Shariah Banking: Middle-East Funds To The Rescue?

The 16th seminar for Finance Correspondents and Business Editors recently took place in Yola, capital of Adamawa State. The event which was chaired by the CBN Governor who was represented by Mallam Dahiru Mohammad, an Executive Board Member of CBN had its theme as “Non Interest Banking in Nigeria: Issues, Challenges and Prospects”. It was well attended by journalist from both the prints and electronics media.

Basically, the seminar was put together in order to further promote the advantages and benefits of Islamic Banking to Nigeria’s economy. Experts from within and outside Nigeria were brought to help sensitize participants on this issue.

In his welcome address, the branch controller of CBN Yola Branch described Islamic Banking as a veritable source of finance to help drive the vision 20:2020 development of the Federal Government. In his words; “there is ongoing trend by Muslims and non Muslims alike tending towards the adoption of Non Interest Banking Model alongside conventional banking. Nigeria needs to explore this veritable source of finance to help drive the vision 20:2020 development agenda of the Federal Government”.

While delivering his paper entitled “Overview and Conceptual Issues of Non Interest Banking in Nigeria”, Dr. Bashir Umar, Special Adviser to CBN Governor on Islamic Banking said that there is a lot funds in the Middle East waiting to be invested in Nigeria only if Nigerians will embrace Islamic Banking. According to Dr. Umar; one of the potential impacts of non interest Islamic Financial Services on the Nigeria economy is that it will “attract Foreign Direct Investments (FDI) especially from the Middle East and South East Asia where a lot of investors have funds waiting to be invested in Shariah-compliant financial products as is evidenced by the exponential growth in international Sukuk.” Sukuk is an Islamic Banking terminology which simply means the issuing of bonds and other financial instruments to raise money for developmental projects.

Dr. Umar also pointed out that Nigeria receives between 12 – 14 billion US Dollars annually from the Islamic Development Bank Group since 2005. In his words “The Federal Government joined the Islamic Development Bank Group in 2005 to avail the country of alternative sources of funding especially for infrastructure development, an area where we are having a lot of deficit in terms of financing (estimated infrastructure financing is 12 – 14 billion USD annually).”

In her part, Mrs. Aziza Atta, a Munich – Germany based Islamic Finance lawyer further enjoined Nigerians to embrace Islamic banking because it is one way through which Nigeria can have access to huge funds for investments and infrastructural development from the Middle East. According to Mrs. Azizat, Islamic finance has developed globally partly due to the excessive liquidity in the Gulf. You will agree with me that people with most liquidity now are the oil rich countries. The major banking institutions such as HSBC, Deutsche Bank, Barclays Bank, Citygroup wanted to get access to this liquidity. Bear in mind that banking in the Gulf States is done in line with non interest banking, so in order to get access to that excessive liquidity in the Gulf, the big financial institutions began to restructure their financial instruments in line with Islamic Banking so that the big investors from the Gulf can come and invest their money in these banks. Bankers are practical people, they put sentiments aside when it comes to money.

With the recent economic crises, we saw countries in Northern Europe that would never have considered Islamic financing go back to the drawing board to re-strategize. They said to themselves; we need money, we need capital, hence they made necessary restructuring in line with Non Interest Islamic Banking so as to gain access to funds from the Gulf States.

The UK recognized it about five years ago and took advantage of it; today they are the financial hub of Europe. The United States of America has also grabbed that opportunity. The Nigeria Government recognizes it and wants to make sure that avenues are opened for such investors to come in to Nigeria so that it can become the financial hub of Africa.

Be that as it may, some participants still expressed doubts about CBN’s genuineness in its Islamic Banking policy. Fears expressed include Islamization of Nigeria through this Islamic Banking Policy, exclusion/discrimination of non Muslims as it relates to job openings in such banks; example was given about an existing Islamic Bank in Nigeria which advertised vacancies with the condition that only Muslims should apply for the available jobs.

Others participants called for the introduction of Christian Banking models, while some simply said that the name Non Interest Banking should be used in place of Islamic Banking. Considering the issue of corporate governance in Nigeria, one of the participants hopes that some of the Islamic Banks do not begin to call out for bailout funds shortly after establishment. Another major worry is that Muslims will be encouraged to move their deposits from the conventional banks into the Islamic Banks, thereby causing financial chaos in the conventional banks.

The above issues and many more were addressed by various speakers at the seminar. Mrs. Aziza Atta, an Islamic Finance lawyer examined the Legal and Regulatory Framework for Non Interest Banking in Nigeria. She referred to Section 23 (1) and Section 66 of the Banks and Other Financial Institutions Act (BOFIA) 1991, which provides for the licensing of Non-Interest Banks (NIBs). The CBN is obliged by law, to issue licenses to appropriate entities for the establishment of NIBs provided they meet the regulatory requirements for licenses.

Taofiq Agbaje an Investment Researcher, talked about the basic principles of Non Interest Islamic Banking which according to him include prohibition of interest, gambling or speculation, removal of ambiguity in the contract terms. Also every Islamic banking transaction must be backed by tangible asset or real service and there must be fairness in its operation. Islamic Banking does not encourage hoarding money.

An Islamic Banking scholar, Abubakar Sadiq Abdulkarim took a look at the sources of funds for Islamic Banking. According to him, Islamic banks get their deposit by offering current, savings or investment deposit products that are compliant with Islamic Jurisprudence. Besides the banks’ own capital and equity, Islamic banks rely on two main sources of funds; first is transaction deposits which are risk free but yield no return, while the second is investment deposits which carry the risks of capital loss for the promise of variable. In all, there are four main types of accounts namely; current account, savings account, general investment account and lastly specific investment account.

Dr. Bashir Umar reminded participants of some potential benefits of Non Islamic Financial services to Nigeria. These include: firstly, financial deepening; that is the introduction of new market and institutional players like Islamic Asset Management Companies and the Islamic Money Market. Secondly, financial inclusion; a number of people who have remained unbanked due to their aversion to interest and interest-based products will be integrated into Islamic banks. Thirdly, it will engender competition in the banking industry which is expected to reduce the current high interest rates. Fourthly, enhance investment in the critical sectors of the economy through the use of Sukuk.

With the introduction of the Islamic Banking in Nigeria, the CBN is set to change the landscape of the Banking sector in Nigeria. However, will the Apex Bank succeed in its quest? The answer lies on its genuineness.

In another development, the CBN donated a Toyota Hiace Bus to the Finance Correspondents Association of Nigeria (FICAN) at Yola the Ada
mawa State capital. This is in recognition of its role in Economic Development through objective reporting of business, finance and economic issues.


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