Usury is condemned and prohibited in the strongest possible terms in these two scriptures. The injunction or rulings of Almighty Allah about any human action ...
International Journal of Management Sciences Vol. 1, No. 1, 2013, 24-29
Islamic Banking in Nigeria: Challenges and Prospects Ismail Kayode Olaoye1, Muhammad Al Furqan Dabiri2, Razaq Kareem3 Abstract The recent development of insolvency of many conventional banks in Nigeria made the Central Bank of Nigeria (CENTRAL BANK OF NIGERIA) to initiate the acquisition of some banks while others were ordered to merge. This was a strong signal to seek for alternative banking system. However, the advocacy for the Islamic banking system as alternative to conventional banking system has been received with mixed feelings. This might not be unconnected to the secular nature of Nigeria. This paper therefore examines the origin of Islamic banking, Islamic financial system in perspective, operations of Islamic financial system as well as the challenges and prospects for the Nigerian economy. The paper posits that awareness, manpower, legal framework, societal belief, cash requirements as some of the challenges while economic growth, attraction of investors, and fostering of egalitarian society are the likely prospects for the establishment of the Islamic banking in Nigeria. The paper concludes that Islamic banking system will bring transformation to all sectors of the economy vis-a viz eradication of poverty, equitable distribution of income and employment opportunities in the country through effective mobilization and allocation of capital. Keywords: Islamic Banking System, Islamic Financial System, Mudarabah, Musharakah Iijarah, Murabahah 1. Introduction Background The recent development of insolvency of many of our conventional banks in Nigeria which made the Central Bank of Nigeria (CBN) to initiate the acquisition of some Banks while others were ordered to merge is a strong signal to seek for alternative banking system. However, the advocacy for Islamic banking system as an alternative to conventional banking system has been received with mixed feelings. This might not be unconnected to the secular nature of Nigeria system. Siddiqi (1993) defined Islamic banking as the business of financial intermediation, mobilizing savings from the public on the basis of partnership and profit and advancing capital to entrepreneurs on the same basis. Islamic banking therefore, is a system of banking that complies with the principles of Shari’ah (Islamic law) and its practical application through the development of Islamic economics. Shari’ah forbids the payment or acceptance of interest fees for the lending and accepting of money respectively. This is known as riba (usury). As said earlier, the basis of any action in Islam is always traced to the Qur’an (Source of Islamic Law) and the Hadith (collected tradition, teachings, and actions of the holy prophet Mohammad). Usury is condemned and prohibited in the strongest possible terms in these two scriptures. The injunction or rulings of Almighty Allah about any human action and prohibitive things are not questionable. For instance, Qur’anic verses on usury (interest) reads thus: (i)
Q2:274: “Those who devour usury will not stand except as stands one whom the Satan by his touch hath driven to madness. That is because they say trade is like usury, but Allah permitted trade and forbidden usury (interest)………..”
(ii)
3: 130, “O ye who belief! devour not usury (interest), doubled and multiplied; but fear Allah; that ye may (really) prosper”
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Department of Business Management, Federal University, Dutsin-Ma, Katsina State, Nigeria Department of Banking and Finance, College of Social and Management Sciences, Crescent University, Abeokuta, Ogun State, Nigeria 3 Department of Economics and Actuarial Sciences, College of Social and Management Sciences, Crescent University, Abeokuta, Ogun State, Nigeria 2
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Q3:132-133: “And fear the fire, which is prepared for those who reject faith. And obey Allah and the messenger; that ye may obtain mercy” (Ali, 1410 AH).
2. Origin of Islamic Banks The origin of Islamic banks as major players in the financial domain was in the early 1970’s. But the rules and regulations governing the Islamic banking system has been present in the world for centuries. The main pillar of Islamic banking is the forbidding of Riba (interest). Even in non-Muslim literature, in the great western classics the Old and New testaments considers interest as evil. The 19th century writers such as William Shakespeare and others repeatedly raised their voice against interest and money lenders; recall, the merchant of Venice. Famous writers such as Charles Dickens have also brought up the evil side of taking interest, and championed the campaign of equal distribution of money among all classes. Famous Indian authors such as Rabindranath Tagore, Munshi Premchand, and Sarat Chandra also showed the dark side of the prevalence of interest charges in an economy. During the middle ages, Islamic finance was popular and was widely accepted and practiced. It helped in furthering trade and business in the Muslim world. During this period, Islamic merchants also played very important role in the commercial emancipation of southern Europe covering the Mediterranean, Spain and Baltic States. The Islamic financial became more popular when major cities of the then Islamic Caliphate became major commercial centres attracting European interests and capital. However, the expanding influence of capitalism and the laissez faire economic principle in Europe saw to the eclipse of the Islamic financial system. The revitalization of the Islamic banking system could be traced back to around 1975-76 when increased earnings from the export of crude oil gave the Middle Eastern oil producing nations the financial strength to seek alternative banking and financial systems. The pioneers in this respect were all private initiatives. The ‘Dubai Islamic Bank’, a private organization, was set up in 1975 by a group of businessmen from several countries. Two more private banks were later founded in 1977 under the name of ‘Faisal Islamic Bank’ in Egypt and Sudan. The first government established Islamic financial institution was the ‘Kuwait Finance House’ also established in 1977 by the Kuwaiti Government. Within ten years of the establishment of the first privately owned Islamic bank in Dubai, more than 50 other banks based on the Islamic template were established. Though, most of these are in Muslim countries, there were also some in Western Europe especially in Denmark, Luxembourg, Switzerland and the United Kingdom. With the exception of the Kuwaiti bank earlier mentioned, the establishment of Islamic banking, up to this point, had been by private initiative and confined to the initiating banks. In Iran and Pakistan, however, it was by government initiative and covered all banks in the country. The Governments in these countries simultaneously took steps to introduce Islamic Banking, on a global scale, in 1981. 3. Islamic Financial Systems in Perspective The theories and concepts regarding Islamic financing system sent a ripple down the existing financial system base of capitalist values. The idea of an interest free financial system seems rather appealing but those used to the conventional financial system thought that a financial institution based on a ‘no interest’ regime could not survive. The people who are attaching importance to moral values, beliefs and ethics in society criticized the conventional financial system as relying heavily on capitalistic methods. Conventional financial system maneuvers the charging of high interests on loans, forcefully occupying premises if loans are not repaid, mishandling the defaulters, are all being observed as on the wrong side of the law. The financial institutions are being harassed by human rights organisations and new rules and regulations are in favour of the client. Clients are reluctant to deal with institutions which do not give due cognizance to moral values and ethics. Investment by financial institutions in unethical activities and activities detrimental to society are abhorred by clients. Islamic banking has created a portal to invest ethically and in a valuable way to the society, thereby increasing its adoption. Socio-demographic trends have been the catalysts for continued growth in Islamic banking and finance. The high rate of population growth in the Islamic community world-wide has been supported by growing affluence, particularly across Asia. With this growth, customers are seeking Islamic banking and finance products that will provide opportunities to invest and borrow according to Islamic ethical principles as defined in Shari’ah law, while still offering the benefits of diversification and a full range of banking products.
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International Journal of Management Sciences Islamic banking is growing rapidly due to the importance that it accords moral beliefs and society. The Shari’ah law is driven by ethical values that are good for mankind, hence, it is well accepted by not only Muslims but also nonMuslim communities. New investment models and business tools are being developed by Islamic financial experts which are not only hundred percent Shari’ah compliant but also highly profitable. These tools or investment portfolios can be used both by Muslim and non Muslim alike. Islamic finance has become a global system spreading as far as Asia, the Middle East, and the Western world. Islamic banking is not limited only to the Muslim nations in the Middleast but is also in existence in developed economies such as USA, Europe, and the Far East. Today, more than four hundred and fifty (450) Islamic banks are operating from China to USA, having assets in excess of one trillion US dollars. Conventional foreign banks (e.g., Standard Chartered Bank, Grindlays, Citibank, etc.), are dealing in Islamic products through their Islamic Units in U.K, Germany, Switzerland, Luxembourg, etc. According to industry estimates, Islamic financial assets have already reached the $300 billion mark, and are expected to reach $1 trillion by 2010 because customers turn to Islamic finance as an alternative socially-responsible banking. Performing the same financial intermediation as conventional banks, Islamic banks act in accordance with revenue-sharing principles, and structure transactions so as to avoid paying or receiving interest. Islamic banking services include a broad range of profit-sharing, safekeeping, leasing, cost-plus financing and joint venture agreements. Innovative new technology solutions have enabled banks to meet the increased demand for these services. Now, virtually every product and service offered by conventional financial institutions has a Shari’ah-compliant equivalent ranging from loans to mutual funds, and from electronic payment systems to stock indices. 4. Operations of Islamic Financial System An Islamic bank is a deposit-institution whose scope of activities includes all currently known banking activities, excluding borrowing and lending on the basis of interest. It is imperative in this paper to ‘X-Ray’ the products offered in an Islamic bank in other countries namely Thailand, Bangladesh and Malaysia. 5. Islamic Banking Product Range
Mudarabah (Passive Partnership): This is a contract between two parties, a capital owner and an investment manager. Profit is distributed between the two parties in accordance with the ratio that they agreed upon at the time of the contract.
Musharakah (Active Partnership): Similar to Mudarabah but both partners participate in the management and provision of capital and also share in the profit and loss. Profits are distributed in accordance with agreed ratios but the loss must be distributed in proportion to the share of each in total capital.
Diminishing Partnership: This is a contract between a financier (the bank) and a beneficiary in which the two agree to enter into a partnership to own an asset, but on the condition that the financier will gradually sell his share to the beneficiary at an agreed price at the agree time.
Murabahah (Sales Contract at a Profit Mark-up): In this contract the client orders an Islamic bank to purchase at a specific cash price, promising to purchase such commodity from the bank once it has been bought, but at a deferred and agreed upon price and profit margin called mark-up in favour of the bank.
Ijara (leasing): The subject matter in a leasing contract is the usufruct generated over time by an asset, such as machinery, airplanes, ships or trains. This usufruct is sold to the lessee at a predetermined price. The lessor retains the ownership of the asset with all the rights as well as the responsibilities that go with ownership.
A Lease Ending in the Purchase of the Leased Asset: Leasing that ends in the purchase of the leased asset is a financing contract which is intended to transfer ownership of the leased asset to lessee at the end of the lease agreement.
Al-Istisna’ (Contract of Manufacture): Al- Istisna’ is a contract in which a party orders another to manufacture and provide a commodity, the description of which, delivery date, price and payment date are all set in the contract.
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Istisna’ Tamwili (financing by Way of Istisna’): Consist of two separate Istisna’ contracts. The first concluded between the beneficiary and the bank. While the second is a subcontract concluded between and a contractor to manufacture the product to prescribed specification.
Salam is a sales contract in which the price is paid in advance at the time of contracting, against delivery of the purchased goods or services at a specified future date
Current Accounts: All Islamic banks operate accounts for their customer and No interest is paid on this account. Funds can be used for business operations by the bank who bares all the risk.
Savings Account: Saving Deposits are also received from individuals. There are different ways of operating savings account by Islamic banks.
Investment Accounts: Also called Profit and Loss sharing (PLS) similar to Deposits account. Can be operated as Individual, Company or Joint/ General Investment accounts. They can also be operated for limited or unlimited periods.
6. Challenges of Islamic banking system in Nigeria Awareness There is apparently low awareness of the Islamic banking concept in Nigeria. Hence, for interest free banking system to work efficiently in Nigeria, there is a great need for sensitization of all the stake holders (government/public, government and individuals) by Islamic professional scholars and Muslim economists. This is borne out of the fact that Nigeria is a secular state. Hence, government should not be seen as trying to Islamize the country’s financial/banking system. This means that the tendency of the non-Muslims to mis-construe the ideology because of its religious colouration calls for nation-wide awareness. Manpower It is worthy to note that for Nigeria to institutionalize Islamic banking system, there is need to incorporate this concept into Nigerian university curriculum to prepare a good foundation and human resources for the operationalization of Islamic banking system. In other words, Scholarship can be awarded to students to travel abroad for practical training from those countries that have succeeded in the implementation of the Islamic banking. E.g. Malaysia, Bahrain, Saudi-Arabia. Etc. Requisite legal framework Central bank of Nigeria being the supervisor and regulator of the banking industry is expected to come up with details of regulations governing the operation of Islamic banking in Nigeria (legal frame work) that conforms to the principles of Qur’an and Hadith of the holy prophet Muhammed (SAW). However, the policy framework should be such that the Islamic banks will be competitive with conventional banks. More importantly, the justification for the existence of an alternative is to quench the thirst of Muslim faithfuls for banking facilities that will be in total adherence to the law of Islam. Societal belief and socio-political environment There is no gain saying that the society’s belief on the interest-based banking services would take a bit longer time to be eradicated. For instance, most of our ‘money bags’ in the society often constitute the major shareholders in the banking capitalization. Hence, to remove such interest from what they have been enjoying might turn out to be a blow on their prosperity and an attack on their sources of wealth. But if the government is really sincere about this course as instructed by Almighty Allah ‘the supreme being’, then, the concerned authority could enact law that will lay the foundation for the establishment of Islamic banking system in Nigeria. Equity Capital/Cash Requirements and Orientation Challenge Due to risk involved in putting huge sums of money for take-off of Islamic banking, people will tend to be reluctant to invest. For instance, the recent Central Bank of Nigeria bank capitalization or cash requirement for International License of banks is N50billion, National license (N25billion) and regional license (N10billion) respectively. Hence, one would hardly see businessmen/money lender putting such amount of money on uncertainties, just in the name of Qur’an and Hadith of the holy prophet (SAW).
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International Journal of Management Sciences 7. Prospects of Islamic banking The prospect for Islamic Banking and financial system is very bright. Muslims all over the world are clamouring for Islamic Banking. For instance, in Bangladesh, about 80% of the conventional banks recently opened separate Islamic banking windows. Islamic Bank of Bangladesh Limited has 132 branches in the country and five hundred applications are pending with Islamic Bank Bangladesh Limited for opening of new branches The situation may not be the same across countries. But if Islamic Banking succeeds in any country, the position may be similar in every Muslim-populated country. This means, that the first Islamic Bank in Nigeria should be well managed and successful so that people would have confidence in the system. Nigeria should enter into working relationships with countries with established Islamic Banks to lend competent officials to assist in setting up Islamic Banks in the country. However, the following points outline the benefits and opportunities for the establishment of an Islamic bank in Nigeria: Population The population of the Muslims in Nigeria which was put at about 50 percent (2006 census) of the Nigerian populace is a veritable source of patronage more so as the bank will cater for not only Muslims but also indigent nonMuslims who would also tap the opportunity to build small and medium scale enterprises with little fear for their sustainability due to high interest rates. Economic growth It therefore follows that the establishment of the Islamic banking and financial system will help in furthering trade and businesses among the most vulnerable portion of the populace leading to an increase in the development and growth of the real sector of the economy. . It should however be noted that when a business succeeds, it opens the door of employment opportunities, human capacity development as well as productivity and ultimately a positive effect on the gross domestic product (GDP). Attraction of investors An interest free investment climate will naturally attract investors who would want to benefit from the support of the interest free financial system. Investment can only thrive successfully in an environment where there is no stringent conditions attached to getting funds to finance investment. This means that Islamic banking system has the wherewithal to facilitate and speed up the development of infrastructures which the country has been yearning for. Egalitarian society There is no doubt that the Islamic banks would foster equality in the distribution of wealth in the society. This will facilitate the transformation of the Nigerian society into a more balanced state with reduced rate of poverty. A sense of belonging would also be created through financing of the business of customers based on Islamic financing procedures. Prevention of Fraud In recent times, the Central Bank of Nigeria has come out with the list of bank executives that have engaged in unsecured loan lending resulting to the insolvency of most so-called reputable conventional banks. This action could be traced to the fact that they were not guided by the principle of the Qur’an and the Hadith. Islamic banks are based on trust and there are dire consequences, spiritual and physical, for contravening the rules guiding the entrenchment of such trust. 8. Conclusion In view of the forgoing, there is no doubt in our mind that if Nigeria could incorporate the Islamic banking system in her financial system, the ailing economy will experience growth and transformation in all sectors of the economy visa viz eradication of poverty, equitable distribution of income and employment opportunities in the country through effective mobilization and allocation of capital to all sectors of the economy. More importantly, it would enhance peace and security of the Nigerian populace when University graduates are gainfully employed as ‘an idle hand is a devil’s workshop’.
I.K. Olaoye et al. References Ali, Abdullah Yussuf (1410 AH). The Holy Qur’an (English Translation of the Meaning and Commentary). Shah Foundation ; http://www.shahfoundationbd.org/hannan/article10.html . Accessed July, 2011. Kareem, R.O and Raheem, K.A. (2011). Islamic Banking and Global Financial Crises. A paper presented at International Conference on Global Financial Crisis: Islamic Banking as a Credible Alternative System. Crescent University Press. 371-391. Oloso, K. K. (2011). Shari’ah Requirements in Islamic Banking. A paper presented at Conference Global Financial Crisis: Islamic Banking as a Credible Alternative System. Crescent University Press, 70-76. Sanusi, L. S. (2011). Keynote Address presented at Conference Global Financial Crisis: Islamic Banking as a Credible Alternative System. Crescent University Press, 4-5. Siddiqi, M. N. (1993). Issues in Islamic Banking: Selected Papers, Leicester. The Islamic Foundation.
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