Islamic finance grows in Tanzania, capital markets lag

ISLAMIC finance has gained traction globally, offering a framework that aligns financial activities with ethical and religious principles.

This trend has also been evident in Tanzania through the introduction of Islamic windows in financial institutions, particularly banks and the emergence of Islamic insurance, known as Takaful.

Despite these developments, capital market products in Tanzania are still lagging.

However, recent developments indicate promising prospects, especially with the drafting of Sukuk issuance regulations by the Capital Markets and Securities Authority (CMSA) and the development of Islamic investment vehicles such as the Alpha Halal Fund and Shirkah.

Currently, fewer than a handful of institutions have issued Sukuks in Tanzania, with only one, the Fursa Sukuk by KCB, being publicly listed on the Dar es Salaam Stock Exchange (DSE).

Furthermore, out of the 22 domestic listed stocks, arguably only two are considered Shariah-compliant, significantly limiting the scope of investment for Islamic investors.

But before delving deeper, let us first understand what the Islamic capital market entails.

The Islamic Capital Market (ICM) operates in accordance with Shariah, the Islamic legal system that dictates the permissibility of financial transactions.

In ICMs, investments must be structured to avoid practices considered forbidden under Shariah, such as charging or earning interest (riba), engaging in speculative transactions (gharar) and investing in businesses involved in activities considered haram in the Islamic religion, such as alcohol production, gambling and pork-related industries.

These prohibitions ensure that all investments are conducted in a transparent, fair and socially responsible manner.

The appeal of Islamic capital markets lies in their ethical underpinnings and emphasis on risk-sharing.

Unlike conventional financial instruments, where interest payments and fixed returns are the norm, ICM investments promote equity participation, meaning that investors share both the risks and rewards associated with their investments.

For instance, a Sukuk—an Islamic financial instrument similar to a bond but structured to provide returns through profit-sharing—ensures that the income derived is tied to real economic activities, making it a more ethical and sustainable investment option.

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Sukuks are one of the most prominent products in the Islamic capital market and offer significant potential for Tanzanian investor’s looking to diversify their portfolios.

Unlike conventional bonds, which represent a debt obligation, Sukuk represent ownership in an asset or project.

This ownership structure not only aligns with Shariah principles but also provides investors with a tangible stake in economic activities.

For Tanzania, which is undergoing rapid infrastructure development, Sukuk can be an ideal instrument to finance projects like roads, energy and real estate in a Shariah-compliant manner.

Investors would earn returns based on the performance of these projects rather than through predetermined interest payments.

This makes Sukuk particularly attractive for Tanzanian institutional investors, such as pension funds and insurance companies, seeking stable and ethical investment opportunities.

Equities are another investment option for Islamic investors but require careful screening for Shariah compliance. Shariah compliant stocks are vetted to ensure that companies adhere to Islamic principles in both their core business activities and financial practices.

This screening process excludes companies heavily involved in borrowing or earning income from interest, or those operating in industries deemed harmful to society.

As a result, investors in the Islamic equity market can be assured that their investments contribute to businesses operating ethically and sustainably.

Investing in Islamic equity funds or Shariah-compliant exchange-traded funds (ETFs) allows investors to gain exposure to a diversified portfolio of these compliant stocks while benefiting from professional management and adherence to Islamic principles.

The governance of Islamic capital market products is another critical aspect that Tanzanian investors should consider.

Each product must be reviewed and certified by a Shariah Advisory Board, which ensures that the investment structure, contracts and operations comply with Islamic law.

This certification provides an added layer of assurance to investors that their investments adhere to ethical and religious standards.

Despite the growing interest and potential, Islamic capital markets in Tanzania face several challenges.

One of the primary obstacles is the lack of awareness and understanding among investors and issuers about the nature and benefits of ICM products.

Many potential investors are unfamiliar with the intricacies of Shariah compliant investments, which can hinder adoption.

Addressing this knowledge gap through educational initiatives, workshops and seminars is essential to promote greater participation.

Additionally, the regulatory framework for Islamic finance in Tanzania is still developing.

While the Bank of Tanzania has made strides in promoting Islamic banking, more needs to be done to create a comprehensive legal and regulatory environment that supports the issuance and trading of Shariah-compliant securities.

Moreover, as highlighted above, Shariah-compliant equities and Sukuk are still limited in Tanzania but are more prevalent within the region. Currently, there are only two Shariah compliant stocks listed on the DSE and one public Sukuk.

There are also about five privately placed Sukuk that do not receive investments from the public. In contrast, a preliminary assessment through Refinitiv shows that there are more than 120 Shariah-compliant stocks listed in the 18 active capital markets within the EAC and SADC regions.

Additionally, there is more than 1.6 billion US dollars’ worth of Sukuk, predominantly concentrated in South Africa, with almost a third issued in US dollar.

Furthermore, South Africa and Mauritius host a number of Islamic mutual funds and exchange-traded funds (ETFs), some of which invest in global Shariah-compliant financial products.

This significantly broadens the investment opportunities for Shariah-sensitive investors in Tanzania, where Alpha Halal Fund and Shirkah play a pivotal role.

The Alpha Halal Fund invests in Shariah-compliant financial instruments within the EAC and SADC regions, while Shirkah serves as a gateway to screened Shariah-compliant investment opportunities, including stocks, Sukuk, real estate, private equity and commodities.

Looking forward, the future of Islamic capital market investments in Tanzania is promising.

The growing demand for ethical and sustainable investment options, coupled with Tanzania’s economic development, presents a fertile ground for the expansion of ICMs.

Establishing partnerships with international Islamic financial institutions, developing robust regulatory frameworks and enhancing investor education are key steps that can drive the growth of the ICM sector in Tanzania.

With these efforts, Tanzanian investors can look forward to a broader range of Shariah-compliant investment opportunities that contribute to both personal wealth creation and the sustainable development of the national economy