“Central bank impact on practicing Mudarabah financing in Islamic banks: the

case of Tanzania”

Habiba H. Omar https://orcid.org/0000-0003-0542-7532

AUTHORS http://www.researcherid.com/rid/U-5731-2017
Mohd E. Yusoff

Habiba H. Omar and Mohd E. Yusoff (2019). Central bank impact on practicing
ARTICLE INFO Mudarabah financing in Islamic banks: the case of Tanzania. Banks and Bank
Systems, 14(1), 81-93. doi:10.21511/bbs.14(1).2019.08

DOI http://dx.doi.org/10.21511/bbs.14(1).2019.08

RELEASED ON Monday, 25 February 2019

RECEIVED ON Wednesday, 09 January 2019

ACCEPTED ON Wednesday, 06 February 2019

LICENSE This work is licensed under a Creative Commons Attribution 4.0 International
License

JOURNAL "Banks and Bank Systems"

ISSN PRINT 1816-7403

ISSN ONLINE 1991-7074

PUBLISHER LLC “Consulting Publishing Company “Business Perspectives”

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© The author(s) 2023. This publication is an open access article.

businessperspectives.org
 Banks and Bank Systems, Volume 14, Issue 1, 2019

Habiba H. Omar (Malaysia), Mohd E. Yusoff (Malaysia)

Central bank impact

on practicing Mudarabah
BUSINESS PERSPECTIVES
financing in Islamic banks:
the case of Tanzania
LLC “СPС “Business Perspectives”
Abstract
Hryhorii Skovoroda lane, 10, Sumy, This paper investigates the challenges faced by Islamic banks in practicing Mudarabah
40022, Ukraine financing under conventional regulatory regime by interviewing eleven Islamic bank
www.businessperspectives.org managers from three selected banks. Thematic data analysis was employed to under-
stand hindrances for Islamic banks in operating Mudarabah financing under conven-
tional regulatory regime. Findings of the study have provided a number of major chal-
lenges that hinder Islamic banks performance in Tanzanian context. The challenges
include irregularities of policies and regulations, non-supportive operational and tech-
nical structure, and missed perceptions of Mudarabah among the public. However, a
new challenge of the impact of the central bank on Islamic banks was identified. It is
expected that Tanzanian Islamic banking performance will be enhanced if the cen-
tral bank introduces sharia regulations for Islamic banking, initiates the central sharia
supervisory board, and harmonize, country regulations with financial regulations re-
garding Islamic perspectives.
Received on: 9th of January, 2019
Accepted on: 6th of February, 2019
Keywords Islamic banking, challenges, Mudarabah, Tanzania,
conventional regulation
JEL Classification G20, G21, G28

© Habiba H. Omar, INTRODUCTION

Mohd E. Yusoff, 2019
To date, the Islamic banking industry has been extensively studied.
Habiba H. Omar, Ph.D. Student,
Universiti Teknologi Malaysia, These studies have confirmed its growth and flexibility within a more
Azman Hashim International demanding financial environment (Rizvi & Arshad, 2014). For ex-
Business School, Malaysia.
ample, Abdul-Rahman and Nor (2017) have asserted that growth has
Mohd E. Yusoff, Doctor of
Philosophy, Lecturer, Universiti been measured by the developments and maturity of products, servic-
Teknologi Malaysia, Azman Hashim es and financial markets, along with the development of infrastruc-
International Business School,
Malaysia. ture and financial institutions. Furthermore, it has been explained
that comprehensive framework of legal, regulatory and Sharia is the
main essence for creating a conducive environment for the industry
(Habiba, Effandi, & Abdallah, 2017). The current economic goals of
broad economic prosperity with full and optimum level of economic
growth and justice in the distribution of income and wealth, are all
in line with the development of the Islamic banking industry (Abdul-
Rahman & Nor, 2017). The Islamic banking products which do not in-
clude gharar (uncertainty), riba (usury) and maysir (gambling), have
all become alternatives to conventional banking in meeting the com-
munity’s ever increasing needs (Siddiqui, 2008).
This is an Open Access article,
distributed under the terms of the Conventional regulatory frameworks have dominated the supervision
Creative Commons Attribution 4.0 of Islamic banks, with slightly modified terminologies (Khan & Shah,
International license, which permits
unrestricted re-use, distribution, 2015). It has been argued that the introduction of Islamic banking and
and reproduction in any medium,
provided the original work is properly
finance into conventional systems has made it difficult for supervisory
cited. authorities who are unfamiliar with the abilities of Islamic banks to

http://dx.doi.org/10.21511/bbs.14(1).2019.08 81
Banks and Bank Systems, Volume 14, Issue 1, 2019

cope with the supervision issues, especially in countries that operate a dual financial system (Sole, 2007).
As distinct from practices, their institutional aspects and structural requirements distinguish Islamic
banks from conventional ones (M. Iqbal, Ahmad, & Khan, 1998).

Many studies have been conducted regarding the challenges that Islamic banks face (Hammoud, 2017;
Shah, Raza, & Khurshid, 2012; Wilson, 1999; Zainordin, Selvaraja, Man, & Hoong, 2016). However,
the studies on the challenges faced by Islamic Banks, and the impacts of central banks in practicing
Mudarabah financing under conventional regulatory regimes, are minimal. Therefore, the study on
challenges faced by Islamic banks under the conventional regulatory regime, and the impact of cen-
tral banks, are both very crucial. The present qualitative study has identified several challenges facing
Tanzania Islamic banks when practicing under conventional regulations, as Tanzania’s central banks
are the regulators and supervisors for all country’s banks. This imposes more requirements on Islamic
banks, which are inconsistent with sharia.

1. THEORETICAL BASES and PBZ Ikhlas are local owned banks, while the
Kenya Commercial Bank and Stanbic Bank are
OF THE STUDY foreign banks, based in Kenya and South Africa,
respectively.
1.1. Islamic banking in Tanzania
The community warmly acknowledges the driv-
The emergence of Tanzania as a frontier for Islamic en changes, regardless of their faith, even though
finance in East African countries, has been en- Islamic banking practices in Tanzania have been
abled by the granting of five banks to provide undermined by numerous challenges hindering
Islamic banking services (BoT, 2011). The range of their valuable performance (Oladimeji, Ab Aziz,
products offered by Islamic banks and windows in & Khairi, 2016). In this situation, further studies
Tanzania differ according to each bank’s nature. regarding the national Islamic banking industry,
In general, they mostly provide financial products. including its strengths and challenges faced, are
Islamic banking and finance in Tanzania have be- very relevant and much needed.
come modes for collecting and disbursing funds,
and for gratifying market needs (Beatus, Tripathi, 1.2. The missing link between Islamic
& Kasongwa, 2013). Table 1 lists Islamic banks in banking and Tanzanian banking
Tanzania.
regulations
Table 1. Number of Islamic banks in Tanzania
In addressing the missing link between Islamic
Source: BoT (2011). banking and the regulatory framework which pre-
No. Banks Status Ownership vails in Tanzania, studies have highlighted several
Amana Bank
challenges that impact Islamic banking under the
1 Full fledged Local private owned
Limited current banking regulations. The main challenge
2 PBZ Ikhlas Islamic Local government encountered by Islamic banks in the Tanzanian
division owned
context, is the lack of an Islamic regulatory frame-
Foreign government work (Habiba et al., 2017; Hikmany & Oseni, 2016;
3 KCB SAHL Bank Window owned
National Bank of Local government
Mzee, 2016). For example, Mzee (2016) has com-
4 Window mented on Tanzania’s regulations, which do not
Commerce owned

5 Stanbic Bank Window Foreign private recognize the Islamic banking operations, even
owned
though they have been allowed to be practiced.
This is evidenced by the constitution of United
Currently, five banks provide Islamic banking Republic of Tanzania of 1977, which provided that
services in Tanzania, with Amana bank being Tanzania is a secular state which only recognizes
fully-fledged, and the rest being windows. The individual religion and worship, as distinct from
Amana Bank, the National Bank of Commerce managing religious bodies.

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 Banks and Bank Systems, Volume 14, Issue 1, 2019

In contrary, Hikmany and Oseni (2016) have the reality that the one with surplus capital lack
conceptualized on the existing legal framework business knowledge and those with the knowl-
in Tanzania for dispute resolution within the edge, lack capital to invest (Laldin & Furqani,
Islamic banking industry, and explore the inef- 2016). Mudarabah has been accepted as a mode of
ficiency of existing framework in resolving dis- financing that utilizes surplus capital in the form
putes. Subsequently, Sulayman (2015) suggested of exchanging capital and knowledge, and shares
that a lack of a sharia regulatory framework has the profit on an agreed pre-determined ratio. The
been claimed to cause a multiplier effect on the one with capital is termed as Rab-ul-maal, while
guidance on Islamic finance transactions, while that with knowledge is termed as Mudarib.
Habiba et al. (2017) contended on the impact of
regulations on the growth and development of the The role played by Islamic banks is to act in both
industry. parties, act as Mudarib in the tier one by taking
the capital from depositors, and act as Rab-ul-
Moreover, literature has revealed other varied maal in the second tier by using the funds from
difficulties such as maintenance of liquid assets depositors and finance the selected businesses
ratios, which are not emphasized in Islamic sha- from entrepreneurs. The funds provided by de-
ria, restrictions to trade by Islamic banks, and positors may/may not be restricted and directed
the depositing of insurance funds (Mzee, 2016). under specified or unspecified business activities
Similarly, there are incidences of double taxation (BNM, 2015). In the case of unspecified business
in Islamic banking products, as Islamic banking activity, Mudarib has the right to invest the capi-
has not been accommodated under Section 5 of the tal provided in whatever business activity ‘al-Mu-
Stamp Duty, Cap. 189. On top of that, Sulayman darabah Al-mutlaqah’ or specify the business ac-
(2015) suggested that people’s lack of understand- tivity for the use of funds ‘al-Mudarabah al maqa-
ing of sharia knowledge and entrepreneurial skills, yyadah’. However, the profit made by Mudarib is
along with the existence of untapped investment to be shared between Mudarib and Rab-ul-maal
opportunities for the purposes of sharing risks, on an agreed profit sharing ratio.
have all impacted Islamic banking.
The application of Mudarabah deposits poses
However, Islamic banks cannot benefit from using challenges to Islamic banks operating in a dual fi-
BoT as the lender of last resort, as the loans pro- nancial system by the increased competition with
vided are associated with interest which is pro- conventional banks. Unlike conventional banks
hibited in Islamic sharia (Hanif, 2014). From this where principal amount is guaranteed and returns
perspective, Islamic banking in Tanzania has been are fixed and predetermined upfront. Contrarily,
insulated by the regulatory challenges that hinder in Islamic banking, return is a function of invest-
its prospective growth and performance. Apart ment performance with no guarantee of the prin-
from the regulatory framework, Islamic banks cipal amount and therefore is exposed to business
in Tanzania are challenged with competition laid risk. However, Islamic banks are exposed to dis-
down by bank lending rates, as provided by BoT. placed commercial risk, withdrawal risk and rep-
Conventional banks make it easier to adopt chang- utational risk in the event that the returns offered
es, by just changing their rates to cater for the in- are not comparable to conventional banks.
creasing costs of transactions. The bank lending
rate of Tanzania averaged 12.54% from 2002 to 1.4. The challenges facing
2017, with a minimum of 3.7% in 2009, and a high Islamic banks
of 21.42% in 2007 (Trading economics, 2017).
Several studies have earmarked on the challeng-
1.3. Mudarabah financing es that face Islamic banks. It has been explained
that Islamic banks and financial institutions in
Mudarabah is a term used to represent a part- Malaysia are affected by low awareness of the pub-
nership between two parties, Rab-ul-maal and lic on Islamic banking that leads to the missed per-
Mudarib in the agreement of profit sharing (BNM, ception of Islamic products. This has been caused
2015). Mudarabah financing came to existence in by less efforts of marketing the products and legal

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Banks and Bank Systems, Volume 14, Issue 1, 2019

challenges (Zainordin et al., 2016). Similarly, chal- ted banks. This study aims to identify challenges
lenges and opportunities faced by Islamic banks faced by Islamic banks in practicing Mudarabah
in Lebanon are explained to be inadequacy of legal in a conventional regulatory regime of Tanzania.
and regulatory framework, lack of awareness and
knowledge of Islamic banking and sharia compli-
ance dilemma (Hammoud, 2017). Furthermore, 2. METHODOLOGY
lack of harmony among sharia scholars in provid-
ing fatwas mentioned to be a big controversy in The qualitative case study method has been used
Islamic finance. This is caused by different sects in in this study. This method involves exploring a
Islamic religion and therefore fatwas are provided problem through methodological traditions of
differently (Shah et al., 2012). inquiry, from knowledgeable persons as sources
(Creswell, 2007). In the present study, multiple
The potential for Islamic banking is beyond ques- case studies involving the examination of chal-
tion, even though there are many challenges to lenges facing the Islamic banking industry were
overcome in order for the market to realize its po- conducted. The study used purposive sampling
tential opportunities. Human resources and reg- to select participants. This allowed information
ulatory frameworks have been addressed to pose to be obtained from the experienced practition-
the greatest obstacles to Islamic banking (Jabr, ers, with a wide knowledge of the Islamic banking
2003; Tabash, 2017). The market faces a severe sector. The data collection has been undertaken
shortage of qualified staff that understand both through in-depth semistructured interviews, by
technical Islamic banking principles and Sharia interviewing eleven managers from three selected
finance (Sanusi, 2011). Also, countries face a chal- Islamic banks. According to Baker and Edwards
lenge in setting up clear principles for Islamic (2012), the sample size for qualitative research can
banking businesses, and in creating a regulatory vary from one participant to a hundred or more.
regime that treats Islamic banks differently from With this in mind, the present study sample was
conventional banking (Tabash, 2017). deemed to be suitable and justified.

In addition, customers’ awareness and the lack of The present study used a thematic analysis meth-
capital market instruments for liquidity also pro- od to provide a structured way of understand-
vide moderate challenges (Jabr, 2003; Tabash, 2017). ing how to develop thematic codes and sensed
Most Islamic banking customers live under the themes. Thematic analysis was considered to be
misconception that Islamic banking operations an appropriate analysis method for this study,
are contrary to the principles of Islam, particularly which seeks to determine its conclusions by gath-
with regards to the ways Islamic banks create and ering interpretations (Braun & Clarke, 2013).
distribute profit (Jabr, 2003). Moreover, there are The method provided a systematic trend of data
limited capital market products that are acceptable analysis (Alhojailan, 2012). Therefore, it allowed
by Islamic principles for providing liquidity condi- the researcher to make an analysis of emerging
tions to Islamic banks. It is worth noting that po- themes from the gathered contents. According to
litical instability and difficulties in providing inter- Marks and Yardley (2004), this method creates
national acceptable products have been seen as the understanding and diverse data collection. This
least significant challenges that face Islamic bank- study’s data analysis was conducted across four
ing (Laldin, 2008; Njamike, 2010). stages, which included data management, coding,
categorization and theme development (Clark
Generally, Islamic banking and finance are still & Creswell, 2014; Miles, Huberman, & Saldana,
underresearched. Most existing studies contem- 2014; Saldana, 2013; Saldaña, 2015). Three broad
plated on sharia regulation, which is believed to be themes that addressed the main challenges of
the most important criterion for the effective pro- Islamic banking in Tanzania, and the impact of
vision of Islamic banking services. Regulations for the central bank in practicing Mudarabah were
Islamic banking and finance have not yet been pro- developed. The analysis of the findings and dis-
vided by the Tanzania central bank, while Islamic cussion of the themes have been presented in sec-
services continue to be rendered from permit- tion 3 and 4, respectively.

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 Banks and Bank Systems, Volume 14, Issue 1, 2019

3. RESULTS lowed for Islamic banks to operate sharia-compli-

ant products in Tanzania.”
The results of this study have been categorized in-
to three broad themes. Table 2 presents the broad (Mr. Malek, bank B Manager)
themes with sub-themes.
Similarly, Mr. Arjun claimed on the deficiency of
Table 2. Thematic findings from in-depth
interviews with bank managers sharia guidelines from BoT and insisted on the
BoT to recognize its responsibility as a central
Themes Sub-themes bank. He said that:
Lack of sharia regulations;
Contradiction of BoT regulations “It is a challenge to the Central Bank, who is the su-
Irregularities of policies with Islamic Sharia;
and regulation Lack of harmonization between pervisor to all banks, including Islamic banks, that
country policies and financial
regulations for Islamic banking [there is a] lack the guidelines that will supervise
Missed perceptions of Lack of awareness and knowledge Islamic banks. Central banks have the responsibili-
Mudarabah among the of Sharia; ty not only of looking into profit maximization but
public Lack of Sharia scholars
into sharia compliance as well.”
Non-supportive Minimum investment opportunities;
operational and Competition with conventional
technical structure banks
(Mr. Arjun, bank A manager)

Mr. Rossly narrated the situation regarding the

4. DISCUSSION steps taken by Islamic banks for products ap-
proved by BoT, without looking at how products
4.1. Irregularities of policies will perform. He stated that:
and regulation
“Up to now, there is no official Islamic regulation in
The Tanzania banking industry is dominated by Tanzania. BoT, which is the supervisor of all banks,
conventional regulations, even though Islamic does not provide regulatory framework of Islamic
banking activities are allowed by the Central Bank banking. What we do, we apply for license. For ex-
of Tanzania. Therefore, the performance of Islamic ample, if you want to establish Islamic finance or
banks is hindered by the lack of sharia regulations Islamic banking, you have to write a letter show-
that fit their unique nature (Mzee, 2016). Due to ing the products you want to provide, how they will
the existing deficiencies, Islamic banking seems to work, and then they provide go ahead. That’s all. It
suffer from common challenges as narrated by lit- does not look into how you will deal with customers,
erature and affirmed by conducted interviews. The discrimination, and the legality of the product.”
identified challenges faced in Tanzania include
the following (see subsections 4.1.1.–4.1.3.). (Mr. Rossly, bank C Manager)

4.1.1. A lack of Sharia regulations The deficiency of a legal and regulatory Islamic
framework creates some challenges to Islamic
The lack of a sharia regulatory framework has been banks, hindering their performance. The lack
addressed as being the main challenge impacting of sharia regulation has been reported by sever-
Islamic banks in Tanzania. It has been mentioned by al authors (including Jabr, 2003; Njamike, 2010;
participants that this challenge is created by the lack Sanusi, 2011; Tabash, 2017). For example, Jabr
of sharia regulations which govern Islamic banks, (2003) detailed the lack of sharia regulations in
leading to policies and different perspectives in in- Palestine, where conventional regulations are
terpretation of sharia regarding Islamic banking. Mr. used by Islamic banks. For this location, he also
Malek clarified the current situation of Islamic banks mentioned the lack of a relationship between the
in Tanzania, in terms of regulations, stating that: Islamic banks and the monetary authority, creat-
ing a gap in performance efficiency. At the same
“Currently there is no dedicated framework which time, Tabash (2017) found that the regulatory en-
governs Islamic banks in Tanzania, but it is al- vironment is the most impeding factor for Islamic

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Banks and Bank Systems, Volume 14, Issue 1, 2019

banks in India. Legal and regulatory frameworks tween the bank and customers. Due to this BoT
have been identified as being basic requirements requirement, Islamic banks sacrifice sharia princi-
for the sound operating of financial institutions ples. Mr. Malek revealed that:
and markets (Ahmad & Hassan, 2007).
“The Mudarabah contract requires the sharing of
4.1.2. Contradiction of BoT regulations profit and loss between Islamic banks and custom-
with Islamic Sharia ers, and not guarantee a capital or profit, but BoT
regulations require banks to guarantee amount de-
Some of the BoT regulations contradict Islamic posited and the profit to be earned in fixed deposits.”
banking sharia, so what is decided by Islamic
banks does not follow those regulations, for the (Mr. Malek, bank B Manager)
sake of sharia, or follows BoT requirements and
thereby forgoes sharia. Mr. Haneef explained the Furthermore, Islamic banking principles re-
steps taken by Islamic banks, in case they cannot quire the sharing of profit and loss when they
avoid violating sharia, and stated that: occur during operations. However, BoT requests
Islamic banks not to share losses with customers.
“There are some BoT regulations that are against Therefore, Islamic banks are obliged to bare the
Islamic sharia, but what is done by Islamic banks is whole loss occurring during operations. This situ-
either to decide not to follow some regulations, just ation is explained by Mr. Murshad as follows:
for the purpose of maintaining sharia requirements.
For example, BoT is a lender of last resort where oth- “Another challenge is [that the] legal regulation of
er banks can borrow with interest, therefore bank B BoT is not conversant with Islamic sharia. Islamic
decides not to borrow from BoT, and [instead] to lend banking law allows the sharing of profit and loss.
using interest in order to avoid being against sharia.” While there is an investment where the money is
allocated, it can turn into a loss as well, but BoT
(Mr. Haneef, bank B Manager) does not allow a customer to receive less than the
amount deposited.”
However, not all BoT requirements provided to
Islamic banks can be sacrificed, with some of (Mr. Murshad, bank A Manager)
them to be mandatorily followed, even though
they are against Islamic sharia. This situation is In supporting this challenge, Ms. Nabila said the
addressed by Mr. Nadir, who detailed the situa- requirement of not share loss with the customer is
tion of a lack of Islamic financing products, such provided in BAFIA 2006, which does not serve to
as takaful, while BoT instructs all banks, includ- share risks with customers. In order to maintain
ing Islamic banks, to insure their customers’ de- the situation, Islamic banks are forced to use some
posits. Therefore, Islamic banks are forced to use mechanisms for the purpose of making sure cus-
conventional insurance in order to meet this re- tomers are retained. She said that:
quirement. The participant Mr. Nadir said that:
“Another issue of BoT regulation is not being allowed
“BoT requires all loans provided by the bank to be to share loss. So anyhow, a bank must have a profit
insured … in Tanzania there is no Islamic insur- equalization reserve, so that the profit is guaran-
ance (takaful) organizations, so Islamic banks have teed and the capital will be guaranteed.”
to insure the loans using conventional insurance.”
(Ms. Nabila, bank C Manager)
(Mr. Nadir, bank B Manager)
The contradiction between regulator and Islamic
In the same vein, Islamic banks are required to banking sharia has been supported by Majid and
guarantee capital and profit to customers. As the Ghazal (2012), who have found the contradiction
core activities of Islamic banks are profit loss shar- of the United Kingdom regulator, which requested
ing products, where profit and capital cannot be guaranteed capital for profit-sharing investment
guaranteed, instead losses need to be shared be- accounts (PSIAs), and not sharing loss with these

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 Banks and Bank Systems, Volume 14, Issue 1, 2019

account holders. In doing so, the sharia compli- Due to this situation, Islamic banks’ products have
ance issue of Islamic banks is compromised for become expensive, and have failed to compete
the sake of conventional regulations. with conventional banks. The lack of harmoniza-
tion between country policies and financial regu-
4.1.3. Harmonization between country policies lations has been reported by Ahmad and Hassan
and financial regulations (2007), Kinyanjui (2013), Majid and Ghazal (2012),
and Njamike (2010). Majid and Ghazal (2012) have
The lack of harmonization between country policies explained the problem of tax restrictions, which
and financial regulations is another challenge faced impede Islamic banks in competing with conven-
by Islamic banks in Tanzania. Islamic banking con- tional banks. It has been stated that conventional
tracts are treated equally as the buying and selling banking laws narrow the scope of Islamic banking
of properties. This creates double taxation, due to activities within the conventional regime.
the nature of their business. Banks mainly deal with
real assets, rather than providing funds for custom- 4.2. Missed perceptions
ers to purchase the property. In this case, they pay of Mudarabah among the public
Value Added Tax, when purchasing, and income tax,
when selling the same property. Interviewees agreed Missed perceptions of Mudarabah among the
that the inadequacy of the present legal and regula- public in terms of lack of sharia knowledge, ac-
tory framework is a serious challenge. For instance, ceptance and awareness and insufficient number
Islamic banks are treated as traders by the Central of scholars have been mentioned by participants
Bank, unlike conventional banks that are treated as as one among many challenges faced by Islamic
financial institutions. This treatment implies double banking in Tanzania. The challenge not only im-
taxation, and also a lack of exemptions for Islamic pacts customers, but also bank practitioners, and
banks. Mr. Rossly mentioned that: regulators.

“One among the biggest challenges that I have seen 4.2.1. Lack of awareness and knowledge
until now is on taxes, in terms of country regula- of Sharia
tions, because there is no official Islamic frame-
work [...] the way Islamic banking is performing, it The lack of awareness and understanding of
relates the banks to entering into [the] sharing of Islamic banking has been mentioned as one
profit with business persons. As a bank you have among the many challenges that hinder the per-
to acquire products and sell them to the customers. formance of Islamic banks in Tanzania. Society
Therefore, in owning and selling there are tax impli- is not aware of the existence and potentiality of
cations, so we find ourselves [as being] owed taxes.” Islamic banking products. Also, people cannot
differentiate between riba and the profit made by
(Mr. Rossly, bank C Manager) Islamic banks. They consider them to be the same
things, only differing in terms of terminologies.
Additionally, Islamic bank’ products have failed However, some of people have religious knowl-
to be exempted from tax, because of the nature of edge, but they are not conversant with sharia
business. This is contributed to by lack of harmo- and banking knowledge. Ms. Nabila has said that
nization in the country’s fiscal and financial poli- it is not only customers who lack Islamic bank-
cies. Mr. Nadir has stated that: ing knowledge, but the knowledge gap has been
a problem to bankers and even regulators of the
“Double taxation is one major challenge faced by banks in Tanzania. She said:
Islamic banks in pursuing their activities. [There is
a failure] to be exempted like other financial insti- “Also, knowledge is missing in the community.
tutions, due to the nature of the business of Islamic Knowledge is missing among the bankers them-
banks, while no regulations support Islamic banks selves. There is resistance from within the bank, in
in Tanzania.” operating as windows; sometimes you want to do
marketing, but there is no budget for marketing,
(Mr. Nadir, bank B Manager) therefore internally we get resistance. Also, advoca-

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Banks and Bank Systems, Volume 14, Issue 1, 2019

cy by our sheikhs is low. For example, a sheikh may think that a bank is just a bank. Therefore, people’s
stand in the mosque and say ‘there is no Islamic understanding is low, especially in [regards to] pro-
banking, and all these are interest is just changing viding loans.”
of words’.”
(Mr. Murshad, bank A Manager)
(Ms. Nabila, bank C Manager)
The deficiency of sharia knowledge has been men-
In the same vein, Mr. Afiq highlighted people’s tioned as another challenge faced by Tanzanian
misconceptions regarding Islamic banking oper- society, from the perspective of practitioners, cus-
ations, and they do not believe banks can operate tomers and regulators. Mr. Rossly made a claim
without riba. People do not believe in the profit about the ability of BoT as a regulator and supervi-
made by Islamic banks and have doubts about sor for Islamic banks, and while instead this func-
their performance. He suggested for creating more tion has been carried out by bank’s sharia boards.
society awareness regarding Islamic banking. He He stated that:
further stated that:
“BoT cannot do that. They have no skills on doing
“People are only thinking that in order for the banks that because they do not know [the] sharia compo-
to survive, there should be extra money in the form nent. But we have sharia board that make sure all
of riba. In this case, the awareness of people is not Islamic products comply with sharia.”
enough. Islamic banks are there, but [their] benefit
is not yet realized.” (Mr. Rossly, bank C Manager)

(Mr. Afiq, bank A Manager)

The lack of awareness and knowledge about sharia
has been referenced by Jameel (2017), Nakagawa
Mr. Arjun said that people’s tendency to fail to (2011), Njamike (2010), Sanusi (2011), and Tabash
differentiate between riba and profit, is due to the (2017). For example, Jabr (2003) mentioned a
lack of sharia and banking knowledge. He said lack of customer awareness of Islamic banks in
that even though people have religious knowl- Palestine. He also mentioned the failure of cus-
edge from the reality, whereby more than 50% of tomers to understand the differences between
Tanzanians are Muslims, but their understand- Islamic banks and conventional banks. Jameel
ing of sharia and banking issues is minimal. He (2017) asserted that customers lack awareness of
said that: Islamic banking operations.

“The big challenge is customers understanding 4.2.2. Minimum number of Sharia scholars
Islamic finance and banking issues. Most of them
think that profit obtained from Muamalat is inter- The lack of sharia scholars has been given as one
est (riba). The most important challenge is aware- of the challenges impacting Islamic banking in
ness and lack of knowledge [of] the public concern- Tanzania. Due to this shortage, some scholars par-
ing Islamic products.” ticipate as members of sharia boards with more
than one Islamic bank. This situation is claimed
(Mr. Arjun, bank A Manager) to create conflict of interest among sharia board
members. The scenario was explained by Mr.
Mr. Umar explained that the reason behind lack Rossly as follows:
of awareness is people’s failure to differentiate be-
tween Conventional and Islamic banking activi- “We have a deficiency of experts in Islamic finance
ties. On top of that, Mr. Murshad added that: in Tanzania. One among the strategies of develop-
ing Islamic finance is the need to have more experts
“Another challenge is [that] the people’s awareness is to participate in sharia boards. Right now, sharia
too low, as [Islamic banking] is a new thing. Some board members are shared between Islamic banks.
people look at it with narrow eyes, so that they can- You may find the same sharia board member in
not see the difference with a conventional bank and bank B, bank C, and bank D. We need to have

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 Banks and Bank Systems, Volume 14, Issue 1, 2019

many experts in Islamic banking in Tanzania, and “There are few financial products in the Islamic per-
[given] the way it grows and it seem it will continue spective which are not yet scheduled in Tanzania,
to grow, therefore experts are important to increase for example Sukuk which has a lot of Islamic bonds
[in number].” where Islamic banks can invest, while Islamic corpo-
rate bonds raised in the stock market have not yet been
(Mr. Rossly, bank C Manager) established.”

The situation has been supported by Ms. Nabila (Mr. Murshad, bank A Manager)
who stated that:
The problem of minimum investment products has
“We have a sharia board with four members, one been detailed by Z. Iqbal (2007) and Sanusi (2011).
member who chairs at bank D, bank A and here The observation made by Z. Iqbal and Mirakhor
in bank C.” (1999) confirms the challenge that faces the Islamic fi-
nancial system when developing risk-bearing instru-
(Ms. Nabila, bank C Manager) ments that are going to provide adequate liquidity
and profitability by involving themselves in Islamic
The scarcity of skilled people at an operational lev- transactions. The innovation of Islamic services and
el, and of Sharia scholars with banking experience products for effective fund mobilization becomes a
and knowledge, is another identified challenge fac- severe problem for Islamic banks. This supports the
ing Islamic banks (Nimsith, Shibly, & Irfan, 2015). study findings that Islamic banks face challenges in
Islamic banks have been dominated by people regards to minimum investment opportunities.
working in conventional banks, who can easily un-
derstand the operation of Islamic banks, but they 4.3.2. Competition with conventional banks
fail to develop Islamic products due to a lack of
knowledge of Sharia rules and regulations (Ainley, In terms of competition, the participants have re-
Mashayekhi, Hicks, Rahman, & Ravalia, 2007). sponded that banks are faced with rivalries from
Nimsith et al. (2015) concluded that the impor- conventional banks that have been dominating the
tance of scholars with Islamic Sharia knowledge is country’s banking industry. It was also revealed that
vital for progress in Islamic banking. competition is caused by rate of return, which is af-
fected by the lending rate. In case of any changes
4.3. Non-supportive operational to the lending rate, conventional banks find it eas-
and technical structures ier to incorporate changes, as compared to Islamic
banks. This is because the rate of return for Islamic
Non-Supportive Operational and Technical banks depends on bank performance, rather than on
Structure are those structures that obstruct the fixed rates of return that are assigned to conventional
efficient operation of Islamic banking activities. banks. Therefore, Islamic banks have to merge the
Findings from interviews addressed two opera- profit rate with the country bank lending rate, ena-
tional and technical challenges faced by Tanzanian bling them to be sustained in the market. Mr. Haneef
Islamic banks, which include those related to in- has presented this issue stating that:
vestment opportunities and competition.
“The rate is made up of so many factors, including bank
4.3.1. Minimum investment opportunities performance, market, operational costs, competition,
and financial risks. Because we are dealing in the
This study’s findings claimed that the minimum same market with conventional banks, […] customers,
range of Islamic products in Tanzania does not al- market and competition are very important aspects to
low for the mobilization of funds. This is contrib- be observed.”
uted by less investment opportunities, due to the
lack of capital market instruments, such as gov- (Mr. Haneef, Bank B Manager)
ernment bonds and stocks that conform to Islamic
principles. Regarding this issue, Mr. Murshad ex- However, Mr. Samir complained about BoT’s tenden-
plained the following: cy to delay on making decisions regarding the sub-

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Banks and Bank Systems, Volume 14, Issue 1, 2019

mission of requests for new products developed by An investigation made by Ariss (2010), using
Islamic banks. He said that this situation has caused different proxies of competition, supports the
the takeover of customers by conventional banks. He finding from present study. He found that the
clarified this as follows: Islamic banking market reveals more concen-
tration and less competition, when compared to
“The main challenge which we encounter [is] BoT’s de- the conventional banking segment. Therefore,
lay in making decisions on approving Islamic prod- Islamic banks are stronger where competition is
ucts, due to the absence of Islamic framework to the low, for the purpose of achieving higher rates
BoT. Due to this delay, Islamic banks fail to reach the of returns. Moreover, Mirakhor (1995) asserted
needs of their customers, even though customers are that the newness of Islamic banks in financial
available. This results to the takeover of customers by globalization means that they fail to compete
conventional banks, which depend on the same cus- with well-established conventional banks in the
tomers and the same market.” short run.
(Mr. Samir, bank B Manager)

MANAGERIAL IMPLICATIONS AND CONCLUSION

This study’s findings have come out with the measures in different dimensions including regulators,
bank practitioners and officials whose active participation is a must for the successful performance of
Islamic banks in Tanzania. From the participant’s perspective of challenges faced by Islamic banks in
Tanzania operating under conventional regulatory regimes, the managerial implications have been pro-
vided, in order to enhance the practices and performance of Islamic banks.

The study has shown that the industry lacks a comprehensive sharia regulatory framework. The findings
show the need for the framework. Managers are therefore able to play a proactive role in initiating the
establishment of comprehensive sharia regulatory frameworks in Tanzania. For example, bank B has
shown a willingness to engage in dialog with authorities. A more collaborated effort by banks is im-
portant for pooling the strength that is going to provide momentum for establishing such a framework.
Consistently, policy harmonization is a challenge that hinders the better performance of Islamic banks.
Country policies are not putting considerations to the specific nature of Islamic banks. Therefore, deci-
sion makers in Islamic banks have to initiate interventions that are going to create harmonized policies
that cater to the uniqueness of Islamic banks.

This study has found inconsistencies on the fatwa provided by sharia advisory boards from different
banks. The idea of harmonizing these fatwas is seen to be appropriate and justified. Therefore, in order
to ensure sharia compliance, customers’ confidence in the Islamic banking system and its similarities to
products provided by the banks, a central sharia advisory board should be established. The board is one
among many instruments that enhance the performance of Islamic banks, by centralizing the fatwa in
countries such as Malaysia. Decision makers from Islamic banks should proactively come together to
establish a central sharia board that will harmonize the fatwas that governs their banks. The implication
here is that the existence of a central sharia board is going to allow for the same treatment of Islamic
products among banks, when compared to the current situation where each bank uses different per-
spectives of sharia, attributed to varied places of references.

Due to the lack of knowledge regarding Islamic banking operations and sharia among customers, prac-
titioners, and officials from central authorities, the dissemination of knowledge among society is the on-
ly solution that can be utilized to increase education regarding Islamic banking. Banks should initiate
programs that aim to provide education, information and facts regarding Islamic banking operations,
and the sharia that governs them. For example, a common controversy is the belief that profit in Islamic
banks is the same as interest in conventional banks. This results in societal reservations in using Islamic

90 http://dx.doi.org/10.21511/bbs.14(1).2019.08
 Banks and Bank Systems, Volume 14, Issue 1, 2019

banking products. Similarly, the advocacy of academicians, bankers and religious leaders is believed to
be greatly helpful in distributing information about main differences between conventional and Islamic
banking. This can be achieved through conventions, conferences, seminars and sermons. For example,
from society’s inbuilt belief towards sheikhs, it is apparently important for banks to persuade them to
emphasize the differences between profit and interest.

In addition, the capital market is an important aspect to be considered when strengthening the perfor-
mance of Islamic banking. Decision makers are to initiate the introduction of Islamic products in the
Dar-es-Salaam Stock Exchange. The market should develop Islamic products like running finance and
call loans, because almost all the banks face difficulties while targeting conventional banking custom-
ers. If such products are developed, it would change the pace of growth of Islamic banks. Islamic banks
need to spend more on research in developing Islamic money markets and Islamic instruments, offering
alternatives to hedging, arbitrage, swapping, forward booking, and other approaches to conventional
banking.

Apart from the inherited challenges on Islamic banking, as mentioned by several authors, Tanzanian
Islamic banks are more vulnerable to the requirements of the Central bank (BoT), which are against
Islamic sharia. Islamic banks are forced not to share losses with customers on practicing Mudarabah,
while this is a sharia requirement. In order to continue operations, Islamic banks have to bear the whole
loss instead of sharing it with customers, while setting aside some reserves (profit equalization reserves)
for enhancing efficient operations.

This study therefore, details the managerial implications of the banks’ decision makers, that involve
proactive initiatives for establishing comprehensive sharia framework, a central sharia advisory board,
and initiatives in harmonizing policies that are going to relieve Islamic banks from double taxation. On
top of that, managers have to create programs that are going to disseminate knowledge, via academi-
cians, religious leaders and bankers, through mediums including conferences, seminars, conventions
and sermons.

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