THE MEANING OF INTEREST AND INTEREST BASED INSTITUTIONS IN TANZANIA-PART III.

2. Intermediate and Support Institutions (ISI).

These institutions are basically law formulating and implementation organs/institutions, establishments involved in mobilizing savings from surplus units, invest in fixed income generating instruments among other assets in their investment portfolio as well as other institutions which are involved in charging or paying interest. Law formulating and implementing organs include the Parliament and the Judiciary respectively.

Saving mobilization organs are Pension funds and Unit Trust of Tanzania, where as Insurance firms, TRA, Dar es Salaam Stock Exchange (DSE) are organ which gets involved in facilitating or investing in interest bearing securities and charging interest.


2.1 The Parliament.

The parliament is the second organ of the government after the executive wing followed by the judiciary. The parliament performs several functions, the main being the watchdog or overseer of the government programmes, plans, decision and actions, formulating legislations and advising the government on matter of national interests. Members of parliaments perform two broad functions; representing the interests, needs and wants of the constituents to the government and taking back or communicating government programmes and plans to the people.

In performing its legislative role, the parliament is described as the supreme legislature of the country. Among all functions and roles, the most important function of Parliament is to make laws. Majority of laws governing the country are discussed and endorsed by the parliament. The prevailing banking and financial sector legislations, Pension funds Acts, among other are the result of long deliberation of our Houses of Representatives and the parliamentarians in pursuit of sound, efficient and effective financial sector. However, the shortsightedness of parliamentarians reveal itself for establishing legal foundation and support for institutions involved in interest without assessing real impact of the law, intended and unintended social-economic consequences thereof. As a result, the legislative formulation has ignored significant section of its population such as Muslims who abhor interest in spirit and practice. There are several bad laws in the country which can be read in the Nyalali Commission Report (1992)- identified forty (40) bad laws which are oppressive in nature, unconstitutional and outdated.

We still remember the very inhumane, unconstitutional, discriminative and draconian law named Anti terrorism Act which was passed in 2004 to please US and his allies. In the business sphere, Tanzanian manufacturers are reported by Times Reporter to have identified fifty (50) different land and taxation laws that hinder smooth growth of the private sector in the country.
The on-going comic show in the making of new constitution is another evidence of this divide between what the citizen wants and ugly interest of political parties safeguarding their political interest. Muslims have already put forward their informed opinion on the new constitution, including among others the abolition of interest in financial sector.

2.2 The Judiciary.

Tanzania legal system is based on common law. Judiciary is the law enforcement organ where by laws made by the parliament are put into action and enforced. The supreme role of independent judiciary is to dispense justice without fear or favor, thereby ensuring all human rights are preserved and protected. It has been said that, “There can be no meaningful administration of justice without a strong, independent and well equipped judiciary. Nor can market oriented economic reforms be implemented in the absence of a sophisticated, legal or regulatory framework, installed and administered by a competent institutions capable of meeting the exacting challenges of a modern market economy and business transactions.”

Tanzania judiciary system has limited manpower but subjected to intensive training to enforce interest based contracts such as loan and security agreements drafted by conventional financial institutions giving very comfortable playing ground to lend on interest based arrangements.

On the other hand, some of these bad laws or outdated as many would like to call them as mentioned in the parliament section, are attributed for failure of the criminal justice system in combating theft and embezzlement in Government institutions and corporations and exercise of justice. It may be remembered the former President Ali H.Mwinyi said, “The problem isn’t with the lawyers, it is with the law itself. That is why we have the Law Reform Commission to review the law so that it doesn’t protect the undesirable elements.” Under intense pressure, the Law Reform Commission of Tanzania established by the Law Reform Commission of Tanzania Act 1980, had to conduct a study of the laws so as to find the problem. Strangely as it may seem, the Law Reform Commission came out in defense of these laws and rest the blame to lawyers despite of Nyalali Commission special mentions of problematic laws such as Criminal Procedure Act and Economic and Organized Crimes Act and recommendation thereof to amend or eliminate these laws!

The Tanzania Law Reform Commission is responsible for the review of the country’s laws. The existence of Law Reform Commission is a manifest of many loop holes that our laws may be exposed to due to shortsightedness of the law makers and the challenge of time as well as a desire to improve. The great challenge to the judiciary and legal activists is to renounce bad laws, including those which cement interest in our economy.

2.3 Tanzania Revenue Authority (TRA).

TRA has been established under TRA Act, as a central body for the assessment and collection of specified revenue, to administer and enforce the laws relating to such revenue. According to TRA Act 2006 first schedule, there are twenty five (25) revenue related laws enforced by TRA. These revenue (tax) laws are subject to the interest based economic context, hence no wonder when we find such laws involve interest elements in case of non compliance and treat graciously interest based lending contracts.

For instance, Income Tax Act 2004 revised edition of 2006, subdivision D where general principles of deductions are laid, interest is considered deductible expenditure if incurred by a person or business during the year of income under debt obligation. However, for the person who receives interest such as saving and fixed time account holder, the amount of interest is subject to withholding tax of 10% charged and collected by the one who pays it and surrender the tax collected to the commissioner of TRA.

Part VIII of the same Act stipulates interest and penalties for non-compliance. The Act section 99 (2&3) and 100 (1) stipulates that interest shall be charged for understating estimated tax payable by installment and failure to pay tax respectively.Non compliance to tax laws cannot be left without curbing measures. Can’t we think of punishing measures apart from charging interest? I believe we are not short of acumen and there can be other ways to punish non compliant persons which can be of much effect than interest.

2.4 Dar es Salaam Stock Exchange (DSE).

DSE was incorporated in 1996 as a company limited by guarantee without a share capital with a mission “to provide a responsive securities market which mobilizes savings and channels them into productive sectors, encourages a saving culture that contributes to the country’s economic growth and facilitates wider access to resources.”

The main securities traded in the DSE are shares and bonds. While shares signify ownership whose reward is dividend or loss, bond is a debt instrument whose reward is pre determined interest rate. There are two types of bonds issued at DSE; Corporate bonds and government treasury bonds. During the end of March 2010, shares trading statistics reports a total turnover of TZS 7 billion compared to previous quarter’s turnover of TZS12.78 billion. The turnover generated by each share/security during the quarter ended 31st March 2010 shows banks which operates conventionally i.e. by paying and charging interest has sold much of their securities/ shares compared to other companies.

Again, during the quarter ended March 2010, government bonds with face value of TZS 29.82 billion were traded and there were 154 issues of T. Bonds with an outstanding amount of TZS 1.18 trillion as well as five corporate bonds with outstanding amount of TZS 55.17 billion. This makes a total of outstanding amount of TZS 1.73 trillion in 159 bonds alone compared to 2.7 million outstanding shares offered for sale.

In this simple analysis of the quarter one 2010, the highest turnover has been on government bonds which offers several interest rates on different maturities. In pricing corporate and government bonds, one principle is vivid; the higher the maturity the higher the interest rate.