Islamic financial institution refers to a banking activity that follows the principle of Islamic law

(shariah) and its practical application through the development of Islamic economic. The
fundamental principle of Islamic banking is sharing of profit and loss and the prohibition of the
collection and payment of interest by lenders and investor. Islamic financial institution may use
profit and loss sharing structures, such as mudharabah (where the bank provides the capital and the
customer manages the investment) or murabahah (where the purchases a good and sell it to the
customer at the mark up).

The Islamic bank transaction are completed without the use of riba this is the primary distinction
between Islamic and conventional banks. The Islamic contracts are typically assets based, and they
adhere to sharia, which prohibits riba (extra interest), gharar(uncertainty), maisir(gambling) and
other non-halal practices.

The Islamic main goal is to meet the demands of Muslims in banking transactions while all
proving option to the rest of the world. There management is guided by Islamic concept of justice
and fairness in the public good.

Islamic financial institution also offers other financial [product and services that are compliant
with Islamic (takaful) and Islamic investment.

Islamic banking has been a new

reality in the international financial
scene since the 1970s.
Its concepts and principles, on the
other hand, are not new, having
been outlined more than 1,400
years ago in the Holy Qur'an and
the Sunnah of Prophet Muhammad
(SAW). The growth of Islamic
finance is frequently linked to the
renaissance of Islam and Muslims'
desire to live their lives in line
with Islamic principles
Islamic banking has been a new
reality in the international financial
scene since the 1970s.
Its concepts and principles, on the
other hand, are not new, having
been outlined more than 1,400
years ago in the Holy Qur'an and
the Sunnah of Prophet Muhammad
(SAW). The growth of Islamic
finance is frequently linked to the
renaissance of Islam and Muslims'
desire to live their lives in line
with Islamic principles
Islamic banking has been a new
reality in the international financial
scene since the 1970s.
Its concepts and principles, on the
other hand, are not new, having
been outlined more than 1,400
years ago in the Holy Qur'an and
the Sunnah of Prophet Muhammad
(SAW). The growth of Islamic
finance is frequently linked to the
renaissance of Islam and Muslims'
desire to live their lives in line
with Islamic principles
Islamic banking has been a new
reality in the international financial
scene since the 1970s.
Its concepts and principles, on the
other hand, are not new, having
been outlined more than 1,400
years ago in the Holy Qur'an and
the Sunnah of Prophet Muhammad
(SAW). The growth of Islamic
finance is frequently linked to the
renaissance of Islam and Muslims'
desire to live their lives in line
with Islamic principles
Islamic banking has been a new reality in the international financial scene since the 1970s.Its concepts and
principles, on the other hand, are not new, having been outlined more than 1,400years ago in the Holy
Qur'an and the Sunnah of Prophet Muhammad (SAW). The growth of Islamicfinance is frequently linked to
the renaissance of Islam and Muslims' desire to live their lives in linewith Islamic principles. The Islamic
law of human conduct, Shari'ah, controls businesstransactions. Due to the prohibition of certain
aspects in transactions, Islamic banks must designshari'ah-compliant financial products

Introduction Islamic Banking was first introduced in Tanzania in 2008.

By 2016, four (4) banks in Tanzania offer Islamic finance solutions through various models including
fully fledged and window. This number is around 7% of licensed financial institutions and commercial
banks in TanzaniaCurrent estimates put the total customer base for Islamic Banks in Tanzania at
around 2.3% of the total banked population.Tanzania is the most populous country in East Africa.
International sources have published figures estimating Muslim population to be more than 40% of the
total population. This means that the primary market potential for Islamic financial services providers is
above 19 Million.At less than 200,000 customers for Islamic Banks, penetration is less than 2% of
potential customer base.*(total customer base sources are estimates derived from internal research)

Islamic banking refers to a system of banking that complies with Islamic law also known as
Shariah law

Islamic finance is growing within international finance. In its modern form, Islamic banking started with
pioneering experiments in the early 1960s in Egypt. The Mit-Ghamr Islamic Saving Associations (MGISA)
mobilized the savings of Muslim investors, providing them with returns that did not transgress the laws of
the Shari'ah. Formally, Islamic banking started in the late 1970s with a handful of institutions and
negligible amounts, but it has increasingly grown over the past two decades,

Islamic financial institutions in Tanzania have developed gradually over the years, with the first Islamic
bank established in the country in 1991. This bank, known as the National Islamic Bank of Tanzania (NIBT),
was established by the government to provide financial services to the Muslim community in the country.

Since then, several other Islamic financial institutions have been established in Tanzania, including the
Amana Bank, which was established in 2007, and the Gulf African Bank, established in 2010. These
institutions offer a range of services including savings accounts, investment accounts, and Islamic
mortgages.

In addition, the Central Bank of Tanzania has also been actively promoting the development of Islamic
finance in the country, through the establishment of regulations and guidelines for the operation of
Islamic financial institutions. This has helped to ensure that these institutions are operating in a safe and
sound manner, and that they are able to provide much-needed financial services to the Muslim
community in Tanzania.

Overall, the development of Islamic financial institutions in Tanzania has been a positive development,
providing much-needed financial services to the Muslim community, and helping to promote financial
inclusion for all Tanzanians

Islamic banking and finance is

becoming an increasingly important
element of
the path to bring the world to a new
level of stability, prosperity, and
international integration in the
current global economic context of
tremendous challenges and
uncertainties
Islamic banking and finance is becoming an increasingly important element ofthe path to bring the world
to a new level of stability, prosperity, and international integration in thecurrent global economic context
of tremendous challenges and uncertainties

Islamic financial institutions in Tanzania have made significant achievements in recent years.
Some of these include:

Expansion of Services: Islamic financial institutions in Tanzania have expanded their services to
include various types of banking, insurance, and investment products that are compliant with
Shariah principles. This has increased the accessibility of Islamic financial services to the general
population.

Increased Market Share: Islamic financial institutions have been able to gain a significant market
share in the country. According to the Central Bank of Tanzania, the market share of Islamic
banks in Tanzania increased from 0.5% in 2010 to 5.9% in 2019.

Improving Financial Inclusion: Islamic financial institutions in Tanzania have been able to reach
out to under-served and unbanked communities, thereby improving financial inclusion in the
country.

Promoting Entrepreneurship: Islamic financial institutions have been able to provide financing
options for small and medium-sized enterprises, which has helped in promoting entrepreneurship
and economic growth in the country.

Improving Transparency and Governance: The establishment of Islamic financial institutions in

Tanzania has also led to an improvement in transparency and governance in the financial sector.

Overall, the achievements of Islamic financial institutions in Tanzania have contributed to the
development and growth of the country's economy.
Many countries including from Europe, Singapore, and the United States are joining the band wagon to
capture capital flows from the Middle East (Hesse, Jobst, and Sole, 2008).

The industry has grown at different speeds across countries.

 The investigation documents the achievements based on real accounting data from 23 countries,
and the suitability of tools in practice to achieve the stated objectives by promotors of IFSI.
Findings suggest that the objectives of IFSI have been achieved to an extent. However, visible
contribution to the achievement of socio-economic justice is yet to emerge. Practical application of
tools shows divergence (in spirit) from the original design, primarily to achieve integration and
coherence with the prevailing conventional financial system. IFSI needs collaborative efforts to
overcome the challenges at hand.

It entails the accountability and

responsibility of all essential roles
(board of directors, Shariah
committee, and management)
for an IFI to follow the
Shari'ah
Governance Framework, which the
Malaysian Central Bank
implemented in late 2010
It entails the accountability and responsibility of all essential roles(board of directors, Shariah
committee, and management) for an IFI to follow the Shari'ahGovernance Framework,
which the Malaysian Central Bank implemented in late 2010

Islamic banking, also referred to as Islamic finance or Shariah-compliant finance, refers to financial
activities that adhere to Shariah (Islamic law).
A bank under Islamic Shariah can act as an agent (on AlWakalah basis) of the
customer and can carry out the transaction on his behalf. Moreover it can
charge agency fee for the services The agency fee can be charged in the
following cases:

 Payment / receiving of cash on behalf of the customer

 Inward bill of collection
 Outward bill of collection
 LC opening and acceptance
 Collection of export bills / bills of exchange. In this case the undertaking
or guarantee commission and take-up commission can be Islamized.
Bank will charge an agency fee for accepting the bills, which is bought at
face value.
 Underwriting & IPO service

Role of the Bank as Guarantor

The bank or financial institute gives a guarantee on behalf of its customer but
according to Shariah, guarantee fee cannot be charged. Normally conventional
banks charge fee for following guarantees:
 

 Letter of guarantee
 Shipping guarantee

Advisory Services
Most of the advisory services provided by the financial institutes can be carried
out easily in compliance with Shariah as long as the nature of business is halal:

 Financial advisory services

 Privatization advisory services
 Equity placement
 Merger & acquisition advise
 Venture capital
 Trading (Capital market operations)
 Cash & portfolio management advice

 Cash & portfolio management advice

 Brokerage services (Purchase & buying of share of companies involved
in halal business, a fee could be charged for it).

Other allowed Islamic financial services & products

 Remittance
 Zakat deduction.
  Sale & purchase of foreign currency
 Sale & purchase of traveler's checks (local & foreign currency)
 ATM services
 Electronic online transfer
 Telegraphic transfer (of cash)
 Demand draft
 Pay order
 Lockers & custodial services
 Syndicate funds arrangements services (non-interest or markup based)
for some fee.
 Opening of bank account (current & non-interest or nomarkup)
 Clearing facility
 Sales & purchase of shares/stock (of companies involved in halal
activities)
 Collection of dividends
 Electronic banking window
 Telephone banking.

Tanzania is a multi-religious and a multi ethnic society with a common law legal structure. The Islamic
Banking system emerged in 2008 in Tanzania and is growing very fast. However, the adoption of
Islamic banking in Tanzania has been accompanied by some legislative challenges which cannot
effectively serve the purpose for which the financial institutions were set up. This is a result of the
single legal framework working with the Islamic Banking. In this context the enactment of the
legislation to allow Islamic Banking to operate according to Islamic rules are needed and give room in
financial markets for Islamic financial transactions.

one ofthe major issues in development of Islamic banking and financial institutions in
Malaysia is themisunderstanding of Islamic financial concepts and its standardization.
Khan, Muneem, Mansor,Balwi, & Rahman, (2021) supported that due to a lack of
understanding and promotion, believingthat Islamic banking is unprofitable because it
prohibits the use of interest and because they followall Islamic precepts, IFIs are only for
Muslims.

On the other hand, Zainordin et al.

(2016) also found that regulatory
challenges are the
second most significant challenge,
followed by a shortage of items
that the market requires. As
refer to Khan, Muneem, Mansor,
Balwi, & Rahman, (2021), the
establishment of specific faculties
or departments of Islamic finance
and banking law in institutions will
improve in the selection of
qualified judges for cases involving
Islamic finance. The legal system
must be established and
strengthened in order to build
and strengthen the Islamic
finance system. The lack of a
risk
management role is the third issue.
This challenge can be proved by the
study of Zainordin et al.
(2016). In their study stated that In
order to begin some kind of internal
evaluation system, Islamic
banks must establish a risk
management culture. As a result, all
Islamic financial intermediaries in
Malaysia had to provide more
information and raise public
awareness in order to increase
opportunities and customer
numbers
On the other hand, Zainordin et al. (2016) also found that regulatory challenges are
thesecond most significant challenge, followed by a shortage of items that the market
requires. Asrefer to Khan, Muneem, Mansor, Balwi, & Rahman, (2021), the establishment of
specific facultiesor departments of Islamic finance and banking law in institutions will
improve in the selection ofqualified judges for cases involving Islamic finance. The legal
system must be established andstrengthened in order to build and strengthen the
Islamic finance system. The lack of a riskmanagement role is the third issue. This
challenge can be proved by the study of Zainordin et al.(2016). In their study stated that In
order to begin some kind of internal evaluation system, Islamicbanks must establish a risk
management culture. As a result, all Islamic financial intermediaries inMalaysia had to
provide more information and raise public awareness in order to
increaseopportunities and customer numbers
In this regard, Muneem et al., (2021) discovered that the other issues and challenges
inIslamic Banking is that Islamic banks do not charge any late payment penalties in
Malaysia'searliest stages of Islamic banking facilities. Malaysian Islamic banks use the
concepts of ta wīdḍʿ(compensation) and gharāmah (penalty) in such situations. Meanwhile,
Aulia Fuad Rahman et al.(2016) state that the challenges are one of corporate governance.
Because they are entrusted withother people's money, all financial institutions require
strict standards of corporate governance.However, due to certain challenges unique to
Islamic financial institutions' business models, thisneed is particularly acute. The further
obstacles, according to Aulia Fuad Rahman and HosamAlden Riyadh (2016), are to
ensure that the industry's evident success does not lead tocomplacency. Islamic
banks have not had to compete for money or ideas because of the industry'sphenomenal
expansion in recent years, along with strong levels of liquidity. Newer entrants to the

A research done by Azwan Abdullah et al. (2018), he states that the challenges
Islamicbanking and financial institutions in Malaysia still facing are Islamic banking now
emphasizes moreimages and services that are substantially identical to those provided by
conventional banking.Furthermore, due to its dual-banking system, the Malaysian IB
industry faced higher levels ofcompetition. The industry is facing challenges in
Islamising banking business activities. Due to itsunderlying system, the Islamic bank
operates in an environment that is influenced by conventionalbanks. For example, in order
to meet client demand, Islamic banks copy traditional products andmake them Shari'ah
compatible by altering the name and removing any terms that are not Shari'ahcomplian
Even the way of communication and service provided by Islamic banking staff to
clientswho deal with these banks reflects a lack of Islamic ideals. Customers demand
greater "Islamic"service from a bank that bears the name "Islam" than from other
conventional banks. NoraizaMohd Zamil et al. (2014) stated in their journal that lack of
awareness and knowledge of theirShari'ah principles from customers in patronising
Islamic banking products and services influencescustomer choice and demand for IB
products and services. Some of them, the clients patronisingIslamic banks aren't driven by
religious convictions. Customers and the general public choose IBbased on various
factors like service quality and return on investment. Moreover, because clientsare
accustomed with conventional banking and risk aversion, their decision to subscribe to
Islamicbanking products is still impacted by the potential returns on their money
if they invest it inconventional banks

urthermore, although the IB system

is established as an alternative
system, it is seen as a
secondary banking business system
to the overall financial system
Noraiza et al,. (2014). The
conclusions of this study from
Mokhtar, H. S. A., Abdullah, N., &
Alhabshi, S. M. (2008) revealed
that Malaysian Islamic banks'
technical and cost efficiencies
might be enhanced further if they
put
in a lot of effort to be the first
banking business system in the
financial system. In this sense, a
concerted effort from management
and policymakers is required to
strive to optimise the use of
restricted resources possessed by
Malaysia's banking industry
urthermore, although the IB system is established as an alternative system, it is seen as
asecondary banking business system to the overall financial system Noraiza et al,. (2014).
Theconclusions of this study from Mokhtar, H. S. A., Abdullah, N., & Alhabshi, S. M. (2008)
revealedthat Malaysian Islamic banks' technical and cost efficiencies might be enhanced
further if they putin a lot of effort to be the first banking business system in the financial
system. In this sense, aconcerted effort from management and policymakers is required to
strive to optimise the use ofrestricted resources possessed by Malaysia's banking industry
The challenges faced in training, teaching, research and development are that
Malaysiangraduates do not have a place in sharia or as bank chairman. In fact, what they
learned did notreach the desired objective and expectations of the requirement which is to
have a master of knowledge in sharia finance and economics (Al-Omar & Iqbal,
2011). Furthermore, they alsoasserted that most of the managers who manage Islamic
banking sectors do not have sufficientknowledge of conducting the Islamic approach in
finance. On the other hand, the obstacles inresearch and development are that they
lack data performance from the past centuries ofmanaging Islamic finance. The
data series is an essential proof of qualifications and also as areference for the upcoming
generations. In addition, from the factors by scholars, they stated thatShari’ah scholars are
cautious in stating rules, thus slowing the progression of dedication solvingany matters
and they are likely to hold on to traditional values. Besides, the authors also addedthat
scholars need to learn about modern finance in order to get on track to financial
development.
In addition, the current recession has impacted nations all over the globe due
to theoutbreak of the pandemic COVID-19. Ali et al. (2021) asserted that COVID-19 had
formed a newway of life and affected all sectors like economic, finance and others. In an
attempt to combat thecovid 19 pandemic, the government has taken several steps to
strengthen the country's structure,including establishing a moratorium. However, this
moratorium challenges the liquidity risk andimpacts the bank's money inflow on
receivables. In addition, Ali et al. (2021) also affirm that due tothe epidemic, the liquidity
limitations caused by global supply and demand fluctuations hadsignificant
consequences on Islamic financial institutions. Besides, the authors said that
Islamicfinancial institutions face a decrease in their credit rating. Moreover, the onset of
Covid-19 led thelending situation for the banking sector to significantly
deteriorate. Furthermore, Brown et al.(2020) stated that the challenges faced on
digitalization are that Islamic banking is trying todevelop the investment sectors
by enhancing digitalization as practiced by the conventionalsectors to minimize all
related costs.
Opportunities of Islamic Banking and Financial Institutions in Malaysia have
beendiscovered in numerous studies. In the article Islamic Finance: Current,
Future Trends andChallenges, the author Aulia Fuad Rahman et al. (2016)
discovered that Islamic financialinstitutions have successfully entered worldwide
markets and now manage $700 billion in assets.In the entire global financial business,
Islamic finance is still a niche area. Because of significantdemand for financial services
from a large segment of the world's 1.4 billion Muslims and the needto properly channel
expanding international savings, notably those of high-net-worth individuals,the industry's
prospects are extremely bright
Challenges to the product
Currently the product(unsecured)depends on salaried employees

Lack of formal payment structures among Islamic Businesses

Lack of education among employees and employers

Inadequate Formal documentation to conduct assessments on Islamic Businesses

High staff/employee turnover

Low level of patronage

Limitations on the usage for the facility

Opportunities for the product

Enrichment of the product to cater for additional requirements such as services (e.g medical,
education etc)

Awareness and Knowledge sharing campaigns to employers and employees

Enhancement to the product to cater for individual/ walk-in customers

Focus on alternative financing opportunities, such as (e.g Agriculture finance, Plot Finance etc)

Introduction of secured variants to the product

General Challenges to the Provision of Islamic Banking Services in Tanzania

Lack of a Regulatory Framework to administer Islamic Banks operations in Tanzania

Double taxation when conducting Murabaha transactions

Insufficient knowledge and awareness of Islamic Finance and Islamic Banking activities within
Tanzania

Inadequate infrastructure to support expansion of Islamic Financial services

Lack of Shari’ah compliant money market instruments

Conclusion

Islamic Banking in Tanzania faces many challenges, however opportunities still exist. The driver for
realizing these opportunities should be innovation. Islamic Banks need to continuously drive cutting
edge ideas and focus on groundbreaking initiatives Islamic Banks need to transcend the current reality
and explore new frontiers which will set fourth a new reality and develop the industry in Tanzania for
the benefit of the customers. .

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