INTRODUCTION

Tanzania has achieved a new milestone by creating a legal architecture for Shari’ah-compliant banking operations within the country. On 19 December 2025, the Bank of Tanzania gazetted the Banking and Financial Institutions (Non-Interest Banking Business) Regulations, 2025. This landmark regulatory framework comes more than 15 years after the Bank of Tanzania first allowed Islamic banking products on the market, making it a significant milestone for Islamic finance in Tanzania. The Regulations represent the country’s first dedicated legal instrument for Islamic banking that establishes a legal structure for Shari’ah-compliant banking operations. This article provides a detailed legal analysis of the Regulations by examining their key features, practical implications and concerns.

WHY NON-INTEREST BANKING?

The introduction of a dedicated non-interest banking regulatory framework is a strategic step toward strengthening financial inclusion in Tanzania. A significant number of individuals and businesses have historically refrained from engaging with conventional banking systems because of ethical, religious or risk-related considerations associated with interest-based financing. Non-interest banking provides a viable alternative by offering financing models that align with asset-based transactions, shared risk principles and socially responsible financial practices. This enables previously underserved populations to confidently participate in formal financial systems, thereby deepening financial inclusion and broadening economic participation.

Globally, non-interest banking is widely recognized and has been successfully integrated into both Muslim-majority and non-Muslim jurisdictions in countries such as Malaysia,  the United Arab Emirates, the United Kingdom and several others. These developments underscore the global acknowledgement of non-interest banking as a credible, competitive and complementary financial model. Tanzania’s move to formalize this sector, therefore, not only enhances confidence and participation within its financial system but also positions the country to tap into the rapidly expanding global non-interest finance market.

KEY FEATURES OF THE REGULATORY FRAMEWORK

Scope & Key Definitions: These Regulations apply to all banks and financial institutions that conduct non-interest banking businesses in the United Republic. This means that the Regulations bind not only banks but also any financial institution that offers or intends to offer non-interest-based financial services. The Regulations also define “non-interest banking business” as a banking business whose products and services are wholly and exclusively compliant with Shari’ah.  The Regulations define “Shari’ah” as the principles and rules of Islamic commercial jurisprudence. This definition is significant because it firmly anchors non-interest banking operations within a recognized body of jurisprudence rather than leaving the interpretation open-ended or discretionary. It also underscores that non-interest banking is not merely a financial innovation or choice but a structured system governed by defined Islamic jurisprudential sources and scholarly interpretation.

Dual Banking Structure: The Regulations establish a flexible dual banking system that accommodates both standalone non-interest banks and conventional banks operating Islamic banking windows. Standalone non-interest banks are provided for under Regulation 4 which states that entities seeking to establish a fully fledged non-interest bank must comply with the existing Banking and Financial Institutions (Licensing) Regulations together with additional Shari’ah compliance requirements. Regulations 5 and 6 proceed to provide a detailed framework for conventional banks intending to establish Islamic banking windows. To establish such a window, a conventional bank must obtain prior written approval from the Bank of Tanzania. The Application must be supported by a feasibility study report addressing Shari’ah-compliant products to be offered, the organizational structure for the window, projected financials for three years and several other matters. Furthermore, Regulation 5(3)(g) requires conventional banks to provide a “written commitment to keep funds and accounts of non-interest banking business completely separate from those of conventional banking”. This aims to address the critical issue of commingling funds which is a fundamental aspect of Shari’ah compliance.

Shari’ah Governance Architecture: The Regulations establish a robust Shari’ah governance framework centered on the Shari’ah Advisory Committee (SAC). Regulation 12 sets out seven key functions of the Committee, including advising the Board on Shari’ah compliance, recommending policies and new products, reviewing audit reports and overseeing the disposal of non-permissible income. The SAC is to be composed of three members appointed by the Board of the Bank. A committee member of the SAC must have the following key qualifications

1. holds at least a bachelor’s degree in Shari’ah studies, Islamic finance, Islamic banking, or any other related discipline, or holds a recognised professional certification in Islamic finance;
2. has knowledge, skills and experience in Shari’ah; and
3. is a person of proven integrity, good moral character and performance.

Notably, the Regulations restrict members of the Shari’ah Advisory Committee from simultaneously serving on more than one SAC within Tanzania’s non-interest banking entities. This means that an individual appointed to the SAC of a non-interest bank, non-interest financial institution or Islamic banking window cannot hold a similar position in another institution at the same time. This provision aims to prevent conflicts of interest, ensure dedicated oversight and strengthen governance integrity.

Treatment of Non-Permissible Income: The Regulations establish a comprehensive legal framework for handling income that violates Shari’ah principles, namely, Non-Permissible Income. The Regulations define “non-permissible income” as income accruing to a non-interest bank, non-interest financial institution or non-interest banking window in a manner that is not compliant with Shari’ah.  Regulation 23 provides that non-permissible income cannot be treated as institutional income and must be kept in a separate account without commingling with its funds. The law further provides guidance on how such income must be disposed of which is by donating it to individuals in need or registered charitable organizations, subject to strict conditions preventing any direct or indirect benefit to the institution, affiliates, its shareholders, directors or employees. The Regulation also prohibits treating such dispositions as corporate social responsibility (Regulation 24(1)(d)). This is particularly noteworthy because it prevents institutions from deriving reputational benefits from funds considered impure under Shari’ah law.

Modes of Financing & Profit-Sharing: One of the unique features of non-interest banking is the permissibility for banks and financial institutions to engage in a range of financing structures, including trading in and holding tangible assets, as well as sharing risks with customers through partnerships or equity participation, as provided under Regulation 17. The modes of financing are to be proposed by the Shari’ah Advisory Committee (SAC) and approved by the Board. This approach reflects a deliberate regulatory choice to provide flexibility, allowing institutions to determine appropriate financing structures rather than exhaustively prescribing them within the Regulations. Furthermore, Regulation 22 establishes requirements for profit-sharing investment accounts, including mandatory recordkeeping and the creation of reserve accounts to mitigate potential losses, thereby strengthening prudential soundness within the non-interest banking framework.

Ring-Fencing for Islamic Windows: The Regulations establish stringent requirements for financial separation in conventional entities operating Islamic banking windows. Key requirements include:

1. Separate Accounting: Regulation 8 mandates separate books of accounts and records for non-interest banking windows. This legal requirement protects against cross-contamination between conventional and Islamic operations, which is essential for maintaining Shari’ah compliance and ensuring effective regulation.
2. Non-Interest Banking Unit: Regulation 6 requires conventional banks to establish a dedicated unit at the head office responsible for monitoring non-interest operations, developing policies, coordinating the Shari’ah Committee, and ensuring compliance with the Bank of Tanzania directives.
3. Core Banking System Requirements: Another critical element is the requirement for an Islamic window bank to have a core banking system capable of processing non-interest banking transactions in full compliance with Shari’ah principles. Regulation 5(3)(k) obligates institutions seeking to operate non-interest banking windows to demonstrate that their technological infrastructure is appropriately configured to support distinct operational processes, accounting treatment and product execution unique to non-interest finance. This requirement is fundamental in preventing operational commingling with conventional banking systems, ensuring accurate segregation of funds, enforcing Shari’ah-compliant contract structures and ensuring integrity in transaction recording.

IMPLICATIONS

Regulatory Harmonization: The Regulations repeatedly reference existing banking regulatory frameworks, including licensing, internal control, liquidity management and capital adequacy hence requiring non-interest institutions to comply with these standards in addition to Shari’ah-specific obligations. This creates a layered regulatory approach that ensures that non-interest banks meet the same prudential and supervisory standards as conventional banks positioning non-interest banking as a legitimate, fully regulated sector rather than an exception to the mainstream banking system.

Disclosure and Transparency: Regulations 14, 19, 26 and 27 establish extensive disclosure obligations covering Shari’ah non-compliance incidents, non-permissible income handling, investment account information and separate financial reporting for Islamic windows. From a legal standpoint, these provisions enhance accountability, strengthen regulatory oversight and build public confidence in the non-interest banking sector by ensuring clarity in operations and governance.

Enforcement Mechanisms: Regulation 28 grants the Bank of Tanzania robust and graduated enforcement powers such as dividend restrictions, suspension of privileges, suspension of lending or investment activities, license revocation, disqualification of individuals and other sanctions. This comprehensive enforcement regime demonstrates serious regulatory intent and enables proportionate responses to varying levels of non-compliance, thereby reinforcing regulatory credibility and sector discipline.

CONCERNS

The Regulations formally recognize Islamic law within Tanzania’s banking framework which is commendable. However, they also raise several important concerns and questions, as listed below:

1. What will be the legal status of the Shari’ah Committee’s opinions? Will they bind the Board?
2. How will disputes relating to Shari’ah compliance be adjudicated, since there is no supreme Shariah Advisory body at the BoT?
3. Does Tanzania’s judiciary currently possess sufficient expertise in Islamic finance jurisprudential matters?
4. Are there sufficient  Shari’ah Expertise? The requirement for SAC members to possess at least a bachelor’s degree in Shari’ah studies, Islamic finance or related fields may present challenges, given the limited number of qualified experts in Tanzania.
5. Liquidity management facilities tailored for non-interest financial institutions remain underdeveloped in the country which may create challenges.
6.  Supervisory Capacity and Shari’ah Oversight: While the Regulations establish internal Shari’ah governance structures, they do not clearly outline how the Bank of Tanzania will independently verify Shari’ah compliance or whether it will develop specialized in-house Islamic finance expertise. Without centralized supervisory capacity, there is a potential risk of varying interpretations and uneven compliance standards across institutions.

The Bank of Tanzania is expected to issue further guidelines on the Non-Interest Banking Legal Framework to address these emerging gaps and clarify the implementation of this recent Regulation. Nevertheless, the implementation and supervision for non-interest finance entities is expected to proceed relatively smoothly, considering that the Bank of Tanzania already allowed the operation of Islamic banking and previously licensed one fully fledged Islamic bank (Amana Bank) as well as several other Islamic banking windows such as KCB Sahl Banking and CRDB Al Barakah, meaning that operational experience and regulatory oversight with non-interest banking already exists in the country.

CONCLUSION

Tanzania’s Non-Interest Banking Regulations of 2025 represent a significant advancement in formally integrating non-interest (Islamic) finance into the national financial system. The Regulations demonstrate a strong commitment to Shari’ah compliance through comprehensive governance structures, strict separation of funds, disclosure obligations and detailed supervisory mechanisms. From a legal perspective, the framework successfully aligns non-interest banking with Tanzania’s broader regulatory architecture while addressing the unique requirements of Shari’ah-compliant finance in Tanzania.

Author

Fatma Haruna Songoro

Islamic Finance Expert

Victory Attorneys & Consultants 

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