Chapter 28
Tanzania
The Growing Competition in Islamic Banking
Uwaiz Jassat
Acting Head, Absa Islamic Banking, and Head, Absa Takaful
Islamic banking was launched in Tanzania by Kenya Commercial Bank in 2008. The National Bank of Commerce and Stanbic launched Islamic offerings in 2010. Islamic banking in Tanzania has grown in popularity based on the fact that almost half of the population is Muslim. In addition to the number of banks, the product range has increased. More recent Islamic offerings have been made available by People's Bank of Zanzibar and Amana Bank, which is the only bank in Tanzania currently offering Islamic banking products exclusively. It is estimated that 91 percent of the population is currently unbanked.
The majority of Swahili and east African Muslims belong to the Sunni Shafi school of Islam. A number of Muslims belong to various Shia schools, such as the Ithna Asharia, the Agha Khan Ismaili, and Bohra. These are mostly of Asian origin. East Africans of Omani origin almost all belong to the Ibadi sect, whereas those of Yemeni origin may follow the Maliki, Hanbali, or Shafi schools. Many Sufi orders also exist.
Shiites came to east Africa during the colonial era; many of them are rather well-to-do and live somewhat secluded lives. In particular, the Ismaili followers of Agha Khan have concentrated on establishing schools, hospitals, and libraries; building societies and guesthouses; and engaging in industrial development. Before the radicalization of socialist politics in Tanzania following the Arusha Declaration in 1967, in which the Tanzanian National African Union, led by Julius Nyerere, outlined the process of building a socialist state, large amounts of money were invested in Agha Khan Industrial Promotion Services, which worked with governments, international financial institutions, and donors to create solutions to pressing infrastructure needs and in Ismaili holding companies.
Wealthy Muslims, mainly of Asian origin and those of the Agha Khan community, have contributed to developing various industries. Recently there has been an increase of Saudi Wahhabi ideas as a result of Tanzanian Muslim students who have studied in Saudi Arabia.
Tanzania has an important role in the region because it is in the middle of eastern Africa and because many Muslim leaders and theologians in neighboring regions like Malawi, Mozambique, Rwanda, Zaire, Uganda, and Burundi were educated in Tanzania.
Diamonds are the most important mineral mined in Tanzania. Gold mines are growing, and there are large deposits of coal, iron, tin, and phosphate. Shrinking current-account deficits and moderating inflation will support currency appreciation. The main constraints are infrastructure, which is now in the development phase, and the banking sector's lack of sophistication, which holds back domestic investment. The economy is primarily agricultural, with the majority of the economically active population engaged in farming, forestry, or fishing. Tourism is a growing and vital part of the Tanzanian economy.
Islamic Banking Products
The National Bank of Commerce offers personal and business checking accounts and a personal savings account bundled with takaful funeral benefit.
Kenya Commercial Bank offers business and personal chequing accounts and savings accounts for adults, children, and communities. It also offers short-term trade finance, asset-based financing, construction materials financing, and letters of credit.
Stanbic offers current and savings accounts.
The People's Bank of Zanzibar offers three product options: mudaraba (profit sharing), murabahah (cost plus markup financing), and ijarah (lease financing).
Amana Bank, the newest entrant to the Islamic banking market, was launched in 2011. It offers current and savings accounts, investment accounts using the mudaraba principle, and lending products covering different types of commodities using the murabahah principle.
Table 29.1 summarizes the Islamic product offerings of Tanzania's banks.
Table 29.1 Comparison of Islamic Product Offerings
| Check | Transactional Savings | Finance | Investment | |
| National Bank of Commerce |  |
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| Kenya Commercial Bank | |
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| Stanbic | |
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| People's Bank of Zanzibar | |
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| Amana Bank | |
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Asset Management
There is currently no asset management solution, either conventional or Islamic, in Tanzania.
The Equity Market
In terms of an equity market, there are too few listed entities on the Tanzanian Stock Exchange and no liquidity in the market. There is currently no electronic platform for share trading, which is a disabler for liquidity. The current shares that are available are not Shari'ah-compliant. The requirements for a future Islamic equity market are electronic capabilities, market liquidity, and the availability of Shari'ah-compliant share options.
The Commodities Market
There is currently no listed commodity market. The requirements for a commodity market are the same as for an Islamic equity market.
The Bond Market
The Tanzanian government currently offers government bonds, but they are not tradable and not Shari'ah-compliant. What is required for an Islamic bond market in Tanzania is the enabling and development of sukuk. This would also enable the development of asset management as a product offering in Tanzania because it would allow for the development of product offerings such as an equity mudaraba offering, with clients being offered high-, medium-, and low-risk portfolios.
Tax and Accounting
The fact that most African countries are not governed according to Shari'ah is one of the challenges in establishing Islamic banking and developing Shari'ah-compliant financial products and services. Having to comply with Shari'ah as well as local statutory legislation and banking regulations makes product development challenging. No significant changes are required to current accounting regulations. It would, however, be ideal if the government made compliance with the Accounting and Auditing Organization for Islamic Financial Institutions guidelines compulsory for all financial institutions that offer Islamic financial products.
Current accounting methods would not have to change unless the central bank, the Bank of Tanzania, introduced specific requirements for Islamic banks.
The Tanzanian Revenue Authority does not yet have a tax framework that supports the growth of Islamic finance in Tanzania. There are currently no initiatives to draft a tax amendment bill to create a level playing field for Islamic banking within the current tax legislation. This means that work still must be done in this regard, particularly related to the potential double-tax effect of murabahah transactions.
The desired tax amendments would ideally be similar to those made recently in South Africa. They should ensure that profit share is treated in the same way as interest for income tax purposes, enable sukuk through an agreement by the government to allow a third party to own shares in a state asset, and enable finance products such as diminishing musharaka.
Retail and Microfinance
Retail banking includes deposits and finance. Currently, Tanzanian government legislation on deposits requires that capital is guaranteed. This is at odds with the Islamic banking principle of shared risk and reward. The structuring of a mudaraba investment requires that capital is not guaranteed. If the government accepted mudaraba deposits (in which capital is not guaranteed) as legal deposits, this would enable the payment of profit share to clients on deposit products. Islamic banks could then give a return to the client, thus enabling the development of a money market instrument.
The greatest obstacle to offering Islamic banking products is the functionality of information technology systems to accommodate finance products and reporting. There is also a need for development in dealing with defaults and in ways for customers to provide sufficient surety in support of a loan.
There are currently no Islamic microfinance products offered in Tanzania.
Takaful and Re-Takaful
Tanzania has a Muslim population of more than 20 million, but takaful's scope is potentially wider because the product can be offered beyond the Muslim community. Islamic finance through Islamic banks and banking windows continues to gain ground in Tanzania. This indicates that the market for takaful is there, because experience in other countries has shown a strong link between Islamic banks and takaful operators.
There is currently no separate Tanzanian regulation dealing specifically with takaful, which means that it is regulated by the laws governing conventional insurance. The regulator has approved Islamic banks, and it seems only a matter of time before attention will be given to the financial services sector.
The market for re-takaful also needs to be developed. The lack of Shari'ah-compliant reinsurance options means that conventional underwriters are currently used, but Shari'ah-compliant reinsurance underwriters should be available to back the primary products whenever possible.
The benefit of takaful to the Muslim population and to the economy as a whole would be significant. The protection of assets and the ability of a family to financially survive the death of a breadwinner are key ingredients of the Muslim population's prosperity.
One of the key challenges of developing takaful products for the Tanzanian market is the education of the market. Conventional insurance has a low penetration rate, and experience in other countries suggests that the penetration rate for takaful products would not differ substantially. Education and market awareness about the benefits and the Shari'ah compliance of the takaful system would be an important requirement for the successful implementation of takaful.
Sovereign Sukuk and Debt Capital Markets
The first requirement for the development of sukuk in Tanzania is for the country to see a need for an alternative means of funding for large projects, such as infrastructure development. Tax amendments are also required to enable the development and operation of sukuk. There are currently legal issues around a special purpose vehicle owning government assets. Sukuk would also have to be listed, liquid, and easily tradable. No electronic platform currently exists for enabling this process.
The same requirements exist for enabling debt capital markets in Tanzania.
Regulatory Issues
The Bank of Tanzania has sought assistance from the World Bank in developing supervisory, regulatory, and legal frameworks for Islamic banking in Tanzania. The task force appointed by the World Bank has already started its work.
The current government requirements related to the delivery of Islamic banking in Tanzania include reporting requirements and the establishment of an independent Shari'ah supervisory function. The current regulations ensure that Islamic banks are in consonance with the ethos and value system of Islam.
Disclosure and record keeping must be in line with the requirements for conventional banks. There is a requirement for an internal auditing structure, which includes an independent assessment of control procedures addressing the specific profile of Islamic finance.
The prudential requirements comply with the core principles for effective banking supervision developed by the Basel Committee, and they build on the international standards set by Basel by accommodating the specificities of Islamic finance.
Islamic banks are required to take an integrated and holistic approach in the management of risks that are borne on account of the requirements of Islamic financial products. This includes the requirement for a liquidity management framework. Islamic banks are required to establish an effective disclosure regime that is in line with international standards of transparency in financial reporting.
Cross-Border Financing
The Tanzanian government currently resists the transfer of Tanzanian shillings out of the country. In response to current domestic and international economic developments, which have affected the foreign exchange market in Tanzania, the Bank of Tanzania has decided to restrict nonresidents' access to credit facilities and Tanzanian shilling accounts, loans, and same-day overdrafts.
Conclusion
There is currently no information available on the relative performance of any of the Islamic windows. Their results are not reported separately. Only Amana Bank makes its performance figures available.
If providing easy access through a national footprint were the measure of success in attracting customers, then National Bank of Commerce would be acknowledged as the market leader. If the measure were response to customer needs, then Amana Bank would be ahead of the rest. Being relatively small and new to the market, Amana has been able to assess customer needs and respond with more customised products than the larger, more established banks have. If having a captive market were the measure of success, then People's Bank of Zanzibar would have the advantage, since it serves all the civil servants in Zanzibar. Reliable competitor analysis on the Islamic banking market in Tanzania will probably not be available for some time.
The international shortage of Islamic banking skills is also an issue in Africa. Skills transfer and development as well as customer education will be critical elements for the growth of Islamic banking in most African countries, as elsewhere.
The opportunity for Islamic banking provided by the large number of Muslims in Tanzania has yet to be realised. The vast majority of Tanzanians are still unbanked. A solution that responds to religious beliefs is bound to be a strong offering.
About the Author
Uwaiz Jassat is the acting head of Absa Islamic Banking and the head of Absa Takaful. He began his career as an insurance specialist and chose to follow his passion for Islamic finance by launching the first takaful company in South Africa in 2003. He developed Takaful South Africa into such an attractive operation that it was purchased by Absa Financial Services, making it part of the Barclays Africa Group.
Uwaiz holds a bachelor of commerce degree from the University of the Witwatersrand, has a higher certificate in insurance from the Insurance Institute of South Africa, and is an accredited financial advisory and intermediary services representative. He is currently completing an MBA through the Management College of South Africa.