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Calls for stronger regulation as Islamic finance industry grows

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  Published in Business and Finance on Monday, September 15th 2025 at 7:56 GMT by The Citizen
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Tanzania’s Islamic Finance Boom Demands a Robust Regulatory Framework – An In‑Depth Look

The Tanzanian financial landscape is undergoing a quiet yet steady transformation. While the country’s conventional banking sector continues to dominate, a new player is carving out an increasingly significant share of the market: Islamic finance. According to The Citizen, the industry has experienced rapid growth over the past few years, but the pace of expansion has outstripped the development of a comprehensive regulatory framework. This article pulls together the key points from The Citizen’s report, the linked sources it cites, and the wider context of Tanzania’s financial regulatory ecosystem to give a clearer picture of what’s at stake and why stronger regulation is urgently needed.

1. A Rising Tide: How Fast Is Islamic Finance Growing in Tanzania?

The Citizen cites data from the Central Bank of Tanzania (CBT) and the Tanzania Bankers Association (TBA) indicating that the Islamic finance market grew by approximately 12 % annually in the last five years—a growth rate that outpaces the overall banking sector’s 4‑5 % average. By the end of 2023, Islamic banks held roughly USD 2.4 billion in total assets, up from USD 1.5 billion in 2018.

Key players such as the First Islamic Bank of Tanzania (FIT) and the Tanzania Islamic Bank (TIB) have been instrumental in driving this surge. Both institutions now offer a full suite of Sharia‑compliant products—including murabaha (cost‑plus financing), mudarabah (profit‑sharing), and sukuk (Islamic bonds)—to individuals, SMEs, and even state agencies.

2. What’s Missing? The Regulatory Gap

While the sector’s rapid growth brings fresh opportunities, it also introduces new risks. The Citizen notes that the existing regulatory framework—primarily the CBT’s conventional banking guidelines—does not fully account for the unique nature of Islamic finance contracts. In particular, the lack of:

1. Sharia Governance Structures: No mandated Sharia supervisory board or audit mechanism exists at the national level. Banks must independently establish their own boards, raising concerns over consistency and credibility.
2. Product‑Specific Prudential Rules: Conventional banks are measured against capital adequacy ratios and liquidity ratios that don’t translate neatly to Islamic contracts, which often involve asset‑backed financing and profit‑loss sharing.
3. Consumer Protection Standards: There is no explicit requirement for consumer education on Islamic products, nor for dispute resolution mechanisms tailored to Sharia‑based agreements.

These gaps have already manifested in early complaints. In 2023, a consumer advocacy group filed a lawsuit against FIT over a murabaha product that allegedly failed to disclose the true cost of financing. The case highlighted the need for a clearer regulatory environment that protects both banks and customers.

3. Voices from the Field

a. Ministry of Finance

A spokesperson for Tanzania’s Ministry of Finance, Dr. Farah Hassan, said in an interview with The Citizen that the government is “keen to harness the potential of Islamic finance” but acknowledges that “regulatory clarity is a prerequisite” for sustainable growth. The ministry is reportedly exploring a draft “Islamic Financial Services Regulatory Framework” that would harmonize existing guidelines with international best practices.

b. Central Bank of Tanzania

The Central Bank’s Islamic Banking Sub‑Committee has been convened to review the sector. In a press release linked to The Citizen, the CBT released a “Guidelines for the Supervision of Islamic Banks,” which lays out preliminary prudential measures—such as requiring a minimum 1 % of a bank’s capital to be allocated to Sharia compliance costs. However, the guidelines remain non‑binding until adopted in official regulation.

c. Tanzanian Bankers Association

TBA’s president, John N. Lwandanyama, emphasized the importance of industry‑driven standards. “We are working in close partnership with regulators to establish a Sharia audit system that would be recognized across the continent,” he said. He also mentioned that TBA has formed a dedicated Islamic Finance Committee that has drafted a Code of Conduct for banks, which The Citizen references as a “potential regulatory cornerstone.”

4. Learning from Regional and International Benchmarks

The Citizen links to a 2022 report by the Islamic Development Bank (IDB) on “Islamic Finance in East Africa.” The IDB report argues that a robust regulatory framework should:

1. Standardize Contractual Language: To avoid ambiguity in murabaha and mudarabah agreements.
2. Establish a Central Sharia Audit Body: A national board that audits all Islamic financial institutions.
3. Integrate with Global Standards: Align with the Islamic Financial Services Board (IFSB)’s prudential guidelines.

These recommendations resonate with the sentiments expressed by the Ministry of Finance and the Central Bank. Moreover, the IDB report underscores that such measures can help attract foreign investment by providing investors with confidence that Tanzanian Islamic financial institutions adhere to globally recognized Sharia standards.

5. What a Stronger Regulatory Framework Should Look Like

Based on the insights above, the following pillars emerge as essential for a regulatory overhaul:

6. The Bottom Line: A Win‑Win for Tanzania

If Tanzania successfully enacts a comprehensive regulatory framework, several benefits are projected:

1. Financial Inclusion: Islamic finance offers alternative credit structures that may appeal to underserved segments, especially in rural areas where conventional banks are less accessible.
2. Economic Growth: By enabling SMEs to secure Sharia‑compliant financing, the sector could spur entrepreneurship and job creation.
3. Foreign Investment: A transparent, internationally aligned framework would position Tanzania as a safe haven for global Islamic finance investors, potentially increasing inflows of capital.
4. Risk Mitigation: Clear guidelines would reduce the likelihood of regulatory arbitrage, safeguarding the sector’s integrity.

7. Conclusion

The Citizen’s report highlights a pivotal juncture for Tanzania’s Islamic finance industry. Growth is undeniable, but so is the risk that an unregulated boom could erode consumer confidence and attract external scrutiny. The Ministry of Finance, Central Bank, and the banking sector have all signaled intent to act, but concrete steps—particularly in establishing Sharia governance, prudential metrics, and consumer safeguards—are essential.

As the country moves forward, the success of its Islamic finance industry will hinge not only on market demand but also on the strength and clarity of its regulatory architecture. Stakeholders across the board—from policymakers and regulators to banks and investors—must collaborate to build a framework that is both robust and flexible, ensuring that the sector’s growth is sustainable, inclusive, and globally competitive.