The growth of Islamic banking


442a4b85a5477eb21The National Bank of Commerce (NBC) head office in Dar es Salaam. NBC is among the oldest financial institutions in the country that will be competing with Sharia-compliant banks.


“At this time when the world faces financial crisis it is appropriate that such banks should be welcomed since they give interest free loans”

Last year Tanzania witnessed the visit of the investors from Gulf African Bank (GAB) who expressed their desire to operate a full sharia-compliant financial institution in the country. Sharia-compliant accounts operate both in secular and Islamic Banks (IB) like GAB, however the principles of IB are not clear to many especially in this country where such banks do not exist.This system of banking is consistent with the principles of Islamic law (Sharia) and its practical application through the development of Islamic economics which prohibits interest on loans or deposits.

Available literatures, however, indicate that today more than 250 sharia-compliant banks operating worldwide from China to the United States, managing funds to the tune of 200 billion US dollars. Some western offer sharia-compliant services through designated units in the United Kingdoms, Germany, Switzerland and Luxembourg. In East Africa, Kenya can be cited as one of the vivid examples in which GAB has invested successfully in full sharia-compliant bank and by the end of last year more than 10 branches of such banks had already been opened in the country.

History shows that the first modern experiment with Islamic banking was undertaken in Egypt as the form of a savings bank based on profit-sharing in the Egyptian town of Mit Ghamr in 1963 under cover without projecting an Islamic image for fear of being seen as a manifestation of Islamic fundamentalism that was anathema to the political regime. That, in 1975, the Islamic Development Bank was set-up with the mission to provide funding to projects in the member countries. The first modern commercial Islamic bank, Dubai Islamic Bank, opened its doors in 1975.

In the early years, the products offered were basic and strongly founded on conventional banking products, but in the last few years the industry is starting to see strong development in new products and services. Local experts have given their views over the introduction of such bank in the country saying that it is proper and will stiffen competition. The former governor of Bank of Tanzania (BoT), Dr Idrisa Rashid said that there is no any obstacle for such banks to be registered in the country and therefore it can chip in anytime as long as all the registration procedures are observed.

He said that Islamic Banks are just like any other banks and their contribution to the country’s economy will be the same just like any other bank. “It is also a blessing since it will give chance for those who according to their faith do not like to take interests or pay interests from the money that they deposit or borrow from the bank,” he said.Dr Rashid said despite the fact that such banks do not charge interests.

“They do make profit through mortgages, they can buy a car for 10m/- and sell it to you for 15 or 20m/- and then you will be required to pay in installments and there is no interest required,” he explained. He added that the bank can also buy any commodity or house, sell it to a customer at a profitable price and ask him or her to pay in installments under the cost sharing policy and there are no additional penalties for late payment.

“It will be wrong to imagine that at all, they do not make profits, if that was the case then they could not survive and remain competitive in the countries where they exist,” he said.Dr Rashid does not consider the Islamic Bank as a threat to already existing banks because it has also been there in other secular countries and it never threatened the existence of other banks. “It can only stiffen competition in areas like Zanzibar with majority Muslims,” he said.

Another expert, Prof Ibrahim Juma who is the professor of law and the current Chairman of Law Reform Commission of Tanzania (LRCT) commented that fear is there in various countries as the Islamic Banks register a tremendous growth. In his opinion it is a good thing to have such a bank in the country because it will stiffen competition but urged that it should be slowly introduced since it is a new concept in the country.

“At this time when the world faces financial crisis it is appropriate that such banks should be welcomed since they give interest free loans,” he said. Prof Juma said that principles in which sharia-compliant banks operates aim at influencing morality in conducting businesses and therefore he believes that its existence may reduce tendencies of dishonesty and crimes like money laundering.

He said distribution of wealth is one of the core principles of Islamic banks, the principle which is vital in transforming people’s lives. “Since Islamic banking is restricted to Islamic acceptable deals, which exclude those involving alcohol, pork, gambling among others, is so sensitive and its customers should be careful not to involve themselves in such businesses, it is really interesting,” he said.

He, however, cautioned that an Islamic bank should not come with discrimination policy in favour of Muslims because such kind of bank could also attract many Christians who do not like to take or pay interests.He believes that in principle Islamic banking has the same purpose as conventional banking except that it operates in accordance with the rules of Shariah on transactions. Its basic principle is the sharing of profit and loss and the prohibition of usury.







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