CHALLENGES FACING ISLAMIC BANKING IN ZANZIBAR

Abstract

Passion in the working of Islamic bankinghas been growing worldwide, not only among Muslims but also Non-Muslims, not only among individuals but within institutions too. A growinginterest has been perceivedrecentlydue to Islamic Banks’ role in providing affordable services and in a just manner to the customerswhere an effective framework is in place for its smooth functioning. In several places, despitethe usefulness of Islamic banking system, it encounters several challenges compared to conventional banks; the challenges include legal, regulatory and misconceptions or lack of understanding of their important features. This study is aimed at assessing the challenges of Islamic banking in Zanzibar.AMANA Bank and PBZ Islamic Banking Division were selected due to their popularity in Zanzibar; while PBZ was the first to establish a separate division to offer Islamic Banking services, Amana Bank was the first full-fledgedIslamic Bank. Branches in the Zanzibar Municipality were chosen as study population for collecting the data. The study applied the purposive sampling;whichgave theresearchersopportunities to decide participants to be plunged in a study according to study criteria. The quota sampling was used to divide population of challenges into strata to have a good representative of other Islamic banks and increased variability; In controlling the study,both primary and secondary sources of data were used. The bases of primary data were from employees of the mentioned banks. The secondary data werecollected from websites and other publications.The open-ended questionnaire was selected for data collection. Resultsfrom the studyshow that some people in Zanzibar lacked awareness on Islamic banking; mmajorityof the consulted were customers because of their faith. Moreover, a big segment of Zanzibar society could not differentiatebetween profit and interest. In addition, the study learned that there wereno Islamic Banking Regulations governing their operations, conventional bankingregulationsare used making the former to lack a competitive working ground. This study recommends more education and awareness on at least basic Islamic Banking Principles. Also, Islamic banks should offer services that meet affordable customer demand based on their faith. Finally statutory bodies handling Islamic Finance should learn from other countries how to handle these new experiences to make them appealing to the customers and contribute optimally in economic development of a country including financial inclusion.