanzanian Sale of Goods Act. M. Price can be paid in installments. allowing cash payment in advance and future delivery or a future payment and future delivery. Istisna’a can be used for providing the facility of financing the manufacture or construction of houses. at the same time. Ijara is an arabic word which is equivalent to leasing.d). Feb).105 Conclusively except for a few differences. and the need for 105 106 Ibid.salam is relatively lower than the price paid for the same item in spot sales.106 3. A. It means a contract which enables possession of a particular intended usufruct of the leased asset for a consideration. 2(2). A research paper. 107The lessor retains the ownership of the asset with all the rights as well as the responsibilities that go with ownership. Al-Baraka Banking Group (ABG).com/media/pdf /Research-Studies/RSIJ-200706201-EN. Department of Research & Development. must exist before a contract of sale is entered into. the contract takes the form of an order by a client to the bank. step by step as agreed between the parties. requesting the bank to purchase a piece of equipment. and a leasing contract. projects. subject matter of sale. ijarah is a means of facilitating life by helping people to get the usufructs of assets which they do not own. As a form of financing used by Islamic banks. A manufacturer or builder agrees to produce or build a well-described good or building at a given price on a given date in the future. and building of bridges.albaraka. a promise to lease. Differences and Similarities in Islamic and Conventional Banking.2. (n. Hanif. to lease it from the bank after it has been purchased. roads and highways. Thus. Ijara (Lease).

e. Ijara may end in the purchase of the leased asset. Both become co-owners. it is obvious. as described above. This works in that. The totality of rent paid is over and above the cost incurred to acquire the asset. 2 (2) 51 . After buying the beneficiary stays in the house or uses the asset upon paying rent comensurate with the shares that are held by the bank but at the same time paying regular scheduled purchases of the banks share in the house or asset. the rental fee deiminishes accordingly until the asset or home buyer owns the asset or home outright. but goes further to include equity financing and trade financing. Sep). does not only envisage financing activities as do conventional banks. Islamic banking. (1988. the beneficiary before purchasing the asset say a house will contribute some money towards buying that house and the bank pays the rest. but on the condition that the financier will gradually sell his share to the beneficiary at an agreed price and in accordance with an agreed schedule. in which the leased asset is either given to the lessee as a gift or is sold to him at a nominal price at the end of the lease agreement. Asian Pacific Economic Literature. 108 108 Ariff. M.usufructs is similar to the need for assets themselvesi. In this case the ijarah contract is that which is intended to transfer ownership of the leased asset to the lessee at the end of the lease agreement. Research Report on Islamic Banking. the poor needs the wealth of the rich while the rich needs the poor's labor.This transfer of ownership is made through a new contract. From this. and consideration of the people's need is a basic principle in contract legislation where contracts are legislated to fulfill such needs and requirements in conformity with shariah which is considered the rationale behind such legislation. Diminishing Musharakah (Diminishing Partnership) is a contract between an islamic bank and a beneficiary in which the two agree to enter into a partnership to own an asset. As the banks ownership diminishes.

as opposed to conventional bonds.111 The most significant product of investment is the sukuk. (2005. The Accountant Journal. 16. J. An Islamic window is simply a window within a conventional bank which is intended for customers to conduct business utilizing only Shariah compatible instruments. May). 16. has been a more common practice in Western countries than in the Middle East. (2009). 112 Ibid. Viability and Challenges of Establishing Islamic Banking in Tanzania. sukuk grants the investor a share of an asset. In an islamic window. Journal of Islamic Economics Banking and Finance. Journal of Islamic Economics Banking and Finance. J. islamic investment bank and a full-fledged islamic bank. p. p. p. Introducing Islamic Banks into Conventional Banking Systems. along with the commensurate cash flows and risk. However.110 In an Islamic Investment Bank a conventional bank offers products specifically designed to attract shariah-compliant investors. 52 . islamic window. which merely confer ownership of a debt. See also Solé. J. (2005. as a take-off platform for moving into the Islamic financial industry. introduces shariah complient products such as maintaining shariah accounts for deposits keeping which are reflected as a liabilities to the bank and Islamic trade-financing products at a small scale which are reflected as assets to the bank. sukuk securities adhere to Shariah principles as to charging or payment of interest. Introducing Islamic Banks into Conventional Banking Systems. As such. 4(2).17. 4(2). 110 Solé. where the tendency has been to establish stand-alone Islamic banks. Reliance on Islamic windows. lenders desire to avail themselves of investment opportunities while complying with Islamic jurisprudence. Islamic banking may be introduced by adopting any of these faces. Islamic Development Bank defines sukuk as being an Islamic equivalent of bonds. 17. Through these products. 109 Islamic window is usually taken as a take-off stage for any non muslim country undertaking to establish islamic banking.4 Development of Islamic Banking in Tanzania Islamic banking has three faces namely. May).3. 111 Ibid. 24 (2). p. a bank while engaging in conventional banking products.112 In a full-fledged Islamic Bank Once a conventional bank has operated an Islamic window for some time and has gathered a sizeable customer base for its Islamic 109 Andilile.

islamicbanking. under one roof. the depositors allow the banks to use their money but they obtain a guarantee of getting the full amount back from the bank. it may decide to establish an Islamic subsidiary. such as underwriting sukuk issuances or managing Shariah-compliant investment and hedge funds. These banks offer current.5 Status of the Tanzania’s Islamic Banking Practice In Tanzania most banks have been licensed to operate islamic windows except for Amana Bank which has been licensed as a full-fledged Islamic bank. and the need to interact with conventional banks which are based on interest.113 Conclusively banks in non muslim countries would hardly begin with a full-fledged islamic window as do some of the banks in islamic countries. For example. By following either of these two routes. Retrieved from http://www. Though all these banks follow the basic principles rooted in shariah they differ in their adoption of which face of Islamic banking and the differences are influenced by varying objectives of these banks. a wider range of shariah-compliant banking products than through the islamic window alone.M. savings and investment accounts. or even fully convert into a full-fledged Islamic bank.html#_Toc3149103 115 True of shariah and transact plus accounts of Stanbic Bank 53 .L. 114 The salient features common to all banks.115 Banks adopt several methods of inducing their clients to 113 114 Ibid. it may be better equipped to fully engage in Islamic investment banking activities.activities.Current or demand deposit accounts are virtually the same as those offered in all conventional banks. however. or to manage its own treasury and money market operations. In these accounts deposit is guaranteed. Interest free Commercial Banking. (1995). the bank may benefit from economies of scope and concentration of knowledge and expertise. These are common features for all islamic banks in all countries in which islamic banking is at nascent stage. The bank will be able to offer. individual bank’s circumstances and experiences. are the similarity of the services they offer. for the former countries it has been ideal to begin with islamic windows and with accelerating experience they gather to embark onto full-fledged islamic banks. See Abdul Gafoor A. As for savings deposit accounts there is comparably rather different ways of operation. In some banks.

117 Standard Bank Launches Sharia Banking In Tanzania. Cash Cover Letters of Credit etc. talking at a seminar to educate Imams on the essence of Shariah banking. Arusha. Profits are shared by 116 At stanbic if the account stays cashless for a period of over six months it is management and labour. vehicle loans and home loans through its Shariah Banking product. As such lower profit rates are expected and that too only on a portion of the average minimum balance on the ground that a high level of reserves needs to be kept at all times to meet withdrawal demands.php?option=com_content&task=view&id=396& Itemid=242 54 .com/news/news-66.116 These accounts are 100% Shariah compliant and provide the same convenient features of conventional accounts. Capital is not guaranteed but the banks take care to invest money from such accounts in relatively risk-free short-term projects. The New Business Ethiopia. Thus funds for these banks are collected from such deposit products. do not offer the full range of all the modes of financing available in Islamic banking practices.119 KCB’s products include deposit products which are Amana Savings catid=43:regional &Itemid=41 118 Mr. Amana Current Account. Visa electron or Maestro debit card. Construction Materials Financing. Asset Based Financing.newbusinessethiopia.php?option=com_ content&view=article&id= 125 :standard-bank-start-shariah-banking.html. lending and governance and its adherence to Muslims sometimes in 2011. This was observed from the Branch Manager. 120 Visit http://www. which currently offers two products under Islamic Banking. savings accounts are treated as investment accounts but with less stringent conditions as to withdrawals and minimum balance. May 04). including internet banking. the stanbic bank's board supervisor Shariah banking. visit also http://thecitizen. Retrieved from http://www. Stanbic Bank. Amana Cub Account and Amana Community 119 Visit the banks website http://www.deposit with them. http://allafrica. In others. 117 Islamic Banks and windows in Tanzania currently offer mainly deposit and financing products. but no profit is Stanbic Bank Tanzania Limited has plans to launch mortgage loans. namely the Corporate and Business Accounts. (2012. and prepaid airtime services. Mohammed Issa.118 Kenya Commercial Bank (KBC) has gone further as to offer more products than National Bank of Commerce. It also offers islamic financing products120 which are Short term trade Financing. These are offered through Mudarabha where the bank contributes the finance and the client provides the expertise.

Amana Bank has a Partnership Current Account which is a special product based on Shariah compliant contract of Qardh (Loan).121 Amana bank is the only full-fledged islamic bank in Tanzania offering products which are fully shariah-compliant. Islamic banking in Tanzania is at its nascent 55 . but when a loss occurs the total loss is borne by the the partners in a pre-arranged proportion. Conclusively. it largely functions within the conventional banks as islamic windows mainly offering deposit products than profit and loss sharing modes of financing. 121 For more information on this visit the bank’s website at http://amanabank. Except for one case of Amana Bank.

The principle Regulatory and supervisory organ in Tanzania is the Bank of Tanzania (BoT). 47(1) of the BOT.123 Regulation and supervision are important elements in establishing a sound banking and financial system. 2006 for the BOT’s power of control over other banks. Supervision refers to the Banking Agencies’ monitoring of financial conditions at banks under their jurisdiction and to the enforcement of banking regulation and policies. The BoT has the power to supervise and regulate the functioning of all other banks as well as all other financial institutions. 126 See s. There are two ways in which such inspection is effected by On-site inspection126 and by Off-site inspection. that act is known as supervision. regulation of banks has been done mainly through law. When law governs banking practice it is known as regulation122 and when the institution vested with the power of regulation (usually central banks) uses the law to regulate the banks. Act 2006 56 . These aspects are usually reduced into an accrony CAMEL and it is generally 122 123 Banking regulation refers to the framework of laws and rules under which banks operate. Asset quality.2. 4. This part presents the mechanisms of regulation and supervision partaining in Tanzania. 6(1)(a)(b) and 7(1)(2) of The Bank Of Tanzania Act.2 Regulation and Supervision of Banks in Tanzania Regulation of banks in Tanzania is through a number of various pieces of banking legislations and subsidiary regulations that have been passed to date. 44(1) of the BOT Act.CHAPTER FOUR BANKING REGULATORY AND SUPERVISORY FRAMEWORKS IN TANZANIA 4.124 This means no other institution apart from the BoT is legally allowed to partake of this duty with the BoT. Insepection is done in respect of all commercial banks. 125 BoT employes a methodology of regulation and supervision which is known as inspection. 125 See generally s. 2006 and 5(1).1 On-site inspection In an On-site inspection the BoT inspects banks with respect to their Capital Adequacy. Earnings capability and Liquidity. Managemnet quality.1 Introduction Throughout the historical development of banking. 2006. 4. 124 See section 4(1) of The Banking and Financial Institutions Act.

2006 and as reviewed recently. 18(4) of BFIA 132 s. s. 17. (2010). The CAMELS analysis also serves as useful vehicle for identifying problem or deteriorating institutions. unencumbered (unfettered/not tied) short term securities issued or guaranteed by the Government of Tanzania. Risk Based Supervision Framework.130 The requirement of Capital Adequacy being important for all banks to observe may cause any bank which fails to so observe it to be required by the BoT to apply for a license to operate as a financial institution instead of a bank. 129 S. its balances with the BOT.000. 2006 130 See s. Further. 000. Under CAMELS analysis. the BoT.referred to as the CAMEL rating system. All banks and financial institutions thus are supposed to maintain liquid assets132 at levels prescribed by the 127 Bank of Tanzania. as well as for categorizing institutions with deficiencies in particular component areas. 17 (b) of the BFIA.128 A bank should also maintain not less than 10% of its total risk-weighted assets and off balance sheet exposure. 57 . 2006 131 See s.131 Adequate capital is not enough to inculcate sound banking system. there are two forms of capital that all banks are required to maintain: core capital and total capital.17 (1) (a) of the BFIA. Directorate of Banking Supervision.129 Matters of adequacy of capital by all banks are one of the the things that the BoT has power of oversight and all banks have to comply. A bank is required to commence banking business with core capital of not less than 15. a bank’s cash in hand. all institutions are evaluated in a comprehensive and uniform manner.000 or higher. and that supervisory attention is appropriately focused on the institutions’ exhibiting financial and operational weaknesses or adverse trends. analyses institutions’ financial conditions and their operational soundness. 17 (3) of BFIA Act. 128 . the assets must have a requisite quality as prescribed by the BoT. 127 As regards capital adequacy. The BoT has a mandate to order a bank that has insufficient capital necessary to cushion it against risks to increase its capital above the requirements of s. By using this system. the rating system assists in following up safety and soundness trends and in assessing the aggregate strengths and soundness of the banking industry. 21 (5) (a) of BFIA defines this to mean.

Secondly. 22(1)-(11) of BFIA. the BoT has power to inspect and get reports of all accounting matters of respective banks and Financial Institutions. analyzing statistical returns and other returns covering key areas of the operations of the institutions.BoT from time to time. From this analysis Warning Reports are produced. putting a requirement to banks and financial institutions that the statistical returns be submitted every week.136 The BoT does this inspection for every financial institution at least once a year and during this activity the supervisors verify these institutions’ compliance with laws and regulations and and assess the effectiveness of the institutions' internal control system. 4. 134 Compliance to requirements of corporate governance and international principles of best practices are also matters that the BoT inspects. Act. 21 (1) of BFIA. semi-annual and annual periods and if the circumstances so demand at any time of the year.133 In finance. 2006 136 See Part IX of the BFIA.135 In this regard the BoT inspects also banks and financial institutions in respect of their liquidity. 2006. 58 . liquid assets are considered to be of a superior quality than illiquid assets. The question of who should take part in the management and Boards of banks and financial Institutions is also controlled since the success of a bank would depend upon its management. quarter.3 Principles and Subsidiary Legislations over Banks Regulation and Supervision BoT’s power to regulate and supervise is obtained from certain country’s legislations and subsidiary legislations.The BoT in its duty of regulation and 133 134 See s. This assessment is done through: firstly. month.2. 2006 135 See s. With respect to the earnings capability and liquidity of banks.2 Off-site inspection In the off-site inspection the BoT undertakes to make a thorough assessment of financial soundness of the financial institutions.12(1) of the BFIA. 2006 See s. Auditors of such banks have to be approved by BoT and these auditors are accountable to BoT directly. 4.

1. and circulars intended to reach the objective of the Act. orders. 1 of 1995 which was ultimately repealed by the BoT Act No. This law was amended later in 1978 through BoT Act No. 137 S. The latter Act is applicable to date. 4 of 2006. 70 (1) of BOT Act. 138 See Preamble to the Act. directions. 139 See part II of the Act. The present legislation began as the BoT Act of 1965. The BoT was established then by this law. rules. it provides for how the same should be managed and it specifies expressely the functions of the Bank as the regulator and supervisor of banks and financial institutions. The BoT Act of 2006 was enacted to provide for more responsive regulatory role of the Bank of Tanzania with respect to the formulation and implementation of monetary policy on the one hand. 137 4.140 and other operations of the Bank under which fall its regulatory and supervisory functions. And the minister of Finance also has a discretionary power granted him by s.141 Thus.1 The BoT Act.supervision of banks and financial institutions is guided by various Acts of Parliament of the United Republic of Tanzania that have been purposely enacted to cater for the banking and financial operations in the country as well as by a number of subsidiary legislations. This legislation had a long history of amendments and repeals in resonance with economic needs from time to time.3.17 of 1978.138 Main provisions relate to establishment of the bank itself. and to provide for the supervision of banks and financial institutions on th other.1 Principle Legislations 4.70 (3) of the BOT Act 2006 the BOT through its board of directors is legally allowed to pass various by-laws. In 1995 the 1978 Act was repealed and replaced by the BoT Act No. 4 of 2006 This is the first important legislation in banking regulation.3.71 of the Banking and Financial Institutions Act. No. 141 See part IV particularly sections 44-48 of the Act. 2006 to make various regulations to help the attainment of the primary objective of the Act. S. 59 . 140 See part III of the Act. this law apart from establishing the Bank. 2006 legally empowers the governor of the BOT to make regulations and issue directives and circulars intended to give effect to the provisions of the BFIA.139 issuance of currency.

to regulate credit operations and provide for other matters incidental to or connected with those purposes. No. No. among others. 5 of 2006 which applies to date. 1 of 1992 This Act was Foreign Exchange Act.3 The Foreign Exchange Act. 1992 60 . transfer or settlement of property and for the purposes incidental to and connected to those. to foster sound banking activities. It was replaced by the Banking and Financial Institutions Act No. 12 of 1991. This is visible in the preambles to these two laws. The 2006 Act is geared. payments.1. See also section 5 (a) of the same Act. 4. 142 143 See preamble to this Act. See section 4 of the Act. export.3. securities. import. 5 of 2006 This law began as the Banking and Financial Institutions Act. 144 See section 5 (d) of the Foreign Exchange Act.4. The BoT licenses and regulates bureaux de change in respect of their activity of foreign exchange.143 Money obtained from them may be deposited by any person into specific accounts maintained in the commercial banks. debts. to provide for comprehensive regulation of banks and Financial Institutions. intended to harmonize the operations of all financial institutions in Tanzania.1. The repeal was necessitated by the need to restructure the banking sector due to a shift in the needs of the country with an impetus from the IMF and the World Bank. foreign currency. 144 This means failure in foreign exchange market may restrict cash in the banks to a certain extent and this would in turn affect flow of the same into the economy.3. There is a close relationship between the banking activity of intermediation of funds and foreign exchange.142 These are the main laws relating to banking. No.2 The BFIA Act. 1992 was passed by the Parliament for the purpose of making better provisions for the more efficient administration and management of dealings and other acts in relation to gold. That of 1991 consolidated the law relating to business of banking.

associations and related matters. Though management of a partnership is done with reference to contracts establishing such partnerships and thus directly falling under this law. Now these are the main laws directly and indirectly involved in regulation and supervision of banks. the Governor of BoT. In short it deals with all matters 145 See forinstance s. by-laws.3.4. regulations directives and circulars useful to make the banking and financial system operate smoothly within the realm of the objectives of the Bank of Tanzania.4 The Companies Act. These are backed up by various subsidiary legislations discussed below. As discussed above three authorities are empowered by law to make various rules. Cap 345 (RE: 2002). No. 12 of 2002 and the Law of Contract Act. of banks and Financial Institutions.2 Subsidiary Legislations. 61 . Cap 345 of 2002 (RE 2002). 169 (2) (3) and s.1 Banking Regulations The number of regulations that have so far been made due to the granting of these powers above are as they appear hereunder. (i) Banking and Financial Institutions (Licensing) Regulations 2008 It enumerates conditions governing entrance into or exit. 4. its propriety is regulated by the BoT with reference to CAMEL rating system of banks herein above discussed. This law will control every bank which is a corporate entity145 while other forms like agency and partnerships are mainly governed by the Law of Contract Act. Cap 212. 4. from the banking industry in Tanzania. The companies Act provides for more comprehensive provisions for regulation and control of companies. and the Minister of Finance of the United Republic of Tanzania. These laws are important also in the management aspects of the banks in such forms on the one hand and other aspects such as protection of relations between themselves and their customers. 171 (4) (a) (i) of the Companies Act. These authorities are the Board of Directors of BoT.

1993 and the Addendum (addition) to Circular No. 1996. (iii) The Banking and Financial Institutions (Capital Adequacy) Regulations. 2008: These Regulations replaced those 2000. (ii) The Banking and Financial Institutions (Management of Risk Assets) Regulations. 2008: 62 . The focal intent of the Regulations is to provide guidance on measuring and monitoring liquidity of banks and Financial Institutions and the maximum ratio of loans to deposits.relating to licensing of new entrants in the banking system on the first hand and on the other it sets conditions necessary for their safe and sound operations. 3 on Capital Adequacy issued on 27th March. Classification of Loans and Other Risk Assets. Provisioning for Losses and Accrual of Interest" issued on 18th October.The principal objective of these Regulations is to provide the depositing public with reasonable protection by enhancing the capability of banks and financial institutions to absorb unexpected losses and thus minimize the incidence of bank failure. (iv) The Banking and Financial Institutions (Liquidity Management) Regulations. 2008 These Regulations came into effect in 2008 and replaced the Capital Adequacy Regulations of 2001 which had repealed "Guidelines for Measuring Capital Adequacy" issued on 1st October. The objectives of these Regulations are generally to provide a prudential (cautious) guidance on management of risk assets and bases for providing for losses on loans and other risk assets. 1991. 2008 These regulations replaced those of 2001 which had repealed "The Guidelines on Management of Risk Assets. (v) The Banking and Financial Institutions (Publication of Financial Statements) Regulations.

1992. The main objective of the Regulations is to keep the general public informed on the condition and performance of banks and financial institutions. The objectives of these Regulations are to encourage risk diversification and curtail excessive concentration of risk exposure of any bank or financial institution to one customer or group of customers. 2000. to regulate equity investments of banks and financial institutions and to avoid undue concentration of economic power and to regulate the amount of investments in fixed assets and prevent the use of depositors' money in acquiring such assets.The Regulations replaced The Publication of Financial Statements Regulations. industry economic sector or activity. officers. to promote arm’s length relationship in dealing between a bank or financial institution and its directors. The main objective of these Regulations is to give guidance to banks and financial institutions to appoint independent auditors that are recognized and registered by the National Board of Accountants and Auditors as well as by the Bank of Tanzania. (vii) The Banking and Financial Institutions (Credit Concentration and Other Exposure Limits) Regulations. Under this duty the banks and Financial Institutions are required to publish Quarterly unaudited balance sheet. (vi) The Banking and Financial Institutions (Independent Auditors) Regulations. staff. 63 . Bank auditing requires more than commercial enterprise auditing and as such only audit firms that meet registration requirements by the Bank of Tanzania may be appointed to audit banks and financial institutions. 2008 These Regulations replaced those of 2000. income statement and cash flow statement and the audited financial statements are to be published once annually. 2008 These regulations replaced those of 2001 which had repealed "The Guidelines on Concentration of Credit and Other Exposure limits" issued on 22nd December. to make credit available to a broader group of borrowers. thereby stability of the financial system. shareholders and their related interest.

the banking sector and the national income. preventing damage or loss of assets.preventing acts of robbery and burglary. The requirements contained in this circular do not cover Non-bank financial institutions.(viii) The Banking and Financial Institutions (Physical Security Measures) Regulations. and creating security awareness among management and staff in all banks and financial institutions thereby promoting a security conscious working environment.3. 4. received and funds borrowed from the general public. (ix) The Banking and Financial Institutions (Prompt Corrective Action) Regulations. assisting in identifying and apprehending persons who commit acts of robbery or burglary. 2008: These Regulations became effective in December. enhance transparency by establishing the minimum actions the Bank shall take in addressing identified weaknesses in banks and financial institutions. which could result into major losses to individual institutions. including foreign currency deposits. preventing injury and loss of life to staff and customers. and maintain confidence in the Tanzanian banking sector. 2008. The principal objective of these Regulations is to prescribe minimum security measures to be instituted by all banks and financial institutions for the purpose of: . 2 which was named Foreign 64 . Circular no.1: Reserves against Deposits and Borrowings This circular requires maintenance. 2008 . The main objectives of these Regulations are to ensure timely and effective actions to deal with a weakening bank or financial institution. The existing circulars so far made by the Bank of Tanzania include the following: (i) Circular No. 2008: These Regulations became effective in December.2 Banking Circulars Most regulations discussed above began as circulars. by banks.2. of statutory minimum reserves on their total deposits.

2001 and later into Banking and Financial Institutions (Capital adequacy) Regulations of 2008. The aim is to capture accurately and uniformly compiled information. S. 2000.6: the Publication of Financial Statements Regulations. Borrowing and Off-Balance Sheet Commitments was repealed on 02/01/1995 and replaced with Circular No. Purchases.Exchange Cover against Foreign Currency Deposits.5: Foreign Exchange Exposure and Placements.4 the liquid assets circular which required banks and financial institutions to maintain adequate liquid assets for meeting normal operations and demands of depositors and creditors was turned into The Liquid Assets Ratio Regulations. Sales and Balances This sets limits on placements with the correspondent banks by the banks and financial institutions. 67(1) of the BFIA. 2000 above discussed.This circular provides guidance to banks and financial institutions on how to file returns submitted to the Bank of Tanzania formally as required by the Banking and Financial Institutions Act. 1991and later in accordance with the Banking and Financial Institutions Act. (iii) Circular No. It is mandatory that these regulations and circulars are well complied with otherwise there is a penalty for non compliance. 2001). 1991.7: Instructions for Filing Returns under the Banking and Financial Institutions Act. 2006 grants the BoT 65 . 1991. and requires the institutions to maintain a net open position not exceeding 20% of the core capital. (ii) Circular No. It became effective on 30th June. 3 which was known as Measuring Capital Adequacy was converted into the Capital Adequacy Regulations. It requires banks and financial institutions to publish Quarterly and Annual Financial Statements in newspapers of General Circulation in Tanzania. Secular no. Also Circular No. (iv) Circular No. 5 discussed below.

power to describe and impose civil penalties on any bank and Financial Institution which violates provisions of the BFIA. Generally.. Firstly. regulations. The power that the bank has in accepting deposits has made bankers to become the principle agents or middlemen in a number of financial transactions as well as in any countries payment system. The penalty may be imposed also in cases where a bank or Financial Institution violates directives or circulars issued by the BoT under this Act. 2006 or any regulation issued under this Act. Banks are key lenders to business sector as well as to individuals. Specifically the justifications 147 why the law is important in regulation of the banking business are as follows. especially at this era when foreign capital is heavily encouraged. Division of Supervision and Risk Management: Federal Reserve Bank of Kansas City. directions or circulars made or issued under this Act. and Effects (5th ed). when the bank does the first function above it has to deal with a vast range and types of borrowers on the one hand. 66 . to protect the economy due to the fact that the broad range of activities banks undertake directly extend to and affect various areas of the economy. This payments system plays a vital role in enabling goods and services to be exchanged throughout the economy. Banking Regulation: Its Purposes. involve a bank at some point. Due to this most payments in Tanzania. therefore. These regulations and circulars have legal force as long as they do not occasion inconsistencies with the Act as well as except when they are revoked or cancelled. have a unique and central role in financial markets across the world. 72 (2) of the BFIA Act Spong.4 The Rationale of Banking Regulation and Supervision Regulation and supervison is done for many reasons. 146 4. 68 of the BFIA. (2000). Implementation. Secondly. and with the flexibility with which banking institutions can handle them. 2006 the governor of the BoT has due power to waive compliance with the provisions of this Act. customers deposit-lending and other related activities banks. through customer deposits-taking. K. they determine how an available large portion of 146 147 See s. However by s.

149 These are discussed is to be allocated across the country.5. that many business men. Considering this importance of banks to the economy and the level of trust customers place in them.1. Protection of Depositors’ Funds Depositor protection is the most basic reason of the law/ regulation and supervision. one that. Banking is an industry having strong public policy implications. bankers and the government have all played roles in developing the present system of banking laws and supervision. Owing to that regulatory system has been responsive to many different needs of the public. in most cases customers basically make use of banks when they draw and cash cheque and when they carry out other financial transactions which necessarily require them to 148 149 Ibid. This is true in three aspects: that the public makes a substantial amount of financial transactions through banks. hereunder in detail. Ibid. the general public. firms as well as individuals do hold a very significant portion of their funds in these banks and lastly that banking activities pose a good number of peculiar dangers to customers funds deposited with a bank. 67 . promoting an efficient and competitive banking system and protecting consumer rights related to banking relationships and transactions. 148 4. maintaining stability of monetary and financial system. A combination of these activities makes it apparent how much the banking system can affect the comprehensive supply of money and credit in a country. These dangers arise out of the following facts. banks are made very decisive links in the monetary mechanism and in influencing the overall condition of the economy. Due to this. it is in no way a surprise to find that governmental regulation and oversight have to extend to many aspects of banking.5 Role of Supervision and Regulation The primary objectives of the Supervision and Regulation function include protecting depositors' funds. Regulation and supervision provides dos and donts that make it done fairly. Thus.

17(3).151 4. 52(1). It is rather difficult to make a thorough and precise assessment of a banks financial soundness from the view of these banks’ expensive buildings or from the lengthy period of time the same has been in business.5. A good banking system is the one whose focus is on making sure that its customers are well provided with quality service and at competitive costs. Banking systems are integral parts of stable frameworks for payment systems in which they operate. 2006: ss. they usually make a more general judgment about the condition of the banks. 68 . that. ss. Two. When they decide to open an account with any bank. 39(2)(a)(b)(c). business men and even the governments. 36(2). Significance of these transactions necessitate that certain rules should be used to make viable safer and acceptable means of payment which is vital to the state of a particular country’s economy.maintain a deposit account. the customer fails also. individual bank depositors have a significant difficulty protecting their interests than customers of other types of businesses. Excessive problems of banking system may gravely interrupt the flow of the transactions across the economy and can threaten the general public confidence in the system. 2006 directly and indirectly relate to maintaining stability of the monetary and financial system. Efficiency and competition are related 150 Read the following sections of the BFIA. 43(1).2 Maintaining Stability of Monetary and Financial System. As a result of maintenance of these deposit accounts. 53(1). 11(1)(b).5. 151 The following sections from the BFIA. he simply pays for goods and services there at. 18(1).150 4. In other businesses a customer never becomes a creditor of the firm. 25(1)(2)(3)(4). which is sporadically prone to error.3 Promoting an Efficient and Competitive Banking System. 23(1)(2)(3)(4). There are numerous and vast volumes of transactions conducted every day both by individuals. customers become banks creditors and become tied to the fate of their bank. Should the bank fail. On this account banking laws contain many provisions which are calculated to protect the funds of the depositors. 55(1). 22(1)(4)(5). 59(1). 11(3)(f). The role of the regulation and supervision in this aspect is to create a regulatory frame work that encourages efficiency and competition and to ensure an adequate level of banking services throughout the entire economy. 7(2). 6(1). 56(1) & (2) of the Act.32(1).

152 4. s. s. s. 48(1) (3) (a) (b) (c). the loss of confidence and participation in markets may affect many other stakeholders. When categories of parties (stakeholders) do not have sufficient confidence that a corporation is being controlled and directed in a manner consistent with their desired outcomes.4 Protecting Consumer and General Public Rights. 153 Many parties apart from consumers may also be concerned with a bank in its corporate social performance.terms. Under consumer protection the law or regulation of banks becomes important so that the banks effect an equal and nondiscriminatory treatment of all the consumers of its services though he is not a depositor especially during this time when there are mounting complexities of financial instruments that come with the uniqueness of individual customers. Without competition some banks might attempt to gain higher prices by restricting supply of their services. 69 . 2006. Conclusively.28(1)(a)(b)(c)(d) of the BFIA.33(2). 48(4) (a) (b) (c). 26(1). practitioners of banking regulation and supervision must well design it in such a way that they extend cover to all areas that require immediate concern of 152 Relevant sections as regards this role are s. s.12(1)(a)(b)(c).13(1). a competitive banking system must be made by banks which operate efficiently. and increases the likelihood of political action. This can work well in an economy like ours where some banks have a monopoly in some areas or even in those areas where many banks do operate.5. The public has a general interest in the returns the bank brings to the economy.2006 153 Read sections. When this becomes a system feature. as far as banks are concerned.34(1)(2). A bank does not function only for the benefits of those who own it.12(2). this restriction of services for higher prices may be done by a group of banks by way of collusion (common agreement). of the BFIA. they are less likely to engage with the corporation. Some people deal in business with the bank whether or not they are this bank’s customers. A key factor in a party's decision to participate in or engage with a bank is his confidence that the corporation will deliver the party's expected outcomes. s.

Out of twelve respondents in the sample only six responded to this question positively. therefore. A. (1997). a muslim scholar relatively conversant with islamic banking from Arusha who responded orally and by supplying documents and four legal practioners who were much aware of presence of risks in banking generally but not particularly in islamic banking. Data are also presented from secondary data mainly from an analysis done on various pieces of legislations relating to banking and subsidiary legislations which include regulations and circulars that are used in banking regulation and supervision.pdf 70 . Read also Gilbert.public policy as failure of a banking system is always catastrophic and in serious cases results into economic depressions affecting all people indiscriminately.1 Introduction This chapter presents the finding and makes an analysis of the data in relation to the research questions and objectives behind the study that motivated the doing of this research as stated in chapter one. These constitute 50% of all respondents who responded tothis 154 See generally Honohan. Retrieved from http://www. Stanbic Bank and the National bank of Commerce (NBC). Monetary and Economic Department: CH-4002 Basle. B. Most of them although they were knowledgable of presence of risks in banking generally. Banking System Failures in Developing and Transition Countries: Diagnosis And Prediction. Switzerland. Louis: USA. they had no idea what would be the risks in islamic banking. the Kenya Commercial bank (KCB). one being a bank examiner from Directorate of Bank Supervision of BoT Dar es salaam.stlouisfed. Retrieved from http://research. who supplied documents which contained Failures_Nov1975. P. The findings in this study.bis. Bank For International Settlements. The researcher presents data collected from the Bank of Tanzania (BoT). Bank Failures And Public Policy.2 Response from respondents as regards the question on “what are the inherent risks in Islamic banking practices?” All twelve respondents were interviewed as per the interview guide herein annexed as regards this question. mirror the three research questions that this study dealt with. Federal Reserve Bank of St.154 CHAPTER FIVE THE RESEARCH FINDINGS 5. (1975).

K. N.155 Since Islamic banking is banking just like conventional banking. 22. Thus what is presented here is a mix of information from their own best knowledge and information obtained from the documents they supplied.. December). p. Kassim.. 156 Ibid. First risk was defined as an uncertainty or possibility of unfavourable outcome from an undertaking. which is the very basis of all islamic financial transactions. These are discussed hereunder. Journal of Journal Islamic Economics Banking and Finance. risk itself can not be divorced from it: these financing transaction are risky in themselves. Although risk is a key element that is equally shared between both systems. 5. risks are partinent especially where the bank makes prompt delivery of assets but client fails to make timely payment. p. From the analysis of the obtained information. In Murabaha transactions forinstance. the fact remains that each system is distinct and has its own distinguishing featuresvarying the nature and degree of risk to each one of them. researcher found out that Islamic banking has many inherent risks. 23 71 . Credit and Market Risks. (2009. it is not devoid of risks. 5(3). operating in the same environment and having the same purpose of financing the economy in which it operates. 157 Ibid. The are generally the following types of risks in islamic banking namely credit risks which mostly militate against the PLS contracts.156 Since islamic banking functions on risk sharing arrangements.M. Being so it has no means to monitor the investment or to participate in the 155 Rasem. 11. By its very nature.question.1 Islamic Banking Credit Risks Credit risks mainly affect the PLS financing modes. Thus both the bank and the customer may sustain the risk of loss. Unique Risks of Islamic Modes of Finance: Systemic. Islamic banking is just as risky business as conventional banking. The bank stands to lose not only its funds but also funds of its depositors.157 In mudarabah transaction the islamic bank is an inactive partner. The bank is in no position to take immediate effective measures to cover its dues nor can it charge interest or impose penalty on the outstanding balance. p.2. M. market risks and liquidity risks.

guaranteed. the Profit and Loss Sharing (PLS) modes are relatively more risky because the rate of return on them may be either positive or negative. These are indirectly exposed to risk of failing banking business.2 Islamic Banking Market Risks Market risksmainly arise from within arrangements under the Sales-based Modes. Islamic shariah requires that the mark-up rate under murabaha and other trade-financing instruments be fixed at the time of contracting. This is when there is erosion in the principal amount of investment deposits in cases of loss. Such risks are like mark-up Risk within Murabaha (cost plus sale). Thus the loss to the bank may also extend to the customers. p. When the business is not sucessiful it affects both the bank and the customers who deposit their funds with the bank. The bank is exposed to total loss of its investment if the entrepreneur fails to manage the business. investment deposits do participate in the risks of the business of banking and are not. Ibid. Conclusively. 13 72 .2. on the liabilities side. 5. This means if the rate agreed say 20% of the cost 158 159 Ibid. Islamic banks have. therefore. This is not the case in the conventional banking system as all demand as well as time and fixed deposits are of the project to which it put its funds. As the bank will chip on customers deposits to maintain capital. depending on the ultimate outcome of the business financed.159 The PLS and sales-based modes of financing are prone to certain degrees of risk. While demand deposits do not participate in the risks of banking business and are thus guaranteed. Customers are exposed indirectly if the losses suffered by banks on their PLS advances by using funds of demand depositors are substantial and the capital and reserves plus investment deposits are not sufficient to cover them. both demand as well as investment deposits from customers.158 Apart from those customers who participate in PLS financing modes demand depositors are also exposed to islamic banking risk.

Another risk islamic banks may face is price risk arising from bai salam. Illiquid assets are distinguished from liquid assets such as money and financial securities. p. 1008). K. Islamic banks deal with assets which are the primary feature of their transactions. In bai salam the Islamic bank has the risk of having to deal with an uncertain environment where the price of goods can vary significantly between the time of delivery and the time of actual sale of the goods in question at the current market price. and not money. 160 161 Ibid. One respondent noted that causes of liquidity risk in islamic banks are firstly. Definitions and Interactions (Working Paper Series No. Liquidity Risk: Concept.of the asset is pre-fixed at the time of making the contract for the entire length of the contract. the limited availability of Shariah compliant money markets. European Central Bank Eurosystems. secondly the absence of true inter-bank money market. Retrieved from http://www. (2009). Liquidity risk means the inability of an economic agent to exchange its existing wealth for goods and services or for other assets. 23 Nikolaou.ecb.160 Inflation risks are said to be the most important market risk facing Islamic banks especially when the currency used to finance is weak or weakens against the US dollar. The risk is the Tshs may be strong when the bank pays for the asset but may be weak when some or all installments from the customer are /pdf/scpwps/ecbwp1008.pdf 73 . thirdly undeveloped secondary markets and lastly the money these banks holds in current accounts is largely maintained in the form of idle cash which can not be used to invest in a broad range of activities as conventional banks do since there are no illiquid short-term instruments (as liquid instruments are not allowed in islamic shariah). The Islamic bank is exposed to the risk of upward movement of the mark up rate without being able to benefit from such an increase.161 An official from NBC bank notes that Islamic banks are mainly affected by liquidity risks that arise from general lack of liquidity as the vast majority of their assets are maintained in the form of illiquid assets.. A good example is the tanzanian shilling.

Those who responded expressed their views generally that the biggest challenge is that the existing regulatory and supervisory documents are not applicable to islamic banking and that the BoT is undertaking the making of new compatible regulations. The researcher. were administered as per interview guide to all 12 respondents sampled. supervisory. However only 9 responded positively.1 Regulatory and Supervisory Challenges Regulatory challenges caused by adoption of Islamic banking are those that relate to various laws in the Tanzania’s legal system. The researcher. 5. Risk is present in all Islamic financial transactions including saving and deposit accounts. which is 25% were nogt appropriately clear about any challenges.Conclusively risk in islamic banking is said to be the distinctive feature of islamic finance. also did an in-depth analysis of the existing principle and subsidiary legislations that relate to the aspect of regulation and supervision of banks. Risk is chiefly considered to be a dividing line between shariah acceptable profit and interest (riba). researcher found out that Islamic banking occasions many challenges which are regulatory. From the analysis of the obtained information.3 Response from respondents as regards the question on “what are the challenges Islamic banking practices engender to the regulatory and supervisory regime?” In relation to this question the researcher targeted most respondents from BoT. This constitutes 75% of all respondents in the sample and the remaining 3 respondents. 5. however. Most laws are not favourable to the 74 . Questions. Of significant is that risk as it is applicable in islamic banking has unparallelled attributes and distinctive characteristics. obtained enough information on how the BoT supervises banks and financial institutions. and judicial challenges. however. apart from this information.3.

(3) of the United Republic of Tanzania Constitution of 1977162 is relevant here. kazi ya kutangaza dini. Being seccular it is not aligned to any religions available in Tanzania. 164 The English version does not necessarily correctly represent the stipulations of the Kiswahili version. These laws and the challenges wedged against them are as follows: (i) Challenges against the United Republic of Tanzania Constitution of 1977 as am. It should be noted that the official version of this constitution is the Kiswahili version163 thus I reproduce here the relevant articles in their official version as the English translation distorts the real meaning and thus if employed would confer a different meaning. na maneno mengineyo 162 163 As amended from time to time. na shughuli na uendeshaji wa jumuiya za dini zitakuwa nje ya shughuli za mamlaka ya nchi. The English version of 1998 was flawed and was actually withdrawn from circulation. The constitution establishes the state of Tanzania as a secular state.functioning of the Islamic banking as their enactment preceded the introduction of this type of banking. This supreme law limits the government to only the recognition of such faiths but strictly forbids it to engage itself with the management of the affairs of any religious body. Article 19 (2) . This means Islamic banking is alien to our laws. The last ammendments were in February 2005 which were not captured in the 2000 constitution. from time to time.165 (3) Kila palipotajwa neno "dini" katika ibara hii ifahamike kwamba maana yake ni pamoja na madhehebu ya dini.164 This article reads in Swahili. kufanya ibada na kueneza dini itakuwa ni huru na jambo la hiari la mtu binafsi. The Kiswahili version of 2005 is the official constitution. 165 This highlighted part is not found in the English version. 75 . Uhuru wa mtu kuamini dini atakayo Sheria (2) Bila ya kuathiri sheria zinazohusika za Jamhuri ya Muungano. It however recognises peoples’ individual faiths. The first challenge is wedged against the supreme law of the country which is the Constitution.

S. 76 . 8 (1) of the Bank of Tanzania Act. The researcher was interested in the words “na shughuli na uendeshaji wa jumuia za dini zitakuwa nje ya shughuli za uendeshaji wa mamlaka ya nchi” which in English the words would loosely mean “and the state shall not engage in the affairs and management of religious organisations. integrity of the society and the national coercion.168 Being an organ of the state it cannot engage in regulating and 166 167 The highlighted part in Swahili version is missing. provides that the power relating to the licensing regulation and supervision of all banks and financial Institutions in the united republic are hereby vested in the Bank.4 (1) of The Banking and Financial Institutions Act. As it is part of this system it is likely to affect the country’s economy if its affairs and management are not supervised by the state authorities as article 19 (3) suggests. 168 See s.166 (3) in this Article reference to the term “religion” shall be construed as including reference to religious denominations.167 The BoT is the organ of the state and as such its governor is appointed only by the president. The Article literally transalated means: (2) Protection of rights referred to in this Article shall be in accordance with the provisions prescribed by the laws which are of importance to a democratic society for security and peace in the society. It has and it is increasingly becoming part of the Tanzania financial system.” Under article 19 (3) the word religion is defined to include religious denominations and expressions relating to it. and cognate expressions shall be construed accordingly. Islamic banking as the expressions suggest is based on Islamic religion and is founded in Islamic shariah principles. This article shuts Islamic banking outside the regulatory and supervisory functions of the Bank of Tanzania as the oversight body of all banks and financial institutions in the country. 2006.yanayofanana au kuambatana na neno hilo nayo yatatafsiriwa kwa maana hiyo. 2006.

supervising islamic banks activities since if it does, it would mean the state itself is managing the affairs and activities of Islamic religion.169 This, the Tanzanian constitution forbids since the state is a secular state.170 Conclusively, the concept of central banking is not alien to an Islamic framework. The general opinion seems to be that the basic functions of a modern central bank are relevant also for an Islamic monetary system.171 While Islamic banking accepts regulatory and supervisory functions of a central bank, the BoT legally does not recognise it. Thus islamic banking brings forth a very significant challenge to Article 19 (2)and (3) of the Constitution.172

(ii) The Judicature and Application of Laws Act, Cap 358 (RE: 2002) Another challenge is brought by islamic banking against the provisions of the Judicature and Application of Laws Act, Cap 358 (RE 2002). This is the principle law that declared the laws applicable to our state, then Tanganyika and it specifically states these laws to be the substance of the common law, the doctrines of equity and the statutes of general application in force in England on the 22 nd July, 1920, and the procedure and practice observed in courts of justice in England at that date.173 Part Three of the Act recognizes application of certain laws including certain Acts of England,174 customary laws, (ii) which reads:

some Indian Acts176 and Islamic law under s. 11 (c)

Nothing in this subsection shall preclude any court from applying the rules of Islamic law in matters of marriage, divorce, guardianship, inheritance,


The BOT does its regulatory and supervisory activities as an agent of the state. The famous latin maxim Qui facit per alium facit per se, which means "he who acts through another does the act himself." applies here. The state has a legal personality as well as the BOT under s. 4 (2) of the BOT Act, 2006. Having legal personalities it is justified that the BOT acts for the state. 170 See Article 3 (1) of the Tanzania Constitution of 1977, as amended from time to time. 171 Chapra, M.U., Khan, T. (2000). Regulation and Supervision of Islamic Banks. Islamic Development Bank and Islamic Research And Training Institute: Jeddah - Saudi Arabia. 172 See here in cited. 173 See s 2 (3) of the Act. 174 See s. 9 of the Act. 175 Section 11 (a)(b)(c)of the Act 176 See ss. 14-21 of the Act. 77

wakf and similar matters in relation to members of a community which follows that law.

This application of Islamic law does not warrant application of Islamic shariah as it is the jurisprudential basis of Islamic banking. The reasons are that: one, Islamic law is only applicable with respect to matters of marriage, divorce, guardianship, inheritance and wakf as Islamic banking is not mentioned it is excluded.177 Two, that all the matters stipulated by the Act to which Islamic law is applicable are relevant only if there are members of a community which follows that law, that is, Islamic law. Islamic banking is not necessarily used by people who have professed Islam; it is used even by non-Muslims who do not follow Islamic law.

This law too faces a serious challenge from establishment of Islamic banking both in its text and in its purpose as it is the only principle law that provides for the sources of law in our country. If this Act does not state that a particular law applies, logically it strictly does not apply. 178 This is a grave challenge to the regulatory and supervisory regime as Islamic banking cannot be properly supervised if it is not legally accommodated.

(iii) Act, 2006

The Banking and Financial Institutions Act, 2006 and the BoT

The researcher found out that this Act whose objectives among others are to provide for comprehensive regulation of banks and financial institutions with the view to maintaining the stability, safety and soundness of the financial system aimed at reduction of risk of loss to depositors.179 Convincing as this objective would appear, it does not by necessary implication apply to Islamic banks. These were found to be in the following aspects:


See the rule of statutory interpretation Expressio unius est exclusio alterius ("the express mention of one thing excludes all others") that is, tems not on the list are assumed not to be covered by the statute 178 See note 167. 179 See the preamble to this Act. 78

(a) Eligibility to acquire licence Sections 3 and S. 7 (1) of the BFIA, 2006 impare islamic bank’s chances to be eligible to acquire license to operate as a bank in other forms than as a company or as a cooperative society. An entity in Tanzania may not operate as a bank without acquiring license from BoT. This is the essence of section 7(1) of the Act which reads: The Bank may, upon application made in pursuance of the provisions of this Act, grant a licence to undertake the banking business to an entity formally established in accordance with the Companies Act, Companies Decree, Cooperative Societies Act, 1986 or the Cooperative Societies Act, 2003.

The incumbent condition in this section is that to be granted a license by the BoT the entity must either be a company or a cooperative society. This section has the effect of restricting the scope of application of section (S.3) of the same Act which defines an entity as to include other forms of business associations such as partnership, trust, association etc. Section 7 (1) excludes these other forms of business entities under section 3.

Ultimately from this observation a non Islamic bank must either be a company or a cooperative society. It seems, however, that the only option for an Islamic bank is a cooperative society since the concept of a company is not acceptable180 in Islamic shariah.181 The most common form used by islamic banks is thus partnership and this is the basis of the Profit and Loss Sharing Schemes (PLS). The main reason why there is no corporation in Islam is that, it is natural persons who have connection and thus are answerable to God for their deeds. While modern corporate law theory posits that a company has an artificial personality responsible for its own deeds, this theoretical construct on responsibility of a company is not recognised in Islamic philosophy as the company has no faculty of mind as an individual person.
180 181

This is a challenge to the Companies Act, Cap 212 (RE: 2002) Kuran, T. (2005, Fall). The Absence of the Corporation in Islamic Law: Origins and Persistence. The American Journal of Comparative Law, 53 (4). pp. 785-834. Retrieved from Issues sorrounding absence of the corporation in islamic law is, however, stiffly debatable. 79

antiques. Thus this is an important challenge to this law as well as to the regulatory framework generally.every bank or financial institution shall maintain liquid assets at levels prescribed by the Banks from time to time.182 This section makes it mandatory that all banks including Islamic banks should maintain liquid assets at levels which the BoT prescribes indiscriminately.. cars. money market instruments and government bonds.” S. and some types of debt instruments. Islamic banks thus can not maintain any higher levels of liquid assets than the illiquid assets. private company /terms/l/liquidasset. a bank or financial institution may engage in trade or other commercial operations that are temporarily 182 Liquid assets are those assets that can be converted into cash quickly and with minimal impact to the price received.asp#ixzz1z3rupXlz.investopedia. Liquid assets include most stocks. The BoT cannot prescribe levels which can apply equally to both islamic and conventional banks since while the former would like to have more illiquid assets the latter would like to have more liquid assets. The foreign exchange market is deemed to be the most liquid market in the world because trillions of dollars exchange hands each day. 45 of the BoT Act is in resonance with this section positing the same dictates.. 80 . This section can not apply to Islamic banking given the intrinsic features it has that differentiates it from conventional banking: Islamic shariah prohibits dealing in most of liquid assets as such a vast majority of Islamic bank’s assets are maintained in the form of illiquid assets. Elsewhere liquid assets are defined as financial resources which can be readily turned into cash or are already cash. Liquid assets are generally regarded in the same light as cash because their prices are relatively stable when they are sold on the open market. the core of their businesses lie on these varying interests. The two Acts do not define liquid assets. Visit also http://whatareassets. (c) Restriction to trade by banks Section 24 (4) of the BFIA reads: “With approval of the Bank.183 The most liquid of liquid assests is money and islamic banks do not deal with money but deal with assets which is the foundation of islamic banking financing. Read more: 183 Illiquid assets include all types of assets including houses. making it impossible for any one individual to influence the exchange rate.(b) Maintenance of liquid assets ratios Sections 21 (1) of BFIA reads: “.

which is the underpin of all the financing modes available in islamic banking. or obligations guaranteed by. When this happens the fund pays back to the bank an amount which is greater than that which had been earlier on contributed by the banks. In essence trade is the continuous activity of these banks. 36 (4) provides that the moneys constituting the Fund shall be placed in an account with the Bank to be invested in obligations of. Retrieved from www.185 S.” This section is also a challenge to the regulatory structure. The philosophical tenets of islamic Shariah prohibit riba but in its place allow trade. Islamic banking is not possible without trading. The fact that the section allows the BoT to approve trading by banks only for temporary purposes is a big challenge to the smooth operation of islamic banks and to the successiful operations of BoT’s supervision endevours. (d) Deposit Insurance Fund Section 36 (1) establishes the Deposit Insurance Fund which is managed by the Deposit Insurance Board (DIB). The section specifically reads: “There shall continue184 to exist the Deposit Insurance Fund to be managed and controlled by the Deposit Insurance Board in its acronym DIB.necessary in the conduct of its business or in the course of the satisfaction of debts due to it. into which shall be paid all contributions and other payments required by this Part to be paid into the Fund and out of which shall be made the payments required to be made out of the Fund. the United Republic and other 184 The word is used since the Fund had been established by the Banking and Financial Institutions Act of 81 . 185 Read Deposit Insurance from the Shariah Perspective Discussion Paper prepared by the Islamic Deposit Insurance Group of the International Association of Deposit Insurers located in Basel Switzerland.” Monies paid into the Deposit Insurance Fund are contributed by banks in order to secure their customers in case those banks suffer failures.

observations reveal that the only laws that are greatly useful in islamic banking are the sale of Goods Act. industrial growing crops. While findings under this part reveal that islamic banking brings in new experience as regards contracts and sales as they are known in conventional banking practice. (iv) The Legal Concept of goods A greater part of islamic banking financing modes are either contracts and or sales. however.This would be viewed by shariah scholars as an interest-based transaction and therefore non-permissible. against these laws are: S. emblements. Under s. The interest element could also exist in deposit insurance when the deposit insurence fund is invested in interest-based transactions or projects not approved by islamic shariah. In Islamic banking. Cap 214 (RE: 2002) and the Law of contract Act. 2 of the Sale of Goods Act defines goods as all chattels personal excluding things in action and money. Cap 214. Cap 345 (RE: 2002) . 29 of the Law of Contract 82 . Under bai salam the fact that one can sell crops even before he has planted the same is not accepted in the law relating to contract.obligations as determined by the DIB to be suitable investments taking into account the purposes of the Fund. the bai salam mode of financing is mainly used for sales of goods such as crops which have not been planted or severed from the farm the same things which are not recognised as goods that can be sold under the the Sale of Goods Act. and things attached to or forming part of the land. which are agreed to be severed before sale or under the contract of sale and by this a contract of sale involving the things excluded is not acceptable. A few challenges. Implications of these sections are that since deposit insurance involves the exchange of money for money and the exchange occurs with different values with a contributing bank receiving more than it gives. The profit would be viewed as not permissible and thus doubtiful to be applied in paying an islamic bank when it has failed.

The crops may or may not be obtained. this fact makes the contract contingent upon availability of such crops. Cap 345 agreement on this kind of transaction is void for uncertainty and under s. does or does not happen. The fee often relates to the value of real property or a financial agreement and is usually charged as a standard part of conventional commercial banking and in business practice. 31 of the same law is referred to as a contingent contract. Contingent contracts under s. The challenge is as regards the purchase and resale agreements associated with some islamic financing. In islamic law a farmer may receive funds from islamic bank to cultivate in return for crops he will harvest. 32 of the same law are nenforceable. Here there is only one financing arrangement but that two transactions are needed to achieve the desired outcome. Section 5 of the stamp duty Act. if some event. Despite these challenges the general freedom of contract under the islamic banking is quite impressive. the bank buys the property instead and then resells it to the client with an appropriate markup. relates to any property in Tanzania or to any matter or thing to be performed or done in Tanzania.Act. Cap 189 (Re 2002) provides: “(1) Every instrument specified in the Schedule to this Act and which– (a) (b) is executed in Tanzania. collateral to such contract. With Islamic sales. The taxation problem is. (v) Double taxation with respect to sales modes transactions Islamic banking brings forth issues relating to stamp duty fee. shall be chargeable with duty of the amount specified or calculated in the manner specified in that Schedule in relation to such instrument. or if executed outside Tanzania. 83 . Usually stamp duty is paid when the ownership in the asset is transferred. these two transactions would normally incur two separate stamp duty payments. A contingent contract is a contract to do or not to do something. however. So the buyer must pay this over and above the purchase price paid to the seller.

The general findings here are that all regulations that are currently used by the BoT in supervising banks are not applicable to Islamic banking since Islamic banking has new commands as opposed to conventional banks.Thus while the interest a conventional bank receives is regarded as a ‘passive’ income. This requirement does not capture the primary expectation of Islamic banking in the loan client. once from seller to bank and then from bank to buyer and therefore both these transactions are twice taxed. Since Islamic bank does business in a partnership with a client. however. capital adequacy and assets of the bank. in trade financing there are title transfers twice. Supervisory challenges Supervision mainly relates to liquidity requirements and adequacy of capital in banks. The two depend on an assessment of the value of assets of the banks supervised. The key words here are liquidity. 2008: The objectives of these Regulations are generally to provide prudential guidance on management of risk assets and bases for providing for losses on loans and other risk assets. the challenges against regulation relate to relevant only against the following regulations: (i) Risk Assets Management Mangement of risk assets is governed by the Banking and Financial Institutions (Management of Risk Assets) Regulations. 5.3. Specifically. In addition. As such a task force has been appointed to design new Regulations which will take on board Islamic banks needs.2. it is not much 84 . These regulations in view of its objectives require banks to do thorough analysis of creditworthiness of a client as regards his character and financial capacity. This decreases the profitability of the venture. profit received by Islamic bank is regarded as an earned income which is treated differently for purposes of tax.

Islamic banks cannot be as liquid as conventional banking as they mainly deal with assets instead of cash. 2006 and s. 2008. Investment and trade in assets and equities in Islamic banking cannot be divorced. 45 of the BoTA. These are challenges to these regulations and the giant oversight organ that made them. 2008. to ensure that banks and financial institutions implement liquidity management standards that conform to international norms and maintain public by ensuring that banks and financial institutions have sufficient liquidity all the times. It is the only products which underlie the foundations of any Islamic banking business. 2006 aboe discussed. (ii) Banks Liquidity Measuring and Monitoring Measuring and monitoring Liquidity of banks is governed by the Banking and Financial Institutions (Liquidity Management) Regulations. Money in Islamic banking is inferior to property. 5. The main objectives of the Regulations are to provide guidance on measuring and monitoring liquidity of banks and financial institutions. among others. Assets are less liquid compared to cash.3 Judicial challenge 85 . The main objective of these Regulations. (iii) Limitation to invest on equity and assets Directives on this aspect are obtained from the Banking and Financial Institutions (Credit Concentration and Other Exposure Limits) Regulations. i.e.3. is to prescribe limits for investment in equity and fixed assets.interested in the latter’s character but rather whether he has skills to engage himself in a profitable venture. The effect of this regulation is like the effect of Sections 21 (1) of the BFIA. S. to ensure that banks and financial institutions have in place liquidity management policies adequate to enable them meet all known obligations and commitments and plan for unforeseen development.

magistrates on the one side nor advocates and legal practitioners on the other side are knowledgeable on how Islamic banking works. Justice Kalegeya186 notes the trend of cases filed by or against the banks in the Commercial division of the High court since its inception in 1999 as being 85. Retrieved from http://www. Dar es salaam. & OrsAuthor(s). research findings reveal that many practitioners in the legal field are not trained on its facets. the dispute settlement machinery is favourable only to the former. Respondents who responded to questions relating to this research question as per interview guide did not have any issues on how the BoT regulates commercial banks but had issues on 186 Kalegeya. 117-134. (2004). Though Islamic banks and conventional banks operate on different philosophical foundations. Neither Justices. Islamic Law and Society. The first case 187 that was settled in an English court raised many of these issues and there was a considerable difficulty deciding the questions above. Symphony Gems N. There is a big challenge on the question on which law to apply as Islamic law is not recognised when a dispute ensues within the confines of Islamic banking practices. judges.B. 86 .Respondents in Islamic banks operations were worried about how a disagreement arising out of shariah principles would be solved. Disputes in a commercial and specifically in the banking area are strictly unavoidable. L.5% of all cases filed in the court. (2005. The Role Of Courts In Facilitating Loan Recovery: Tanzania Experience. 11 (1). A Murābaḥ a Transaction in an English Court: The London High Court of 13th February 2002 in Islamic Investment Company of the Gulf (Bahamas) Ltd. This is a serious challenge to the regulatory v. The issue is not whether they will or they will not happen but the issue is how they will be resolved. pp.4 Response from respondents as regards the question on “does the existing regulatory and supervisory system call for any fine tuning as regards Islamic banking established in Tanzania?” In relation to this question all 12 respondents were interviewed. 5.V. March). Islamic banking being a new discipline. how would it be for a recent adopter like Tanzania? This in itself is an area for further research. If a country where Islamic banking came earlier the problem was that significant. Golden Tulip. 3.jstor . Paper presented at the Tanzania Bankers Association Conference. p. K. 187 See Balz. would islamic banking be regulated. on whether the regulatory and supervisory systems be fine tuned came from respondents at the Bank Supervision Directorate of BoT and legal practitioners and one islamic banking scholar. Best response. The current regulatory and supervisory framework restricts trading for banks and does not permit banks to engage directly 87 . Trading restrictions Trade is central to islamic banking.4.1 Islamic Banking Regulatory and Supervisory Regime needs change to accommodate Islamic Banking Respondents from BoT stated their knowledge that Islamic banking does not fit in the BoT’s regulatory framework. ii. The current regulations are restrictive on capital ratios of banks that need to be amended. respondents pointed out those specific areas that require fine tuning include. the capital requirements set by the BoT for all banks can not suffice for islamic banks. Generally. From the analysis of the obtained information. that is mostly trading on PLS schemes. They necessarily need to have a relatively stronger capital base in order to provide an adequate safety net but also to adopt some effective strategy that would help prevent the risks of investment deposits from being transferred to demand deposits. Thus. When trade goes wrong the bank may opt to erode on the capital and even depositors funds. Capital ratios requirements Islamic banks are more prone to risk of loss to depositors funds given the nature of their activities. however. The risk to which depositors may be exposed creates a greater need in the Islamic banking system for providing a psychological reassurance to the depositors about the health of the financial system. Apart from pointing to the fact that new regulations are underway that will accommodate forms of Islamic banking regulation and supervision they did not point out what would be the difference between the existing regulations and the new regulations. i. the researcher found out that the sytem requires fine tuning to allow for accomodation of islamic banks.

This also another area of reform. Deposit Insurance Fund (DIF) Since the bases of islamic banking is islamic sharia principles. v. There is need for further auxiliary legislation in order to fully realise the goals of Islamic banking by either enacting new law or modifying the existing statutes and the BoT regulations. The existing rules on liquid assets ratio maintenance must be fine tuned to reflect ratios that are as minimal as possible to accomodate islamic business enterprises using depositors’ funds. of much importance is the customers’ skills to engage in a profitable investment with a bank. iv. trading. Since their core activity is trading. Islamic insurance may be useful as its functions are also within sharia principles. Maintenance of liquid assets ratios The existing regulatory and supervisory principles require that banks maintain liquid assets ratios. Islamic banks mainly maintain illiquid assets. Management of risk assets In this the BoT is concerned with management of risk assets and provision for losses for loan and other risk assets. For islamic banking these are not significance. Islam does not accept pay-little-receive-more schemes as any excess in return is regarded as interest (Riba). It is in these that lies their core function. 88 . iii. The bank stresses upon creditworthiness of customers judged alongside their character and financial capabilities. This is also an area of reform which is not addressed by the existing regulations. The existing regulation need changes in this area. the deposit insurance Fund to which all banks pool resources in order to help them out during the times they are likey to collapse does not suit and ideal islamic bank. Islamic banks have no use for money except in so far as trading is concerned.

Other forms such as partnership which may be more appropriate are not availed to islamic banks. Registration and licencing requirements The regulatory requirements for acquiring licence as a bank are not favourable to islamic banking. These are possible if Policy and law support the same. As Islamic banks do not operate in vacuum but in the same financial and economic system as conventional banks. Policy and Laws of the country to address needs of Islamc Banking Any sound banking system results from prudential regulation and effective supervision. It is also necessary to improve and streamline corporate governance so that the funds received by firms from banks are more effectively utilised for the ultimate benefit of both the financier and the user. vii. Fine tuning need to take stock of this issue also. The significance of this cannot be overemphasized as banking without regulation always attracts failures. effective internal controls and external audit. failure of Islamic banks would be contagious to the whole system and this would in turn tarnish trust in them by depositors bringing about sweeping consequences. with special stress on capital adequacy. this change in the law or enactment of new set of laws is necessary in order to put in place a proper regulation and supervision of this new type of banking. These currently address conventional banking Conclusively. 89 . proper risk assessment and management. So it is important that they should aslo reflect islamic law. and greater transparency. It restricts islamic banks to operate only as cooperative societies as discussed herein above.

market risks that relate to sales based modes. The study. has risks too which are identified as credit risks within the Profit and loss Sharing schemes. liquidity risks etc. concludes that the current regulatory and supervisory environment is not. requires stronger regulations which is currently lacking in the regulatory framework. thus. 6. without changes applicable to Islamic banking. Study also revealed that regulation of banks is done in order to save depositors from the risk of loss by these banks. risks on possibility of islamic banks eroding on depositors funds when PLS schemes fail. Islamic banking. Presented in this chapter are conclusions on the findings and recommendations thereto.1 Introduction The study dealt with a critical analysis of the impacts of adopting Islamic banking in Tanzania to the subsisting regulatory and supervisory regime.2 Conclusions The first objective was to assess the current system of banking regulation and supervision in Tanzania as it relates to islamic banking. Islamic Banking.CHAPTER SIX CONCLUSIONS AND RECOMMENDATIONS 6. like any other banking system. Of significance is that risk as it is applicable in islamic banking has unparallelled attributes and distinctive characteristics as such regulation and supervison of the same is as mandatory as is of conventional banking. the study generally reveals that Islamic banking in Tanzania brings forthwith many regulatory and supervisory challenges given its nature which necessitates a customised regulatory and supervisory mechanism in order to properly 90 . inflation risks. price risks. The study concludes that the current regulatory framework comprises of various statutes relating to banking such as the Banking and Financial Institutions Act. Risks are prevalent in all Islamic financial transactions including saving and deposit accounts. Furthermore. the BoT Act both of 2006 and various Regulations and circulars made by the governor of BoT are not geared towards accomodating Islamic banking smooth operation. therefore.

6. The study found out that the nature of Islamic Banking requires a reinforcement of prudential regulation and effective supervision. 6.adopt Islamic banking. the Law of Contract Act. 91 . 188 188 Massive deposits withdrawals by a bank’s customers. the Sale of Goods Act. Cap 214. It must also take into consideration the aspect of safeguarding the interests of demand depositors and such systemic considerations in view of the fact that. 2006. the failure of an islamic bank can significantly result in the public’s loss of confidence in the stability of the banking system as a whole. the Judicature and Application of Laws Act and the Banking and Financial Institutions Act. proper risk assessment and management.3. Further that the system must take into certain considerations as they arise from the risk-sharing nature of investment deposits. The regulatory challenges are wedged against Article 19 (2) and (3) of the Constitution of the United Republic of Tanzania.1 Ammendment of the regulatory and supervisory systems The BoT as the body vested with regulation and supervision of banks needs to have in place a regulatory mechanism which takes on board both the traditional prudential supervision aspect and a developmental role that is equally important to Islamic banking. with special stress on capital adequacy. in which depositors provide the funds that the bank invests in the activities it deems profitable. effective internal controls and external audit. In relation to that the study found that all regulations that are currently used by the BoT in supervising banks are not applicable to Islamic banking since Islamic banking has new commands as opposed to conventional banks. 2006. Also the BoT Act. Cap 345 and Tax Laws. thus triggering a generalized bank run.3 Recommendations The researcher came up with the following recomendations. and greater transparency.

and continued expansion of these institutions and enhancing their contribution to financial stability and economic development. This is necessary as most staff are more conversant as they were trained in conventional economics. A number of Multilateral institutions have been established to provide assitance to governments and supervisory agencies on islamic banking generally. which is the international board for islamic banks standards setting. It is dangerous in a central bank to have staff engaged in supervison of islamic banks while they have not had enough exposure to islamic banking activities. and ADB. 6.3. IFSB. These institutions include IMF. Without this they may lack while on duty the requisite vision and conviction on the efficiency or otherwise of islamic banking. they could as such share this experience to help the local situation.3 Intensive training to employees Practitioners within the BoT especially those in the Directorate of Bank Supervision must be well trained to enhance the supervison exercise.6.3.2 Alignment of Regulatory and Supervisory Rules to International Best Practices As the question of central banking is not alien to an Islamic framework the basic functions of a modern central bank are relevant also for an Islamic monetary system. There is a need to put in place requisite islamic banking proffessionalism in the BoT supervision practice. It does not work in a vacuum. The BoT and other banking practitioners must effect a liason with international bodies for Islamic banking best practices. These bodies have greater experiences regarding islamic banking. They need to know how islamic banks work in order to effect a worthwhile supervision to the benefits of islamic banking and the general financial syatem. The BoT must also put it mandatory to practitioners in the islamic banking industry that they are well conversant with the 92 . strength. and specifically on best practice guidelines. Tanzania banking sector is part of a larger global economy. This stems from the imperative of ensuring the viability. the AAOIFI which is an international standards setter for accounting and auditing best practises for islamic banks. The regulatory and supervisory instruments of the BoT need something with regard to islamic banking in view of the relatively different risk perspective of these institutions.

the same laws may provide for both Islamic banking and conventional banking. This is a very limited area.190 marriage. As such the necessary principles may be included in the banking statutes and the statutes may have a selective application depending on which bank they apply. This is so since it is not all of Islamic sharia that applies to Islamic banking but only a few principles and that is only those that relate to Islamic finance. a larger area being that which relates to other Islamic aspects such as.189 fiqhi. 6. charitable or benevolent purposes or for the maintenance and support of any member of the family of the person endowing or dedicating such property. inheritance. that is. Laws on banking were enacted without the view of sharia principles. The laws may either take an all-in-one feature. new laws may be enacted that specifically regulate Islamic banking leaving the old laws to regulate conventional banking. wakf191 et cetera. Allah Islamic jurisprudence 191 Section 140 of the Probate and Administration of Estates Act.5 Improve Corporate Governance It is also recommended that there is a necessity of improving and streamlining corporate governance so that the funds received by firms from banks are more effectively utilized for the ultimate benefit of both the financier and the user. This implies that only a small portion of Islamic sharia that needs being considered. This will assist the Bank in it supervisory missions.principles under which their banks functions. Cap 352 (RE: 2002) defines wakf as an endowment or dedication in accordance with Islamic law of any property within Tanzania for religious.4 Amendment or enactment of certain banking laws Law makers must review the existing laws so that they accommodate Islamic banking.3. tawheed. Alternatively. As stated above Islamic banking has unique needs that include mainatenence of illiquid rather than liquid assets and the requirement of trading. 93 . To 189 190 Faith in one Muslims’ God. 6. Only after this is done that regulation and supervision of islamic banking can effectively be done to the benefits of the banking and the economic system as whole.3. These are not currently addressed in these laws.

effect this either new laws and regulations are needed or a massive accommodative amendment of the existing documents should be effected 94 .

95 .

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What amendments do you think should be done to the existing regulatory and supervisory framework? 102 .ANNEXTURES ANNEXTURE I INTERVIEW GUIDE FOR BoT OFFICIALS AND LEGAL PRACTITIONERS This research is about the regulatory and supervisory challenges of establishing Islamic banking in Tanzania. How does the BoT regulate and supervise banks? 5. are Islamic banks regulated and supervised any how different from conventional banks? 6. It is hoped that you will provide maximum cooperation in answering the questions. What does the word risk stand for in banking operations? 2. Given their nature. If there are any problems. Is the present system of regulation and supervision of banks in Tanzania capable of regulating Islamic banking without any problems? 7. What are the common types of risks do Islamic banks face? 4. can you identify them? 8. 1. Do the banks that operate as Islamic banks have any risks as do those operating conventional banking? 3. The researcher seeks to investigate and collect in depth information on the effectiveness of the regulatory and supervisory framework in accommodating Islamic banking.

What are you required to do by the BoT with respect of Islamic banking products you offer? 103 .ANNEXTURE II INTERVIEW GUIDE TO THE OFFICIALS OF NBC. Since when has your bank offered Islamic banking products? 3. KCB AND STANBIC BANK 1. How many Islamic banking products does your bank offer? 4. What is Islamic banking? 2.