THE MEANING OF INTEREST AND INTEREST BASED INSTITUTIONS IN TANZANIA-PART II

INTEREST BASED ECONOMIC AND POLITICAL INSTITUTIONS IN TANZANIA.

The Prophet Muhammad peace be upon him cursed the accepter of interest and its payer, and one who records it, and the two witnesses; and he said: They are all equal.
“To err is human to get paid for it is divine.” William Freud.
“Let us look at the records.” Alfred F. Smith (Politician)..


Interest based political and economic institutions in Tanzania (IBEPI) refers to those institutions which get involved directly or indirectly in lending or borrowing or investing or formulating and implementing economic policies, legislations and regulations under the ambit of interest as defined above. Some political institutions are included in this discussion because they play significant role in the economy of the country directly or indirectly. IBEPI can be grouped into two main categories.

1. Core Institutions.
2. Intermediate and Support Institutions.

These institutions are interconnected and complementing each other in their operations and hence hard to separate one from the other.

1. Core Institutions (CI).

These institutions formulate fiscal and monetary policy, perform supervisory functions or engage in interest based transactions hundred percent or to large extent (more than 50%). These include Ministry of Finance, Bank of Tanzania, Investment and Commercial banks, Microfinance Institutions and saving and Credit Cooperative Societies (Saccos).

1.1 Ministry of Finance and Economic Affairs.

The Ministry of Finance and Economic Affairs manages the overall revenue, expenditure and financing of the Government of the United Republic of Tanzania and provides the Government with advice on the broad financial affairs of Tanzania in support of the Government’s economic and social objectives. The ministry involvement in interest based transactions is noticeable in many ways. One way, is in Public Finance Management particularly in the way government raise funds for the government and manages borrowing on financial markets. Second way, the ministry plays a role of developing regulatory policy for the country's financial sector in cooperation with the Bank of Tanzania and representing Tanzania within international financial institutions. Besides, the ministry has several subsidiary institutions which conduct business based on interest directly or indirectly which are classified among other as:

a)Regulatory institutions such as Bank of Tanzania, Gaming Board of Tanzania, Capital Markets and Securities Authority (CMSA) Public Procurement Regulatory Authority (PPRA) and Tanzania Insurance Regulatory Authority (TIRA).

b)Insurance and Banking Institutions such as National Microfinance Bank (NMB) Tanzania Investment Bank (TIB), Tanzania Postal Bank (TPB), National Bank of Commerce (NBC), National Insurance Corporation (NIC) and Insurance Deposit Fund.

c)Pension Funds such as Parastatal Pension Fund (PPF), Public Service Pension Fund (PSPF) , Government Employees' Provident Fund (GEPF)

d)Liquidation and collection firms such as Dar Es Salaam Stock Exchange (DSE), Loan and Advances Realization Trust (LART) Tribunal and Consolidated Holdings (T) Ltd.

The ministry is doing a great deal of business by owning fully or partially these subsidiaries which provide 'great service' towords building the nation. In corporate management perspective, the finance ministry is the business wing of the government. The ministry of finance and economic affairs is the mother or focal stone of all financial institutions in the country.

1.2 Bank of Tanzania (BOT).

BOT is at the apex of interest based banking and non banking financial institutions in the country. (BOT) was established in 1965 by an act of parliament. The Act supplement of the Bank of Tanzania Act 2006 specify principal function of the bank is “to formulate, implement and be responsible for monetary policy, including exchange rate policy, to issue currency, to regulate and supervise banks and financial institutions including mortgage financing, development financing, lease financing, licencing and revocation of licenses and to deal, hold and manage gold and foreign exchange reserves of Tanzania”. BOT is the government banker and its fiscal agent. The bank holds government deposits accounts as well as financing government projects under strict regulations.

In financing the government, BOT charges the government an interest of not less than 3%. The main source of funds for the bank is coming from the capital invested by the government, the government deposits and deposits of financial and non financial institutions. As the government fiscal agent, it manages the government public debt including issuance and redemption of government securities and the payment of interest.

The central bank major business is with commercial banks and other financial institutions. One of the major functions is to control commercial bank reserves and thereby credit conditions. The bank has been given powers to control the volume, terms and conditions extended through loans, advances or investment. The bank may also prescribe the maximum or minimum rates of interest that the banks and specified institutions may pay on any type of deposit and in transactions of their business. The bank as the lender of last resort provides loans and advances to financial institutions based on interest instruments for a short period. According to H.H Binhammer, “Such loans and advances have to be pledged by Government securities or short term instruments acceptable by the Bank for rediscount purposes.”

Furthermore, BOT is in charge of developing financial market. Government treasury bills and bonds are the commonly used money market instruments traded in the financial market. Since it was founded, BOT has taken the role to foster a Treasury bill market which is traded on interest basis.

1.3 Commercial Banks.

Commercial banking in Tanzania mainland was introduced by the German during the colonial period. These commercial banks were Deutsch Ostafrikanische Bank opened in 1905 and Handelsbank fur Ostafrika opened in 1911 in Dar and Tanga respectively.

In 1967, all foreign banks except Jetha Lila Bankers in Zanzibar were nationalized forming one bank, named the National Bank of Commerce under the control of the government (NBC Act 1967) . After nationalization of banks in 1967, three banks existed; NBC, National Co-operative Bank (NCB) and the People’s Bank of Zanzibar (PBZ). Later on, Tanzania Housing Bank was established. The results of this move has been described as “poor performance, insolvent and inefficient government owned banks”. As part of broad economic reforms, financial sector reforms of banking industry occurred in 1991(under BFI Act 1991), in the form of decontrolling interest rates, privatization of government owned banks and liberalizing banking sector by allowing entry of private banks (Wangwe:2004).

Currently, there are 34 commercial banks and 18 financial institutions in the country as per the BOT website on 29.05.2014. The number is likely to increase following preparatory move on going. Out of these, five banks offer Islamic Banking services devoid of interest.

1.4 Microfinance Institutions (MFI).

The term microfinance refers to the provision of financial services to low income clients, including the self employed. Microfinance institutions have been understood as an organization providing microfinance services, whether regulated or unregulated.

Tanzania poverty alleviation strategies recognize the role of microfinance activities in helping the poor and eradicate poverty in the country. In Tanzania, microfinance services have been largely provided by the government under several local government schemes and financial NGO’s (MFI-NGOs). Their main business is limited to provision of credit and charging of very high interest rate. Currently, there are about 247 microfinance institutions scattered across 26 regions in Tanzania with very small number of clientele base of not more than 400,000 making coverage of less than 1% of the country total population of 44.9 Million. MFI in the country isn’t a success story despite operating in the country for the last twenty years despite of its huge potential to eradicate poverty. The problem is high interest rate, limited customer focus and poor customer centric products and services.

1.5 Saving and Credit Cooperative Societies (SACCOS).

SACCOS are thrift organizations among groups of workers in one organization or in related organizations or professions. The coming of SACCOS in Tanzania can be traced back after 1991 when financial sector reforms took place.

SACCOS are seen by the government as one of economic empowerment programme through which small and micro entrepreneur can access loans which can transforms and improve their business and living conditions. On that regard, the Minister of Finance and Economic Affairs in the last two years budget speeches, he has ever fall short to mention SACCOS as one of government supported programme under economic empowerment programmes through which the government boost itself in the effort to eradicate poverty in the country.

Official statistics indicate that by May 2009, there were 5,042 registered Saccos, with a membership of 822,685. A half of the Saccos (53.76 per cent) are based in the rural areas, where they serve about one per cent of more than three quarters of the poorest Tanzanians. This is an increase of about 262 SACCOS from 4780 in the span of less than a year. Besides, Mr. John Haule, Deputy Permanent Secretary in the Ministry of Finance and Economic Affairs has given an update on the records when he said the number of Saccos has reached 5330 with 819,000 members as of 2009.

However, the executive secretary of the Savings and Credit Cooperative Union League of Tanzania (Sccult), Mr Abdul Mshaweji doesn’t agree with the figures because the government SACCO’s registry is not updated accordingly. Mshaweji argues that some SACCOS have collapsed and other are in “brief cases” with no physical offices but still can be found in the registry. Instead, Mshaweji estimates that there are only 2500 active SACCOS countrywide.

These SACCOS main business is to lend money to their members and charge them interest except recently launched Islamic SACCOS. This return on money lent is justified on ground such as to meet operational costs and making profit and hence maximize shareholders value for money. Some few well managed SACCOS have got loans from Banks such as NMB, CRDB, NBC and from other banks on interest. SACCOS-Banks mutual relationship is very systematic as banks find themselves relieved from the challenge of financing the poor or micro entrepreneur who doesn’t possess required experience or collateral and SACCOS finds themselves in good position to manage liquidity and meet credit needs of their members.

THE MEANING OF INTEREST AND INTEREST BASED INSTITUTIONS IN TANZANIA -PART I

O ye who believe! Observe your duty to Allah, and give up what remaineth (due to you) from usury, if ye are (in truth) believers.
And, if you do not, then be warned of war (against you) from Allah and His Messenger. And, if ye repent, then ye have your principal (without interest). Wrong not, and you shall not be wronged. (Qur’an, 2:278-279).
-Prophet Muhammad may Allah’s peace and blessing be with him said "“An age will come, when all people would be involved in Usury and if not, they would at least be affected by its results.”


The doctrine of Interest is an institutional and conventional rather than natural phenomenon in our economic system. The institution of interest exists not because it is natural or inherent phenomenon of the modern time society but because it had existed in several societies for some reasons and for some time (Afzal ur Rahman: 1980). Modern economists regard institution of interest as a necessity for modern society and must be kept alive at all costs despite its socio-economic malaise.

In the recent global financial crisis, it has been clearly noted that it was caused by western banking system indulgence on documented lending based interest in the mortgage financing sector. On the other hand, stability and resilience of Islamic banking system during the crisis has provided a clear insight to the significance of interest free economic system.

THE MEANING OF INTEREST AND RIBA.

Interest has been defined differently by different people. Stephen G. Kellison says “Interest may be defined as the compensation that a borrower of capital pays to a lender of capital for its use. Interest can be viewed as a form of rent that a borrower pays to the lender to compensate for the loss of use of the capital by the lender while it is loaned to the borrower.” Others have defined it as a fee paid for using other people's money. Some argued that interest is a fee paid to the courier of capital. To the borrower, it is the cost of renting money, to the lender the income from renting (lending) it out.

Tanzania Income Tax Act 2004, revised edition 2006, Part I Preliminary section defined interest as “a payment for the use of money and includes a payment made or accrued under a debt obligation that is not a repayment of capital, any gain realized by way of a discount, premium, swap payment or similar payment.”

In the Muslim world, Western minded Muslims are accused for misinterpreting Riba as usury only in which they say it refers to primitive form of money-lending for consumption purposes and differentiate it from interest. To the contrary, Muslim scholars maintains that such difference never exists as the Arabic word Riba includes both usury and interest. Using Maulana Abu Ala Maududi words, “Arabic Riba is but partially covered by the English word Usury which in modern parlance signifies only an exorbitant or extortionate interest. The Arabic Riba on the other hand means addition, however slight over and above the principal sum lent and thus it includes both usury and interest.”

Sharia scholars and Islamic economists have given a broad meaning of the term interest after having studied Riba manifestations and connotations from Islamic revealed sources and opinions of distinguished earlier generations of scholars. They defined interest as a pre determined excess or surplus over and above the loan capital received by the creditor conditionally in relation to a specified period. In other words, Riba contains three elements:

a. Excess or surplus over and above the loan capital or produce.
b. Determination of this surplus in relation to time; and
c. Bargain to be conditionally on the payment of a pre-determined surplus.

These three elements jointly constitute Riba and any deal or bargain or credit transaction, in money or in kind, which contains these elements, is considered a transaction of Riba by the Muslim jurists and economists.

WHY IS INTEREST PROHIBITED IN MONOTHEIST/ ABRAHAMIC FAITHS.

Islam, Christianity and Judaism have prohibited interest based transactions. However, in Judaism, the strict codes of prohibition were relaxed to a lesser extent especially with non-members of the Jewish community. In Christianity, reform began by the end of 13th century in protestant church led by Luther and Zwingli who agreed to the charging of interest and then catholic whereby John Calvin and St. Thomas Aquinas conformed to the secular pattern and provided a theological rationale for charging interest. In Islam, Muslim Scholars have maintained the condemnation of interest in Islam for almost 14 Centuries despite efforts to use deceptive practices to circumvent the Sharia injunctions.

The basic argument against interest is exploitative nature of money lending practices based on interest. For example, in the banking system, we find rich creditor exploiting poor debtors. However, the prohibition of interest in Islam goes beyond exploitation explanation. We have people who may question how can I be exploiting the government by purchasing T-bill Or corporate bonds or buying a unit in the UTT collective schemes or by being a member of pension funds or by depositing in a saving or term deposit account and so on? Of course, in what ever scenario, Allah commands justice to be served in financial deals. How fair to get a return without any element of business risk such as when you buy treasury bills or having a fixed or saving account? Where will the government get funds to pay the principal and interest? Isnt the money comes from taxes that a common mwananchi has to pay expecting better social services? Where will the bank gets money to pay you? Isn’t from charging highly those who borrow or in use of banking services? Isn’t this exploitation? Where do we abide by risk taking principle of “no pains no gains”?

In broadest view, Islam prohibited interest so as to establish economic justice and get rid of injustice. The interpretation of the verse 2.279 ends with…deal not unjustly and ye shall not be dealt with unjustly. In other words, without inflicting or receiving injustice, whereby both an increase and decrease of the amount returned relative to the amount lent is considered injustice.

ARGUMENTS FOR INTEREST.

A lot of efforts in economics have been directed towards justifying interest. This is what can be found in theories of interest such liquidity preference theory, time preference theory, loanable fund theory, abstaining or waiting theory of interest which were propounded by economists such as Robertson,Ohlin, Pigou, Walras, Cassel, Alfred Marshall, Keynes, J.S Mills among others. These theories have been criticized on several grounds. In the words of Shaikh Mahmud Ahmed as quoted by Abdul ghafor,

“… leaving out some notable exceptions, like Bohm Bawerk’s Capital and Interest, significant parts of Keynes’ General Theory and parts of Harrod, Hawtey and Kurihara, questioning the validity of interest, bulk of the effort of economics has been to justify it, yet not a single argument advanced in favour of this institution has a leg to stand on. All theories of interest evolved till the time of Bohm Bawerk, including those resting on productivity, abstinence and demand and supply concepts, were unanswerably repudiated by him. Yet economics continues whipping these dead horses, without evolving any persuasive answers to his criticism.”

To sum up argument in favor of interest which is handwork of money lenders and modern banking system, they propound that since money lent is used to invest in a business venture and make a profit, it is reasonably fair to ask for a share in that profit. For easy of reference, the interest is fixed in advance and for the protection of capital a collateral security is required. On this ground, charging an interest as agreed by both parties is seen as logical.

However, predetermined interest is not at all charged on profit in modern banking operations. Interest is charged on the money used by the borrower by the end of a month as the case in bank overdraft facilities or depending on money lent regardless of use by end of every month (term loans) and debited on the customers account automatically. In both cases, there is no sharing of profit which is normally determined by the end of every three month or half a year or annually.

On that account, banks simply sale money for money. This is the nucleus of injustice and double standard. Money as a means of exchange, measure of value and store of value is treated in the same basket like furniture, maize and rice. Contrary to the distorted perception of money, Islam maintains its position that money isn’t a commodity or product because its doesn’t possess intrinsic value which is possessed by products such as furniture, maize and rice.

ISLAMIC FINANCE DEVELOPMENT REPORT-CAN TANZANIA FITS IN?

According to Islamic Finance Development Report and Ernst and Young World Islamic Banking Competitiveness report, all of 2013, Islamic financial institutions have grown tremendously over the last decade reaching thousands with combined assets in excess of USD 1.5 trillion and the customer base of more than 34 million, two-third are residing in QISMUT (Qatar, Indonesia, Saudi Arabia, Malaysia, UAE and Turkey). It is projected that the Islamic Finance industry shall continue to grow at growth rate of 19.6% over 2013-18 across QISMUT countries to reach USD 1.6 trillion by 2018.

ISLAMIC FINANCE ASSETS CONCENTRATED IN FEW COUNTRIES.

In the list of top ten countries, Malaysia has the largest Islamic Finance industry with total assets in excesses of USD 411 Billion, 30% of the global Islamic finance sector, followed by Saudi Arabia and Iran. These top ten countries make up 94% of Islamic Finance assets with 64% concentrated in the top three countries alone. In terms of Islamic banking assets, Saudi Arabia despite absence of Islamic banking legal framework, topped the top ten list, followed by Malaysia and Iran. However, countries like Turkey and Indonesia are expected to grow significantly. On the other hand, in terms of total assets, number of institutions, stock performance and financial performance, Qatar tops with strong performance, followed by Sudan and Bahrain.

Islamic Banking is the most developed sector of Islamic Finance with strong performance and institutional depth among leading countries.Performance has been positive with most countries showing average return on equity in excess of 10% save for UAE, Kuwait and Bahrain. Indonesia is the top perfomer with average return on equity of 15% and Bahrain was the only country to have negative poerfomance. Nearly a third of Islamic banking institutions are windows. This demonstrates that even Islamic windows are acceptable to consumer and they continue to represent 31% of Islamic banking institutions.

RECENT ENTRANT IN THE TOP TEN LIST.

There are several recent entrants (countries) which made their way to the top ten list of countries with significant development of Islamic Banking in terms of total assets, institutional depths and financial performance. For example, Turkey and Iraq. Turkey introduced participation (Islamic) banks in 1990's and according to Islamic Finance Development Report 2013, Turkey ranked number five ahead of UAE, the home of the first Islamic Commercial Bank where as Iraq scored ten position slightly below Iran, which runs its whole banking system based of Sharia rules.

Apart from quantitative performance of the new entrant, qualitative performance shows significant developments. The report on the knowledge indicator shows that Oman which introduced Islamic Banking in 2011 scored eighth position based on the number of educational institutions offering degrees or courses in Islamic Finance and number of research published in the last three years. Oman has four institutes offering Islamic Finance courses and has issued six research papers on the subject in the last years. Important to note that Sri-Lanka despite being a non-Muslim majority country has scored ninth position on the list due to an established educational infrastructure which included seven institutions offering Islamic Finance cources and two universities offering degrees in Islamic Finance.Muslim minority countries like USA, Australia, France and India also performed well. In absolute numbers, UK and Malaysia lead the way on the knowledge front in terms of institutions and research.

On education and research as sub-indicators of knowledge indicator,countries like Maldives, Oman and Tunisia made their way in the top ten list. On education, Maldives scored tenth position with strong Islamic Finance education infrastructure relative to its size, with three institutions offering Islamic Finance courses although the country doesnt have significant Islamic Finance sector (one Islamic Bank with limited activity). On research, Tunisia scored number three and Oman number six on number of research papers published on Islamic Finance for the last three years (2010-12)ahead of prominent centers of Islamic Finance such as Pakistan and UAE respectively. In absolute numbers of research papers, Malaysia is a leader with 169 research papers during the period. However, UK leads with 60 institutions offering courses and 22 institutions offering degrees in Islamic Finance.

On governance indicator, which measures and assess regulatory environment, Sharia and corporate governance based on the guidelines of IFSB and AAOIFI; Singapore, Oman, Nigeria, Australia, Sri-Lanka, South Africa, UK and Jordan featured in the top ten list on various sub-indictors ahead of Saudi Arabia which has highest islamic finance sector assets. On the regulation sub-indicator, Singapore,Oman and Nigeria featured in the top ten where as KSA, UAE, Indonesia, Turkey are absentees despite holding sizeable Islamic Finance assets. Similar position can be noted on Sharia governance, where you find Jordan on the top ten but there is no KSA, Iran, Turkey and Indonesia despite being in the top ten on islamic finance assets. Sizeable number of new players are also absent on this category, hence new and old players need to focus on improving Sharia governance.

EAST AFRICAN COUNTRY ON THE TOP TEN LIST.

On awareness indicator which measures number of seminars, conferences and news articles related to Islamic Finance, new entrants have dominated the top ten list which is led by Oman with 8 seminars, 3 conferences and 531 articles related to Islamic Finance. Tunisia, Mauritania and Djibouti which has recently introduced Islamic finance have also performed well and made it to the top ten.

On the conference sub-indicator which is based on number of conferences held in 2012 with more than 100 participants, African countries have dominated in the top ten list. Mauritania, Tunisia, Djibouti, Sudan and Uganda are on the list. Uganda is the only country within East African Community which has featured in the top list on conferences being seventh on the list ahead of five countries in the QISMUT except Malaysia. Interestingly, Uganda has no Islamic Bank or window yet, but there has been a growing interest to launch Islamic Banking services in the country and the cabinet minister have endorsed the Islamic Banking Bill expected to be tabled any time in 2014. If the bill passes, it will be the first country in the EAC to have legislation targeting Islamic banking. All these are good news for Uganda and for east africans.

However, Tanzania and Kenya must speed and wake up in their efforts to develop Islamic Finance taking note of the fact that the two countries already have Islamic Banks/Windows and with sizeable Muslim populations. Well,the question is, can Tanzania and Kenya feature in the next publications of the report? Time will tell but due to efforts taken today,I believe Tanzania can.

WHERE ARE THE RESEARCH CARRIED OUT ON ISLAMIC BANKING IN TANZANIA?

Before and after the introduction of Islamic Banking products in the country, a number of researches undertaken in a diverse fields of Islamic Finance in the country by students of local universities as well as abroad. However, to find out where these researches are and what vast topics covered by them is tounting task for any information seeker.

THE DILEMMA.

Almost every year, i receive request to fill in questionnaires for Master and Ph.d students from Tanzania and elsewhere. I gave them one condition to promise to share the 'executive summary or abstract' with me after completion in order to let the general public aware of the existence of such research and significant findings. Few from abroad managed to share and unfortunately none from Tanzania has shared. Were the research aborted, incomplete or these researchers are yet to grasp the significance of sharing research findings?

SIGNIFICANCE OF SHARING RESEARCH FINDINGS.

In the 17th century, many scientists kept new findings secret so that others could not claim the results as their own. Prominent figures of the time, including Isaac Newton, often avoided announcing their discoveries for fear that someone else would claim priority. However, this fear has long been overcame by various measures instituted to protect discoverers and researchers.

In a country like Tanzania, research and development go hand in hand. According to Elias Banda, it is not possible to talk about development without talking about deliberate and structured efforts to establish information about a certain problem, and possible ways of solving it. For example, you can not eradicate poverty without thinking of the root causes of poverty and without doing an investigation on the best wealth creation methods that could absorb the poor and marginalised communities so they are given a fresh start in life. You can not strategize on increasing banking populations without doing investigation on the root cause of nonbanking and ppractical ways to address the problem.

It is long withheld view that 'Research findings have the potential to influence positive changes in the way government and other key institutions conduct business, especially in relation to the development and implementation of policies affecting the poor and the marginalized.'This view stands true today, as research revelations puts issues on top of the agenda of public and private stakeholders. For example, the research article by James Andalile in 2009 titled Viability Of Islamic Banking in Tanzania, provided a sound information on practitioner perceptions on viability Islamic Banking in the current conventional framework. It may be agrued that due to positive feedback shown in the article, triggered the entrant of new players such as NBC,Stanbic and PBZ to start offering Islamic Banking products besides KCB Bank. Furthermore, the research findings shed light on the legislations which must be reviewed to enable Islamic Banking compete fairly with conventional banks. Though this is yet to materialise, the central bank has already engaged consultants from the world bank to come up with Legal, Regulatory and Supervisory framework for Islamic Banking in the country.

On the other hand, if the knowledge gathered from the research is not shared, the research becomes useless to the development of Islamic banking industry locally and globally. Hence, there is need for strategic and innovative ways for ensuring that research findings in the field of Islamic Finance do not gather dust on shelves and in drawers like other researches carried out in the country, but the findings trickle down to the different interested stakeholders.

WAY FORWARD.

There is a number of ways to disseminate or sharing research findings in the current era of information technological advancement, such as engaging news media or journals editors to publish research findings but also using blogs such as this for the purpose. On the last way, i assure researchers in Tanzania and elsewhere that their research work in the field of Islamic Finance is mostly welcomed in this blog and enthusiastically awaited. 'Do research, summarise key finding and share knowledge or information' should be the primary goal of today's researchers.

ISLAMIC FINANCE EDUCATION AND AWARENESS AMONG YOUTH,WHEN SHOULD IT START?

By: Sadia Karim.

Several months ago, I came across this question through some published blog article. This is a very critical question which is thought provoking and is also related to the existing challenges in human capital in Islamic Finance. As we laid out in our Global Islamic Finance Education 2013 report, there are several issues which are chained together in the human capital challenge. Although awareness among the youth has neither been among the worth mentioning motion in major Islamic Finance forums, nor was it included in GIFE 2013 report, this is a critical matter of discussion for the future of Islamic Finance industry.
Traditionally the issue of Riba and the fact that the most obvious form of Riba is actually the term ‘interest’ that modern day banking system lives on, has not been a topic of discussion in the common Muslim household. So when the youth grows up without any understanding of it, while at the same time studying at school how to calculate interest rates and having no idea of how a bank can operate without interest, isn’t it natural to find himself/herself in a confusing state as an adult when he/she first gets exposed to the matter of Riba and its significance in the faith that he/she follows?

In a confusing state human being doesn’t know how to react in the most logical manner. We see various reactions from the Muslim consumers regarding Islamic Finance. In its extreme expression, we hear this stereotypical claim from both conservative Muslims and Muslims whose reasonings are largely influenced by secular thoughts or who are indifferent about religion in matters of finance, that Islamic Finance is a scam and doesn’t exist in reality. Dealing with this perception has been among the strongest challenges for Islamic Financial institutions to market and sell their products and services among segments of customers even when their products and services were reviewed and accredited by independent Shariah Boards.

One convincing reason for the root of this perception is the way Islamic banking and finance is integrated within the conventional framework which is inseparable from Riba from its existence. Another reason being the mismatch or misrepresentation between theory and practices by IFIs in some cases. As marketing gurus say perception is something that doesn’t change over time and once perception is formed it is formed (unless it is shaken from its root). So it will be of little benefit for the IF institutions to try to change this perception externally without addressing the roots of the formation of it.

Education shapes the minds and thoughts of a human being. It develops his/her perspective and understanding about how to reason with a matter. The curriculums in K-12 to higher education system that exist currently in almost all parts of the world is inherited from the western thinking and innovation where there is no room for understanding sections of business math without calculating interest rates.

Here is an alternate teaching method that few Islamic Schools in the west are undertaking in regards to integrating knowledge from the Quran and Sunnah (two primary sources of Islamic Finance) into the existing body of secular knowledge. This is a non-conventional approach, which is worth exploring and investing in for the purpose of educating youth and preparing them for the shifting global economic paradigm.

Prophet Muhammad (PBUH) : The Economist

By Dr.Mansur Durrani.

“It is clear that we should be self-sufficient and not rely on debt. That we should live more simply, consume more wisely, think of generations to come, and wonder what desires we want to plant in children‟s hearts…..Bringing decency back into debates, normalcy into pay rates [checking greed], and ancient truths into temples is going to take a fight.” At first look, these words appear to be from a long-bearded, fanatic mullah sitting in the Yemeni desert or “lawless region” on Af-Pak border. But these views are expressed in a 2010 Newsweek column by a young, blonde American journalist/writer Julia Baird. Her message is crisp and clear: the whole world is dying for a change. Not change of names; not change of faces; and not change of titles. But a change of the present system that the “civilized world” has practiced for about four centuries and is now committed to impose, even by force, on the “uncivilized world”!

History tells us that more or less similar gloom prevailed in the 6th century Arabian Peninsula. Human values were completely absent. Greed and selfishness was at its peak. Among others, two of the seven social sins listed by India‟s founding father Gandhi (i) wealth without work and (ii) commerce without morality were particularly rampant. But one individual changed all this. His name was Muhammad – the last Prophet of God. It is impossible to understand the relevance of Prophet Muhammad (peace and blessings of Allah be upon him and his family) without grasping the core of Islamic ideology that he successfully practiced and then preached within a short span of 23 years, to almost one third of humanity of his time. This core (accountability), is briefly discussed in the “Pre-solution” section below. This piece remains focused on the economic aspects of Islam.

The Challenge

A handful of financial whiz kids, through opaque algorithmic magic, are minting money while hundreds of millions of hard-working, skilled and honest individuals are loosing jobs, further affecting many more millions in their families. In spite of the downturn, in the US the rich are indeed getting richer, according to an analysis of new data by economists Thomas Piketty of the Paris School of Economics and Emmanuel Saez of the University of California, Berkeley. Their report revealed that two-thirds of the US‟s total income gains from 2002-07 went to the top 1 per cent of households, with this top tier holding a larger share of income in 2007 than at any time since 1928.

The findings released by the Center on Budget and Policy Priorities show that during those five years the inflation-adjusted income of top 1 percent of households increased more than 10 times faster than the income of the bottom 90 percent of households. Please read once again. It is bottom 90 percent households and not any specific faith group. These households most certainly include Christians, Jews, Hindus, Muslims and followers of other religions. The system is almost equally cruel to all faiths. The last time such a big share of the income gain went to the top 1 percent – and such a small share went to the bottom 90 per cent – was in the 1920s! This proves that depression, recession, contraction etc. are meant to hit ordinary folks only while rich get richer during these economic downturns.

The world had 1,011 billionaires in 2010, up from 793 in 2009, according to the Forbes list of March 2010. The US had 403 billionaires, the most in the world. But in just 3 years, the billionaire population has doubled. The Wealth-X and UBS World Ultra Wealth Report released on 10 September 2013 identified more than 2,000 billionaires globally with a total net worth of US$6.5 trillion. Not just this, despite ongoing economic and geopolitical uncertainties, the world‟s ultra wealthy population reached an all-time high of 199,235 individuals with a combined fortune of nearly US$28 trillion in 2013. They grew by more than six percent in population size from the previous year and adding US$2 trillion to their combined wealth, greater than the GDP of India! This also presents hard evidence that the figure in rich and poor debate of 99% versus 1% is inaccurate. In fact, if we divide 199,235 individuals by the present global population, it becomes 0.00003% versus 99.9999%!

Our incredible India – home to the largest humans living under poverty line in the world – has 10 of Asia’s top 25 billionaires! China is no different. It has the second highest number of billionaires in the world while urban Chinese earn an average of US$ 1,800 and rural Chinese US$ 758 per year only! Wall Street Journal reported in April 2010 that the worldwide sale of super yachts – toys for rich boys – was up in 2009 compared to 2008. The collective wealth of Britain‟s 1,000 richest people also increased by 30%, the Sunday Times Rich List said. Their combined wealth rose by more than GBP 77 billion since 2009 to GBP 333.5 billion, the biggest annual rise in the list‟s 22 year history.

It is not just daddies (and few mommies) who are hungry for money. Their kids are naturally following their footsteps. The evangelical author Jim Wallis cites a 2006 study, in his new book Rediscovering Values: On Wall Street, Main Street and Your Street. The study found that in 2006, 66% more high-school students thought “having lots of money” was “extremely important” than just a generation back said the same in 1976. This rapid descent to the culture of greed i.e. wealth at any cost has brought us to the brink of disaster. Today’s high-school kids are tomorrow’s teachers, doctors, lawyers, civil servants, corporate and political leaders. They are our future. What kind of a society will they sculpt, is a critical question that must be addressed forthwith.

The feelings of disgust at this state are not restricted to only “thinkers”. Even some members of showbiz are realizing the gravity of crime prevailing system is facilitating. American comedienne Joan Rivers recently blasted Victoria Beckham, the celebrity wife of soccer star David Beckham saying “I am not a fan of outrageous consumption. I think it is vulgar. No one should flaunt that they have a 100 Hermes 6,000 pound bags. Not when people are starving.” 6,000 Pound means approximately INR 5.4 lacs per handbag. And she is not the only one who has them in hundreds. But a criminally extravagant lifestyle is a natural outcome of too much and too easy money that the present system allows a handful of us to earn. At a new year party at a gutkha (chewing tobacco) baron’s farmhouse near Delhi, bollywood czar Shah Rukh Khan reportedly charged INR 5 crore for a 30 minute leg shaking appearance. Yes, almost one million Dollars for a 30 minute dance!

The issue is not that we have less wealth in the society. We have plenty. The problem is its massive concentration in too few and too selfish hands.

Pre-Solution

Sense of accountability to our Lord on the Day of Judgment for every single deed is the centerpiece of the ideology Muhammad was chosen by God to practice and preach. This ideological belief is meant to shape our behavior in this world. Just 30-40 years back we would laugh away at the suggestion that a time would come when every move of ours will be recorded and all matters will be decided on the basis of this hard evidence. But security cameras all around us do not leave any doubt in our minds now. Muhammad said exactly this about 1,400 years back that there are video cameras all around us. They are recording every single act of ours. Be watchful of your behavior. Based on this life-long recording, there will be reward or retribution when our lives come to an end.

In the context of economic challenges the world is facing today, let‟s pick-up the cornerstones of Muhammad‟s philosophy. If practiced sincerely by Muslims first and then followed by non-Muslims, will help make this world a better place. In my view, these are broadly four and are inter-connected; more so because they originate from the same centerpiece. And these are not based on rocket science that only Harvard or MIT graduates can practice. The Prophet established the golden principle: “Make it easier, not harder” (Bukhari). These are simple, yet difficult, “inner engineering” or behavioral solutions to current economic challenges. They do not require super computers; they only need super determination that motivates us to think of others.

The reason why most of us do not do good is: “what is the point?” And: “no one cares.” Very true; if we take a pedestrian view. However, Muslims are supposed to have a deep sense of accountability that there will be a Day of Judgment when all good deeds will be rewarded by our God. On the contrary, there will be retribution for a behavior lacking compassion. This belief is the core or centerpiece of an Islamic life. Without religiously practicing this belief, one cannot be a Muslim.


Muhammad challenged the establishment of his time. Ruling elites – like today‟s – attempted to buyout the person who wanted to change the system of exploitation; the system of nepotism; the system of corruption. He was offered all the wealth of his home town Makkah – a thriving city like Dubai or Hong Kong of today. He refused. He was threatened and persecuted for 13 long years. He was forced out of his town empty-handed, in the dead of night! Declining a “lucrative deal‟ was possible only due to his strong belief in accountability on the Day of Resurrection.




After migrating to the present Saudi city of Madinah, he laid the foundation of the first Islamic state in modern history. His mission was so simple; so pure and so appealing that the state grew from less than a 100 square kilometer in size to over a million square kilometer within a decade. It is clearly recorded in history that the total loss of human life in expanding justice-led (not force-led) governance from both his side and his adversaries’ was little over 1,000. He knew that political and social justice will remain only dreams in the absence of economic justice. Like a prudent economist, under the direct guidance of our Creator, he crafted an economic policy on the basis of four self-sustaining and value-driven cornerstones namely, Zakah, Sadaqah, Waqf and Tarakah.

Prophetic Solution I

The institution of zakah is the core of Islamic economic system. It is a micro economic solution to deal with macro economic challenges i.e. unemployment and poverty. Zakah literally means purification. When applied on wealth annually, it is meant to purify our earnings/assets. A fixed percentage payoff is mandatory for every Muslim having his/her networth above a certain threshold (which is not very high). Zakah is deeply rooted in the Islamic scheme despite an economically fragile state of Muslims in general. Prophet Muhammad and his successors used force against affluent Muslims if and when they refused to pay the share that the underprivileged and the weak had in their wealth. Almost all the seven categories of zakah recipients are needy and underprivileged (Chapter 9:60).

In Islamic states, the authorities are allowed to force high networth individuals/corporates to pay annual zakah. This economic self-help system eliminates utter poverty and starvation leading to a morally and socially healthier society. Wealthy non-Muslims do not pay zakah, even in an Islamic state. However, economically deprived non-Muslims may receive zakah in both Islamic and non-Islamic states.

Zakah increases money circulation in the society. It gives purchasing power to those who are unable to generate it on their own. It is important to note that zakah is not meant to be used up on consumption alone. The preferred use of zakah is to economically empower the recipient so that s/he soon becomes a contributor to rather than remaining a recipient of zakah. It is the responsibility of the contributor to ensure that the recipient becomes economically self-reliant at the earliest. For optimum results, it is better to distribute zakah in an institutionalized form rather than individually. For responsibilities like these, a large group of efficient and ethical persons is needed. If there is shortage of such folks, our priority should be to develop human capital from grassroots level. Yes, I mean through top quality schools which produce more ethical and efficient generations than ours. Sitting back and waiting for such people to emerge out of the blue is not an option.

Prophetic Solution II

Life and death is routine. Every moment, thousands of humans are entering and exiting this world. The second micro economic solution to the present economic challenges relates to prompt and fair distribution of property/wealth left behind by the deceased. This is called tarakah in Qur’an. Unlike zakah, there is no minimum threshold of assets for inheritance distribution. Every bit should be shared among the wife, children (not just boys) and other inheritors of the deceased. The Qur’an commands us to divide the smallest of assets (Chapter 4). This is another effective mechanism to discourage concentration of wealth in fewer hands. In reality, the “smartest” or the most powerful in the family walks away with all or most of the assets left by the family head. This not only leads to economic deprivation for others, but also results in enormous social and legal costs.

However, sticking to this rule requires love for justice and fair play rather than love for money and power. This is again directly connected to having a strong faith in the Day of Judgment when all violators will be punished for their greed and injustice. But it will be too late for them to regret. There is a graphical punishment mentioned in Qur‟an for those who delay or do not distribute the inheritance as per the detailed guidance of Muhammad (Chapter 4).

Prophetic Solution III

Zakah is fixed charity. The third solution relates to sadaqah. This is voluntary and unlimited charity. This solution is very strongly connected to the Islamic worldview: this world/life is just a transit point. This philosophy dictates our behavior in almost every aspect including economic matters. More than two-thirds of humanity is barely surviving on 1 dollar a day or even less. On the contrary, about 1% super-rich control almost 2/3rd of the global income and wealth. This level of economic disparity is driving some of us nuts. Human beings are usually not greedy. Although the „civilized world‟ makes us believe that we are inherently greedy. But I can say with certainty that most of us in the „uncivilized world‟ are not! We are content with a respectable life if most of our needs and few comforts are met with dignity. But when hundreds of millions of dollars (thousands of crores of Rupees) of illegally earned wealth is recovered from Ministers and bureaucrats – this is proof enough that our governance system (from which flows the economic system) is rotting and requires a surgical solution.

From start to finish, Prophetic life is an example of selfless and compassionate character. Despite heading a rapidly expanding and increasingly rich state, he did not leave behind fat bank accounts; big chunks of real estate; gold and jewelry; industries or businesses. He lived like a traveler. He gave away whatever wealth came to him. This is one of the reasons why he is fondly remembered as a Prophet of mercy by over 1.5 billion Muslims every day. Non-Muslims admire his simplicity and humility even after 1,400 years of his departure from the scene. How many billionaires are remembered with love and respect after they die? On the contrary, most of them are either hated for all the wrong means they used in accumulating their wealth or they are cursed by their own offspring/inheritors for „not leaving enough‟!

Prophet Muhammad created enormous sense of love for eternal life, after death, among his followers. They would go out of the way to spend their rightfully earned money generously on others. He once asked his companions “Who among you love his wealth more than the wealth of his inheritors?” Everyone replied, “all of us love our own wealth over our inheritors”. He said “your wealth is only what you have remitted to the life after death i.e. given away to the poor and needy” (Bukhari). His teachings and his own practice created a society where wealthy competed with each other in keeping for themselves as little as possible and give away to poor and needy as much as possible.

Prophetic Solution IV

Muhammad was acknowledged as Amin (trustworthy) by even his non-Muslim adversaries. In line with Islamic belief, he used all resources at his disposal as a responsible trustee of God and not as an absolute owner. This approach fundamentally shifts the direction of economic affairs. Whatever one “owns‟ is to be utilized within a framework of rights and obligations; fulfilling one‟s own needs, and of the family, the society, the state and the humanity in general.

A hardworking, selfless and honest society always creates surplus wealth. We witness this even among individuals and smaller groups around us. When such a society is not into indulgences of life (buying 6,000 Pound handbags or spending one million Dollars on a 30 minute dance show) then the only way they can use their wealth is by helping less privileged human beings. Islamic history is full of tangible evidences where numerous endowments, schools, hospitals and other social infrastructure were created through waqf i.e. donation of large properties or businesses for general welfare of the society (not just Muslims). Worldwide waqf assets (including in India) are worth tens of billions of Dollars. If managed honestly and efficiently as a proper trust, they can generate enough regular income to meet many genuine needs of the lower-rung of the society.

Let us bear in mind that these present waqfs (awqaf properties) are only indicative of our past glory. But our present is gloomy; and future no brighter. For a vibrant present and future, it is essential to persuade our millionaires and billionaires – in the light of the statements and practices of Prophet Muhammad – to give away as much as possible before they return empty-handed to their Lord.

Conclusion

Prophet Muhammad was not a socialist or a communist. He was not against private ownership. Nor was he adverse to profit making. His focus was economic justice. He knew the reality of life that human beings are not equal in talent, energy, skills and knowledge. Some have a right to earn, and also spend, more than others. But earnings must be rightful and spending must be judicious. Muhammad presented a strong, categorical and permanent moral filter for sourcing and using funds. Extravagant lifestyle is not in sync with Islamic values when millions are starving.

The same Prophet who sought God’s refuge from poverty, also prayed: “O God, grant me life as a poor man, make me die as a poor man and resurrect me [on the day of Resurrection] in the company of the poor.” He was asked why?

He replied: “Because (the poor) will enter Paradise (before) the rich.” He continued “Do not turn away a poor man even if all you can give is half a date. If you love the poor and bring them near you, God will bring you near Him on the Day of Resurrection.” (Tirmidhi)

Over the past decades, Muslim political “leadership” has mastered the art of blaming “others” for our state of affairs. This is designed to mislead Muslim masses so that they do not question internal deficiencies. However, the religion of Islam seeks internal solutions, to the maximum possible extent. All the above economic solutions are purely internal. No demonstrations, agitations or begging for job reservations are required. Already an economically fragile community must not be turned into parasites. The government should only be asked to set-up fast track courts to release the encroached waqf lands all over India, in a time-bound manner.

Internally, through counseling and setting right examples, economic empowerment can be achieved. It is impossible to attract non-Muslims towards Muhammad (peace and blessings of Allah be upon him and his family) and his philosophy, if his own followers are in deep economic mess as a result of ignoring the above principles of Islam.

WHOSE ROLE TO PROMOTE UNDERSTANDING OF ISLAMIC BANKING IN TANZANIA?

INTRODUCTION.

Islamic Banking emerge in 1960s and reached Tanzania in 2008 when KCB bank launched Amana Accounts. Today, there are several banks and SACCOs offering Sharia compliant financial services. In this epoch, Tanzanian banking customers have also witnessed new delivery channel of banking services through mobile banking services. All these are new to many and so often the mass wonder how it works. When it comes to Islamic banking many dont know what is it? those who have heard often wonder how can a bank be said to follow Sharia rules and principles and be able to cover the costs of operations? What sort of services are offered? What is the difference between Islamic banking and conventional/normal banks?

In this article, i dont intend to answer those questions but to analyse initiatives so far taken to build understanding of Islamic Banking in Tanzania and what needs to be done by various players.

WHY PEOPLE NEED TO UNDERSTAND ISLAMIC BANKING?

In Tanzania where the level of financial exclusion is high and where majority of Tanzanian use non-bank formal products, it may rightly be asked why understanding Islamic Banking while the normal banking which is many years old not even used by the majority? To fairly answer this, we need to understand why normal banking is not widely used as might be expected despite having close to 50 banks in the country. Recently published Finscope Survey provide reason for this, 2/3 of Tanzanian population lives in rural areas often remote parts of the country, low level of education where 2/3 of our population is with no formal education or with primary school education or less and nearly quarter of the population is dependent on others for their main source of income.What this survey doesnt tell us and surveyors seems not interested is if there is a population that doesnt want to access normal banks based on religious grounds? However, if you look at regions with highest levels of financial exlusions most of them the population is predominatly Muslim for example Zanzibar and Singida with highest level of financial exclusion. I remember when
the Finscope survey was launched at Bank of Tanzania, one of the participants wanted to know if one of the reason for Zanzibar to be on the top of these financially excluded is because they are predominatly Muslim. The response was that,they dont think that was the reason but rather there is high level of dependents in Zanzibar! If you examine Dar es Salaam which has the highest number of people using bank products (31.6%), the remaining dont use bank products. Why? Arent most of the banks in city? arent the majority of the Dar dwellers educated? These are unanswered questions which Finscope survey doesnt provide straight answers.

Tanzania is a religious sensitive country. By this i mean there is significant number of our population which maketheir choices and decisionsbased on the tenents of their religions. Islam and some sect within christianity prohibits interest which is the tool of normal commercial banks to make exorbinant profits. The teachings of these two religions are dearly followed casuing followers to refrain from banks or use it only where necessary.Thus,understanding Islamic Banking and how it works is likely to attract those excluded on religious grounds. Furthermore, with the presence of Islamic banks/Window in the country, the public deserve to know how this banks work to protect them from deceitfulpractitioners who might use the word Islamic Banking while doing other things.

LEVEL OF UNDERSTANDING OF ISLAMIC BANKING.

I am yet to come across a research in the country gauging the level of understanding of Islamic Banking either across the bank's customer or general public. However, through various public gathering and exchanges with even bankers, very few know about Islamic Banking or banks which provide Islamic Banking services in the country. Just recent outreach carried by Amana Bank around Buguruni area in Dar es Salaam many people where interested to know about Islamic banking and what is the difference between islamic banking products with conventional products. Similar interest displayed during my presence in Sabasaba Trade Shows last years as well as promotion initiatives in Radio and Masjid platform. More people are interested to know but limited sources to enlighten them. This gap has left without understanding, misconceptions and myth.

Importantto note that people are interested to know a wide range of issues in regards to Islamic Banking and from different perspectives. The most dominant perspective are those on legal, operational, commercial, sharia, risk as well as marketing perspective. Besides, people interested to know Islamic Banking are from different academic backgrounds and level of education.

INITIATIVES FOR PROMOTING UNDERSTANDING OF ISLAMIC BANKING IN TANZANIA.

The first initiative to understand Islamic banking was undertaken by KCB when it introduced Islamic banking products in the country in 2008 followed with scattered advertising campaign using Radio, brochures, Masjid Talk and billboards. However, most of this initiatives as well as those taken by new entrant centered on products offered rather than on Islamic Banking per se. This appears to be the shortest and least cost by banks offering Islamic financial services to date.

In 2012, Zanzibar university launched 'certificate course on Islamic Finance' focusing on basics of Islamic Banking.However this programme after the first graduate it has not continued to date.Similar year,Bank of Tanzania organised a three day seminar on Islamic Banking, despite its limited audience it did not continue in 2013 and hopefully will be done again in 2014 as per the BOT training calender 2014. In 2013, Amana Bank organised the first training on Islamic Banking to students of Ubungo Teacher's college.Noting the gaps on Islamic Banking training, several foreign entity eying the opportunity have started to organise training in Tanzania like the KPI of India which conducted training in Feb 2014.

All these initiatives have specific limited target audience and none target the general public at grassroot level on long term basis. I am certain that with this approach so far Islamic Banking will continue to face shortage of skilled manpower within the country and Islamic Banks/Windows will have extra burden by having uninformed customers who might be banking with them with unrealistic expectations such as expecting free money from Islamic banks/window, expecting fixed returns on their deposits, expecting banks not to have collaterals when financing, expecting forgiveness when they default or unable to pay, expecting charity among others.

WHAT NEEDS TO BE DONE.

Various initiatives needs to be done by different stakeholders to provide understanding on Islamic Banking in the country. Forecample;

Tanzania Institute of Education under the Ministry of Education, has to review primary school curriculum to incorporate banking as whole and Islamic banking in particular. The need for this reveiw is self-evident from the finscope survey which showed that the most likely to be financially excluded are those with primary school edecation or less one of the reason might be-they dont know what bank does. The population of those who attend primary school is higher compared to any other level of education in the country which provide a strong base for our people to know what bank does, inform their parents and when mature to access bank products. Besides,secondary school curriculum should incorporate Islamic Banking since Banking is part of the topic on the commerce subject. However, rather than banking being tought at form 3, it should be tough at either form 1 or 2 so that those opting science or art can have access to the banking topic. This curricullum changes must move upward up to university level for those undertaking banking or finance.

Bank of Tanzania Training Institute, need to have systematic approach to train Islamic Banking courses with adequate curriculum to ensure seminars or workshops cover the curriculum from basic, intermediary to advanced topics of Islamic Banking. The BOT is expected to play leading role on Islamic Banking training for bankers taking note of their responsibility to ensure sound and efficient banking system. Forexample in Malaysia, the central bank annually sponsor students to undertake courses relevant in promoting Islamic Banking industry and finance research in the vast fields of Islamic Banking.

Training Institutes/Colleges under NACTE should also deliberate on developing a course on for basic technician certificate in Islamic Banking, Technician in Islamic Banking to Ordinary Diploma on Islamic Banking. NACTE must ensure the curriculum is adequate, systematic and up to date to provide skills to the students undertaking the courses.

Islamic Banks/Windows rather than focusing on product awareness or understanding alone,they should adopt schools
or colleges or universities to deliver lectures to students in order to impart understanding of Islamic Banking on each intake. Besides, they can jointly or separately sponsor experts to speak on Radio/TV for public awareness,prepare articles about Islamic Banking for the media, sponsor researches in the Islamic Banking field undertaken in Tanzania, prepare leaflets which answer frequently asked questions from time to time,organise seminars/workshops to bring Islamic banking into the attention of policy makers, take her staff abroad to attend seminars, workshop and training as per the organizational needs from time to time and the least goes on.

CONCLUSION.

The role to provide understanding of Islamic Banking may go beyond those mentioned above to include academicians, researchers, media owners, Sharia scholars,private entreprises among others,each according to his ability. I believe, once such boldsteps above are taken not only Islamic banking will prosper but also overall banking industry.

THE CHALLENGE OF MANAGING LIQUIDITY RISK IN TANZANIA-A CALL FOR ACTION!

INTRODUCTION.

Currently there are five banks and several Islamic Saving and Credit Cooperative Societies offering islamic financial services (SACCOs). On the banking side, only Amana Bank, is a fully fledged bank established in 2011 the rest operate as Islamic Window, namely PBZ, NBC, KCB and Stanbic. On Saccos side, there is KUTAYBA SACCOS, TAMPRO SACCOS, HAJJ TRUST SACCOS and many other institutional based SACCOS. Among the banks, only three accepts deposits and provide financing namely, Amana Bank, KCB and PBZ whereas all SACCOs accept deposit and provide credit to their members.

A distinctive feature of Islamic banks and SACCOs is the obligation to conduct operations in accordance with principles of sharia, which is the religious law of Islam/Muslims. The basic sharia principle applied by Islamic financial institutions is the prohibition of usury/interest (arabic. riba). This principle has its origins in the holy book of Muslims – Koran. The hadiths, which describe the life and actions of Muhammad, the Messenger of Allah, also state that riba is condemned. According to most Islamic scholars one definition of riba is any sort of increase over the principal amount in the contract of loan. The prohibition of riba has huge implications on operations conducted by Islamic banks and Islamic SACCOs since none of them can be based on interest.

Hence one of many challenges Islamic banking industry has been facing since its inception is the creation of instruments which have to serve the same needs as conventional products but have to be constructed in a different way to comply with principles and rules of Sharia. Those instruments include money market operations, which are essential for managing the bank’s liquidity.

The purpose of this article is the investigation of the problems facing Islamic banks/window/SACCOs with regard to managing liquidity risk in Tanzania and analysis of what needs to be done by individual banks, and their regulators.

THE PROBLEM OF MANAGING LIQUIDITY.

Liquidity is the ease by which an asset can be exchanged for another with little or no loss of value; usually cash. Liquid assets are those held in cash or are invested in instruments which can be converted rapidly into cash like deposits in cash with a bank as a current demand deposit, deposits in other banks and investments in short term liquid government securities. The bank tries to maximize bank's return on total assets by investing as much of the cash available. However, the management is also challenged by the need to have enough liquidity to meet any mismatch of the term structure (maturity dates) of assets and liabilities. Liquidity risk results from the mismatch between maturities of assets and liabilities. The different maturity structure of assets (mainly medium and long-term) and liabilities (mostly short-term) generates the risk that the bank is unable to respond immediately to requests for payment or forces the bank to quickly sell a high volume of financial assets in its portfolio accepting the price much lower than the market value.

While liquidity surplus is considered a drag on competitivenes, shortage of liquidity is said to be assasin of banks. Liquidity stress is not unknown to fully fledged Islamic banks as well as Islamic banking divisions of conventional banks some forced to close e.g. Ihlas Finance in Turkey in 2001. During the recent crisis all these types have faced liquidity shortages of varying degrees and varying durations.

Due to lack of Islamic instruments for liquidity management and less developed infrastructure, fully fledged Islamic banks face more difficulties compared to conventional banks and the Islamic windows of conventional banks. Since the liquidity risk management is carried out at the bank level rather than divisional level, the risks of the division can be absorbed using conventional hedging tools without facing operation and reputation risks.Those tools include interbank deposits, foreign exchange swaps, repo operations, treasury bills and commercial papers. Interbank market where banks lend each other their liquid reserves has the most significant meaning for banks in managing their liquidity. It should also be noted that in critical situations, when because of lack of trust banks do not want to lend money to each other, they have possibility to approach a central bank for help. In this case a central bank plays a role of a lender of last resort (Iwona Sabol). This creates negative externalities for Islamic banks and for the Islamic financial system (Salman Syed Ali, 2012).

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LIQUIDITY RISK IN ISLAMIC BANK.

All the above-mentioned instruments are based on interest rate and that is why they are not accessible to Islamic banks. Thus the problem with the access to liquidity management instruments constitutes one of the most serious problems and largest challenges for Islamic financial institutions in Tanzania and elsewhere. Theoretically, islamic institutions should not suffer from shortage of liquidity but their problem is excessive liquidity. This is not always true because the practice much differs from the theory.In practice the nature of balance sheet of the Islamic bank is quite similar to the balance sheet of the conventional bank. Both institutions are characterised by illiquid assets and relatively liquid liabilities. Judging from the above it is not surprising that a lot of Islamic banks just like their conventional counterparts must be very careful about maintaining the proper level of liquidity. Otherwise, they risk insolvency.

COMMON INSTRUMENTS AND INTERNATIONAL BODIES.

In countries such as Malaysia, Sudan, Bahrain among others where Islamic financial services are taken seriously, we observe a number of common tools used for liquidity management such as:

1.Interbank money market placements through the contract of Mudharaba, Wakala and Commodity Murabaha.
2.Corporate Sukuk under different structures such Sukuk Ijarah, Sukuk Murabaha etc.
3.Government issued Sukuk through the central bank as well as commodity murabaha with the central bank.
4.Islamic Leasing Investment Fund.
5.Islamic Mutual Fund.

Furthermore, international efforts to manage liquidity risk led to the establishment of Liquidity Management Centre in Bahrain, International Islamic Liquidity Management Corporation in Malaysia,Islamic Interbank Money Market and International Islamic Financial Market in Malaysia. This international efforts should send clear signal to the regulator on the need to have proper policy and tools to enable Islamic Banks manage liquidity efficiently. Once Islamic banks have tools to manage liquidity, Islamic SACCOs who are clients of these banks shall have robust partner to manage theirs.

ACTION REQUIRED.

Before we start to witness liquidity stress from Amana Bank or else it is paramount for Islamic banks/Windows and the regulator to review their liquidity management practices and policies. Amana Bank and windows of conventional banks must find a way to engage themselves even if on non-commercial terms to assist each other but also to embark on joint financing. Externally, the central bank should examine and structure any of the above mentioned tools to cater for the liquidity management as well as to relax restriction on cross border movement of capital for the liquidity management purpose under well known internationa bodies. Failure to take action now, is like putting a head on crocodile mouth and expect smooth exit.

TAKAFUL STUDY REPORT SET A CLEAR PATH TOWARDS INTRODUCTION OF TAKAFUL IN TANZANIA.

Tanzania Insurance Regulatory Authority (TIRA) team to study viability of introduction of Takaful products and associated regulatory framework in Tanzania has completed its work and submitted a detailed report on the way forward for introduction of Takaful in the country. According to reliable source, who have seen the report, (it is yet to be released in public) it provides a clear path and workable recommendations to follow if the country is to succeed on its drive towards introduction of takaful products and its related framework in the country. Summing up the major findings of the report, the source noted: • The report finds that in a country where a large proportion of the population is Islam, there is significant and growing demand for Takaful insurance in the country. Hence, it is important that necessary steps be initiated in order to accommodate this demand as it is already overdue. • The industry is yet to adequately offer Takaful products considering absence of legal and suitable framework, expertise within TIRA to regulate Takaful and structure to oversee Sharia compliance aspects at the company level and regulatory’ s level. • To ensure a level playing field and given the likely sensitivities where financial products structured around religious beliefs are concerned, it is essential that the right regulatory framework be put in place for Takaful insurance before it is allowed to be practiced in the market. Taking note of the above, the team recommended practical steps on the way forwards, which includes forming a committee to work on the strategy for introduction of Takaful, enacting Takaful Act and its regulations in 2013 so as to introduce Takaful products in 2014. However, to date there is limited information on whether or not the recommendations of the report have started to be implemented.

Halaal Certification In Tanzania.

In 2012, The Supreme Council of Islamic organizations and Institutions of Tanzania in the course to fulfil its religous and social roles established Halaal Bureau Ltd for a number of purposes including but not limited to promote awareness to the general public on the need to use of Halaal branded goods voluntarily, to certify goods for Halaal certificate in order to protect consumers from flimsy goods among others. Goods with Halaal certification are increasing in the Tanzanian market, some are locally produced and others are coming from as far as South Africa, Kenya, UAE, China, Thailand among others in order to bully Muslims and general public to believe that these goods were prepared in line with acceptable Sharia (Islamic rules) standards. Those produced in Tanzania could hardly stand validity challenge of being Halaal due to absence of Halaal certification agency in the country to validate their claims and audit the production process until it reaches the ultimate consumers. However, now things are expected to change with the establishment of Halaal Bureau Ltd. The 'Halaal Industry' as referred to to day is vast and it includes finacial services like Islamic Banking and Insurance as well as Manufacturing Industry among others. Despite its significance it is not free from defects and challenges which must be worked upon to ensure Halaal brand stands to its expectations. Below are some assertions which Halaal Bureau Ltd must devote its resources to address as explained by Rashid Siddique in his recent article 'Halaal Industry-Fact, Fiction and 'Faction'? Assertion: The halal industry, like Islamic finance, is only for Muslims. Halaal is for all mankind, but the [religious] reality is the term confines its reach and usage only to Muslims. Thus, halal faces similar challenges as ‘Kosher,’ food only for Jews. Yet, it’s only the Muslims that are saying ‘Halaal’ is not just for Muslims. Assertion: Halal is just about religious slaughter. First, halaal, lawful or permissible, is about a holistic way of life as prescribed by the Koran and Hadith. Second, it entails the seven sectors (Islamic Finance, Food/Beverage, Pharmaceuticals, Cosmetics, Fashion/Clothing, Travel, Media/Entertainment and Travel), including ingredients that form the final product. Third, relating to livestock stock slaughter, it’s about ‘farm to fork,’ from humane treatment of animals (no factory farming), including free range grass fed (non-GMO feed), to slaughter (invocation of Creator’s name), to non-cross contamination with impermissible animal (pork) during distribution, hence, it’s about organic, accountability, transparency to minimize leakage. Assertion: Muslims control the halal food supply chain. It’s estimated the 80-90% of halal food is manufactured by non-Muslim owned companies, hence, perceived integrity risks for complying with halal certifications. Putting in context, Islamic finance allows minor amounts of interest or impermissible income (with purification), whereas if a DNA spec of pork is found in say, halal burger, it cannot be consumed by Muslims. Assertion: Halal is hygienic (meat shops monitored), healthy and provides uniform taste ‘Faction’: Tina Jamaluddinn, halal industry expert, recently stated ‘food quality and food safety means it's fit for human consumption, but not necessarily that it's good for your health, i.e., breakfast cereals that are high in sugar, soda, processed products, etc.’ Assertion: Halal is an investable asset class In 2011, the SAMI Halal Food Index was launched in Malaysia, and recent press release from Dubai Exports is talking about a Halal Index for Dubai. Its well accepted indexes are DNA for investing, from funds to venture capital to private equity. This is innovation in halal, and it extends to R&D, i.e., finding alternatives to pig-based gelatin, vaccines, etc. Finally, i salute BARAZA KUU for this initiative and call upon Halaal Bureau Ltd despite it is infancy to join hands with local and global players to address these challenges. Insha Allah, good efforts taken will yield positive results.