Islamic Banking in Nigeria : Can Nigeria do it?


Abuja — What is Islamic finance and banking?

Islamic finance generally is a mode of financing project through Islamic legal means. It is brought out of the main Islamic economics. Islam is a complete way of life, therefore there is no demarcation between social, political or economic life of a Muslim and every Muslim is expected to adhere to the tenets of Islam to guide his way of life. The economic aspect of life deals with the legality, the Islamic do’s and don’ts regarding occupation, economic interactions, what to do; what not to do, what to sell; what not to sell, what to profit and not to be profiteering, usury and other things.

The global economic system is secular in nature, I will not say it is Christian in nature because I believe even in Christianity usury is not condoned. Therefore the global financial system is secular; it does not recognises any religion and that hurts a lot of Muslims because they are affected. As Muslims they are suppose to lead their lives as ordained by God and they have been warned vehemently to desist from interest related activities.

Islamic mode of financing is the one that is done without involvement of usury and at the same time it is the one that goes with the tenets of Islam. You can profit but you cannot exploit others because that is the essence of Islam.

Now, when you come to banking, the same thing applies. The global banking system is also a secular system that is based on interest and the reality is that interest is pervasive and it has never helped even the global economic system. Even now it is badly affected because of the inability of so many people that have taken loans with high interest to pay back. And this is what Islam foresaw and prohibits interest. But you can build economic relationship on commission or on profit or sharing of loss. Islamic banking is based on that principle. Instead of predetermine; because interest is a predetermined amount and it has not ever been affected by the risk. So if you collect bank money and no matter how badly affected you are by whatever circumstance you have to pay back plus the interest. Islam is a sympathetic religion, it prohibits that. It created a situation where there must be profit and loss sharing. There must be an agreement between the customer and the bank; you go on profit and loss sharing. That, principally in a nutshell what Islamic finance and banking means.

Can Nigeria do it?

There are several factors that may inhibit the full implementation of Islamic banking. The legal factor is there, the political factor, the social factor and even the economic factor. Now when we look at the legal factor we can see that the banking decree in Nigeria does not allow the establishment of any bank with a religious name but a compromise has been reached that you can open an interest free banking. There is some significant difference between an Islamic banking and an interest free banking. An interest free banking is banking without interest but the mode of operation or the institutions it may use in its operation might not necessarily be Islamic. It may even have some Islamic window, for example Bank PHB has an Islamic window; you can transact interest free if you like but that does not mean the bank will not transact with other non Islamic institutions like brewery and other things.

So a bank can be an interest free but its instrument cannot be Islamic. It doesn’t deal directly with interest but the instruments or the people it gives loans may have some elements of unIslamic practices. A pure Islamic banking is the one that does not deal with interest as well as all its instruments, purely Islamic. They will not invest in gambling, brewery and any kind of trade that is un Islamic.

Economic environment is seriously required for an Islamic banking because you will need especially the development of micro small and medium enterprises. Even the conventional banking is finding it very difficult to attract this group of beneficiaries because of the high rate of interest .Therefore; it is really very difficult for the economy to regain itself operating under this system.

Socially every banking system whether secular or Islamic is based fundamentally on one aspect-trust. You can see this in the banking system where a breach of trust is leading us to poverty and usury. Islamic banking system is primarily base on trust. To share profit and loss is extremely tied to trust. People must be trustworthy for them to actively participate in an Islamic banking. But unfortunately, given the circumstances in the Nigerian economy; considering the social scenario, the level of distrust and dishonesty in the system may make it become very difficult for an Islamic banking to operate. For example there is a social account in the Islamic banking where those people that are so weak, you don’t need any collateralisation; you don’t even need much agreement. You give them money, when they trade and fail they don’t pay anything and if they succeeded, they repay the money. In the case of Nigeria this social account might be misused because nobody will be willing to bring back the money even if he succeeded in the business.

When you look at the political situation, it is always hue and cry when you mention Islam; once you mention anything Islamic is like a repellent in the Nigerian economy. Even mentioning of OIC somebody will be saying Nigeria will be Islamized. Look at how an Arabic inscription on our currency was scaring some people.

So people become unnecessary scared by mentioning anything Islamic. So the moment you say Islamic banking, some people will start saying the Muslims want to create their own financial system in the country. The hue and cry is unnecessary because Muslims in Nigeria also have a right and the right of someone ends where he infringes on the rights of others. So these are the inhibiting factors to the establishment of Islamic banking.

Assuming Islamic banking is established in Nigeria, how would it help the economy?

All the problems we are witnessing in terms of poverty and other things are as a result of interest. For the past one thousand four hundred years Muslims have been warned against interest. No economy, no human relationship can survive on interest and therefore it is a major generator of poverty because it takes more from the weak and gives to the powerful. Whoever is giving out has more, that is why he is borrowing and by the time he is exploiting the borrower, two things happen-either he pays all the loan and makes nothing out of it or he will fail to pay back because the interest will be accumulating. This begets a lot of poverty. The access to finance will be limited to only people that have so much money and will be able to satisfy the demand of interest. Those micro, small and medium scale enterprises that create the greater part of employment have been denied access to credit simply because of interest and that leaves people with low capital and when people are left with low capital, their ability to invest is being tarnished. if people cannot invest then it simply means people cannot generate production and without production there will be high level of inflation and unemployment which means there will be low level of income and with low level of income there will be low level of savings again and without savings you have created a problem of another under production and without production and investment you are in a vicious circle of poverty.

So the Islamic banking will do a lot in ameliorating these kinds of problems by providing easy and accessible loans to small and medium scale enterprises which are the backbone of any economic growth.

Could it have prevented the global economic credit crunch?

You see, the financial meltdown affected almost every economy that has direct or indirectly linkage with Western Euro- American countries. And the problem is that these countries have net worked their economy with the global economy, such that whatever happen to them will have a similar effect on the other countries. They have succeeded in doing that and that is why they can proudly tell you that if America sneezes other countries catch cold. But where the economy is delinked with the so-called global economy, countries developing their economy based on their needs and problems, the less the effect it will have on them.

Why is it difficult to raise funds for JAIZ bank?

It is the socio-political problem and it is a disappointment that Nigerian Muslims cannot raise N25 billion for the JAIZ bank. There are so many men in Nigeria who can single headedly finance the establishment of JAIZ but the economic land scale is such that it makes them feel sceptical. Because of that social stigma or political relationship they sometimes feel unsecured to invest and they are not even very sure whether this kind of banking system can be practicable. So the reality is that Muslims must unite to develop a financial system that will satisfy the yearning and aspirations of the Muslims.

source : daily trust

Islamic Bank: Global asset worth 750bn US dollars

The global asset of Islamic banking industry has been estimated at 750 billion United States dollars, an Islamic financial expert and Chief Executive, Metropolitan Skills Ltd, Abuja, Hajia Ummahani Amin, has said.

She spoke in Kano at a workshop entitled: Fundamentals in Islamic Finance Workshop for International Islamic Economics and Management of Sciences Project. She observed that the quoted estimate above is without some major Sukuk issues and structured deals, which analysts estimate will run into trillions of dollars in the years to come.

She explained that Islamic banking practices have taken root in the Middle East and Malaysia, while adding that Europe and North America have recorded giant strides in offering Shariah acceptable products in an attempt to satiate an ever-increasing demand for interest-free banking and profitable returns that fall within the parameters of the Islamic law.

She maintained that the quest for Islamic banking is currently moving towards the African continent, pointing out that, at present, only a handful of countries in the continent have an effective Islamic banking infrastructure even though the scope of the section is immense.

She noted that, “in Nigeria, the banking system is about experiencing a proliferation of Islamic banks as the Central Bank of Nigeria is about to introduce new measures that will encourage and facilitate the existence of Islamic banks.”
She argued that Nigeria has an approximately 50 per cent Muslim population, adding that providing a banking framework that would be acceptable to their belief system would not only increase the bankable population but would bring about the benefits of social responsibility and economic empowerment.

She noted that the integration of Islamic Economics has been successfully implemented in Islamic schools in South Africa in the last two years while adding that Kenya, Tanzania and Mauritius have expressed interests in its implementation. She urged the Federal Government, which she said had taken interest in this project, to introduce the Islamic Economics in the educational policy of the country.

source : sunnewsonline

Nigeria: Experts to Brainstorm on Islamic Finance

Investors, analysts, bankers and other financial operators will be exposed to the benefits of Islamic banking in a workshop staged by the Chartered Institute of Bankers of Nigeria and Lotus Capital Limited.

The workshop on Islamic finance and investment products put together by CIBN and Lotus Capital, according to a statement, is scheduled for 22 – 26, March, 2010, at Colonades, Ikoyi, Lagos, at 9.00 am.

It said, participants will have the rear opportunity of not only discussing and appreciating such critical issues and Sub-topics in Islamic Banking as “The Road Ahead: Realizing the Potential of Islamic Finance and Investment”; “Islamic Finance Contracts”; Successful Shari’ah Complaint Product Structuring”; “Islamic Finance: An Alternative Approach to Project Finance and Infrastructure Development” and “Creating Interest Free Bonds” but also hear directly from seasoned Islamic banking experts from Nigeria and abroad.

Top on the list of the high profile discussants include: Professor Dr. Monzer Kahf, of Qatar faculty of Islamic Studies, a Professional Lecturer, Trainer, Consultant and advisor of international repute in Islamic banking and Investment and Mrs. Hajara Adeola, Managing Director, Lotus Capital Limited, a convertible Bond Research Analyst of BNP Paribas, London and an accomplished Consultant at Andersen (now Accenture).

It is expected that at the end of the workshop, participants would be able to reasonably “understand the new global wave of Islamic finance and investment banking”, “learn the Islamic finance instruments and structured products and their relationships with Conventional financing instruments” “understand Islamic Finance contracts”, “Provide with an in-depth understanding of the growing Islamic investment funds, their structure and growth” and “Know how to structure Islamic insurance/Takaful products”.

source : allafrica

Nigeria:Islamic Banking and Finance

The recently mooted idea of an Islamic finance system may be a welcome alternative to the age-old traditional Anglo-Saxon financial practices.

The credit crunch occasioned by the economic meltdown and the need to lever up with bailouts have created the need for a new approach to finance and banking. The Islamic financial system has been mentioned in this regard.

Although it is modelled on its interest-based counterpart in that both systems share the same material goals and adopt same institutional structures and so the products promoted by the Islamic finance industry are often seen as undistinguishable, there are sufficient differences to make for a viable alternative to orthodox banking practices.

Ordinarily, interest-based lending secured by collateral sufficiently absolves bankers from their clients’ risks, which usually leads to conflict of interests. Oftentimes, the banker who endorses the loan deal has already collected his bonus and retired by the time the deal goes bad. This could scarcely be the case should the requirement of Shari’ah be implemented, where commercial banks would be required to share the profits as well as the losses of their clients, whether on business investments or home purchases. In such circumstances, banks would be more careful when choosing which deals to finance. This risk-sharing finance eliminates conflicts and ensures greater stability in economic activity, since there would be no sub-prime crises where the value of a bank’s liability is determined by the performance of its assets.

Incidentally, risk-sharing techniques are not prevalent in modern finance practice. The reverse is usually the case. Both entrepreneurs and bankers actually increase risk, then insulate themselves from it, all in the bid to increase return on capital. If, as an example, the entrepreneur borrows from a bank at 5 per cent interest and then invests in a business that makes 20 per cent profit, he takes away 75 kobo in profit for every naira invested. Logically, he is encouraged to borrow heavily and grow his business operations. This results in a situation where a few large organisations become dominant players on the business landscape. Yet, when he is heavily indebted, a moderate rise in interest rates combined with a moderate fall in revenue can erode his entire profit margin.

Interest-based finance also biases the availability of funds in favour of those who are already rich. Individuals with great ideas but have no collateral, that is, the poor people, often fail to attract finance under the system. This increases the yawning gap between the rich and the poor from one generation to another. Under the practice of tawarruq, however, Islamic banks are allowed to provide their clients with interest-bearing loans in all but name, through a good combination of commodity trades.

One of the factors that engender market volatility is the facility that exists for buying shares on deferred payment terms, or for selling in deferred delivery terms. Price swings as large numbers of sellers and buyers appear in the market. Under Shari’ah, however, ownership of a share is a pre-requisite for its sale, such that there can only be one seller for each share at any particular time. Again, Shari’ah also restricts the use of margin trading and forward trading. This means that one or both counter values (shares or cash) must be exchanged in full on the spot when trading shares.

About the most powerful destabilising factor in modern markets is the issue of money creation by the banking system. For more than three hundred years in the western world, the creation of money out of nothing by central banks and lending it into circulation has caused age-long succession of inflationary trends, as such newly created monies that are spent on assets such as property and shares make their prices rise, naturally.

To address these, Muslim thinkers, such as Mahathir Mohamad, have canvassed for the use of gold and silver as legal tender as against the use of “representative” forms of money such as paper and economic data. Under such metal monetary system, gold and silver, unlike ‘representative’ money cannot be created out of nothing, and so no organisation has the power to create money without cost, which becomes an important guarantee of stability in a monetary system. The law of trust and the prohibition of interest are the two Islamic regulations that work to prevent money creation by the banking system.

Islamic finance experts, Haitham al-Haddad and Tarek el-Diwany have criticised the deviation from the norms of Islamic finance as the only reason it may not be offering alternative banking and finance practices that are much needed for these times.

Here in Nigeria, there had been facilities like the Small and Medium Income Enterprises (SMIEs) loans which had been put in place as an interest-free facility meant to bridge the yawning gap of wealth inequality between the poor and the super-rich. The scheme hardly achieved its set objectives as it was criticised for circulating only in Lagos and just amongst the few. This may be another opportunity to address what the SMIE failed to do.

Again, we are not unmindful of the religious coloration of our people’s faith. The law regulating the practice of banking and finance in Nigeria does not allow the use of religious nomenclature in banking operations. This may be enough to allay the fears of individuals who might think that the Islamic banking and finance is a covert or subtle way of transforming Nigeria, a secular, nay, multi-religious State, into an Islamic State. The fact that the Bible itself discountenances usury is enough reason for all and sundry to embrace a banking system that would alleviate the problems of our people.

It is important that Islamic banking and finance be considered on the basis of its own merits and demerits, rather than seeing it from the viewpoint of religious divides. Practitioners and promoters of the ideals should also go the extra mile to enlighten their prospective customers and clients that it has nothing to do with furthering the cause of one religion over another, nor the promotion of terrorism.

The fact that Islamic finance is largely unorthodox is enough ground to believe that its jurisdictional challenges may not be as broad as the orthodox. To move it from its geographical territories to other lands must therefore be done within the context of adaptability.

source :editorial