Central bank impact on practicing Mudarabah financing in Islamic banks: the case of Tanzania

“Central bank impact on practicing Mudarabah financing in Islamic banks: the case of Tanzania” Habiba H. Omar https://orcid.org/0000-0003-0542-7532 http://www.researcherid.com/rid/U-5731-2017 AUTHORS Mohd E. Yusoff ARTICLE INFO Habiba H. Omar and Mohd E. Yusoff (2019). Central bank impact on practicing Mudarabah financing in Islamic banks: the case of Tanzania. Banks and Bank Systems, 14(1), 81-93. doi:10.21511/bbs.14(1).2019.08 DOI http://dx.doi.org/10.21511/bbs.14(1).2019.08 RELEASED ON Monday, 25 February 2019 RECEIVED ON Wednesday, 09 January 2019 ACCEPTED ON Wednesday, 06 February 2019 LICENSE This work is licensed under a Creative Commons Attribution 4.0 International License JOURNAL "Banks and Bank Systems" ISSN PRINT 1816-7403 ISSN ONLINE 1991-7074 PUBLISHER LLC “Consulting Publishing Company “Business Perspectives” FOUNDER LLC “Consulting Publishing Company “Business Perspectives” NUMBER OF REFERENCES NUMBER OF FIGURES NUMBER OF TABLES 46 0 2 © The author(s) 2021. This publication is an open access article. businessperspectives.org Banks and Bank Systems, Volume 14, Issue 1, 2019 Habiba H. Omar (Malaysia), Mohd E. Yusoff (Malaysia) BUSINESS PERSPECTIVES Central bank impact on practicing Mudarabah financing in Islamic banks: the case of Tanzania LLC “СPС “Business Perspectives” Hryhorii Skovoroda lane, 10, Sumy, 40022, Ukraine www.businessperspectives.org Received on: 9th of January, 2019 Accepted on: 6th of February, 2019 © Habiba H. Omar, Mohd E. Yusoff, 2019 Habiba H. Omar, Ph.D. Student, Universiti Teknologi Malaysia, Azman Hashim International Business School, Malaysia. Mohd E. Yusoff, Doctor of Philosophy, Lecturer, Universiti Teknologi Malaysia, Azman Hashim International Business School, Malaysia. This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International license, which permits unrestricted re-use, distribution, and reproduction in any medium, provided the original work is properly cited. http://dx.doi.org/10.21511/bbs.14(1).2019.08 Abstract This paper investigates the challenges faced by Islamic banks in practicing Mudarabah financing under conventional regulatory regime by interviewing eleven Islamic bank managers from three selected banks. Thematic data analysis was employed to understand hindrances for Islamic banks in operating Mudarabah financing under conventional regulatory regime. Findings of the study have provided a number of major challenges that hinder Islamic banks performance in Tanzanian context. The challenges include irregularities of policies and regulations, non-supportive operational and technical structure, and missed perceptions of Mudarabah among the public. However, a new challenge of the impact of the central bank on Islamic banks was identified. It is expected that Tanzanian Islamic banking performance will be enhanced if the central bank introduces sharia regulations for Islamic banking, initiates the central sharia supervisory board, and harmonize, country regulations with financial regulations regarding Islamic perspectives. Keywords Islamic banking, challenges, Mudarabah, Tanzania, conventional regulation JEL Classification G20, G21, G28 INTRODUCTION To date, the Islamic banking industry has been extensively studied. These studies have confirmed its growth and flexibility within a more demanding financial environment (Rizvi & Arshad, 2014). For example, Abdul-Rahman and Nor (2017) have asserted that growth has been measured by the developments and maturity of products, services and financial markets, along with the development of infrastructure and financial institutions. Furthermore, it has been explained that comprehensive framework of legal, regulatory and Sharia is the main essence for creating a conducive environment for the industry (Habiba, Effandi, & Abdallah, 2017). The current economic goals of broad economic prosperity with full and optimum level of economic growth and justice in the distribution of income and wealth, are all in line with the development of the Islamic banking industry (AbdulRahman & Nor, 2017). The Islamic banking products which do not include gharar (uncertainty), riba (usury) and maysir (gambling), have all become alternatives to conventional banking in meeting the community’s ever increasing needs (Siddiqui, 2008). Conventional regulatory frameworks have dominated the supervision of Islamic banks, with slightly modified terminologies (Khan & Shah, 2015). It has been argued that the introduction of Islamic banking and finance into conventional systems has made it difficult for supervisory authorities who are unfamiliar with the abilities of Islamic banks to 81 Banks and Bank Systems, Volume 14, Issue 1, 2019 cope with the supervision issues, especially in countries that operate a dual financial system (Sole, 2007). As distinct from practices, their institutional aspects and structural requirements distinguish Islamic banks from conventional ones (M. Iqbal, Ahmad, & Khan, 1998). Many studies have been conducted regarding the challenges that Islamic banks face (Hammoud, 2017; Shah, Raza, & Khurshid, 2012; Wilson, 1999; Zainordin, Selvaraja, Man, & Hoong, 2016). However, the studies on the challenges faced by Islamic Banks, and the impacts of central banks in practicing Mudarabah financing under conventional regulatory regimes, are minimal. Therefore, the study on challenges faced by Islamic banks under the conventional regulatory regime, and the impact of central banks, are both very crucial. The present qualitative study has identified several challenges facing Tanzania Islamic banks when practicing under conventional regulations, as Tanzania’s central banks are the regulators and supervisors for all country’s banks. This imposes more requirements on Islamic banks, which are inconsistent with sharia. 1. THEORETICAL BASES OF THE STUDY 1.1. Islamic banking in Tanzania The emergence of Tanzania as a frontier for Islamic finance in East African countries, has been enabled by the granting of five banks to provide Islamic banking services (BoT, 2011). The range of products offered by Islamic banks and windows in Tanzania differ according to each bank’s nature. In general, they mostly provide financial products. Islamic banking and finance in Tanzania have become modes for collecting and disbursing funds, and for gratifying market needs (Beatus, Tripathi, & Kasongwa, 2013). Table 1 lists Islamic banks in Tanzania. Table 1. Number of Islamic banks in Tanzania Source: BoT (2011). No. Banks Status Ownership 1 Amana Bank Limited Full fledged Local private owned 2 PBZ Ikhlas Islamic division Local government owned 3 KCB SAHL Bank Window Foreign government owned 4 National Bank of Commerce Window Local government owned 5 Stanbic Bank Window Foreign private owned Currently, five banks provide Islamic banking services in Tanzania, with Amana bank being fully-fledged, and the res (...truncated)