Interest-free Banking and Islamic Banking in Nigeria

sanusiNigeria’s quest for a virile banking reform had led to the adoption of several policies and strategies that would truly give the nation’s economy an edge towards growth and sustainability. No doubt, the bail outs of “failed banks” and the acquisition of toxic assets from bad banks’ books did saved the economy and Nigerians to a large extent from such kind of economic blows suffered in the Scandinavian banking crises. Without minding words as a follow up to an earlier publication, Zero Interest Banking in Nigeria: Identifying a Sustainable Module,

I still emphasis on the identification of an achievable element for an Interest-free Banking System as well as supporting it to its plausible fullest, rather than introducing religious sentiments or interest that could harm the Nigerian financial sector. Less I forget in a hurry, do the Nigeria’s economic policy fault finders understand what Interest-free Banking entails?

It is true that the Central Bank of Nigeria (CBN) had emphasized on its readiness to establish or give licence to banks wishing to operate Interest-free Banking system (which is popularly known by many as Islamic Banking because of its tandem with Islamic jurisdictions and beliefs that prevent dealings in interest (Riba) or usury). It is also true that the Apex Bank has the jurisdiction, as provided in its Act to allow such financial or banking practice; but what should not be seen as true is the perceivers’ believe that the CBN’s policy was meant to enforce Islam or Shari’ah on Nigerians or construed as a personal agenda of the Apex Bank’s Chief. For the avoidance of doubts, as it were with conventional commercial banks, Interest-free banking system has its inherent pros and cons which affects the Muslims and non-Muslims alike.

A first glance of how Interest-free banking system operates could set a pace of reasonable understanding to its fault finders. The bank is operated by, and has Muslims and non-Muslims customers; its lending principle is based on the belief that the provider of capital and the user of capital should equally share the risk of business ventures. Translated into banking terms, the depositor, the bank and the borrower should all share the risks and the rewards of financing business ventures. However, Nigeria as well as any other country wishing to practice Interest-free banking system may design a module that fit its economy, so far that its applications does not go contrary to the Islamic jurisdictions of Riba or interest, the use of money and capital; and also, identify the key challenges facing the model such as the dearth of knowledge, skills and technical capacity to regulate, supervise, or operate non interest banks. Also, higher quality personnel with experience in project management and Islamic jurisprudence are required for financing and marketing activities.

Interestingly, the flexible nature of Islamic finance provides enormous opportunities; it has positive and far-reaching impact for the Nigerian economy. The interest-free banking principle in Islam allows only one kind of loan and that is qard-el-hassan (literally good loan) whereby the lender does not charge any interest or additional amount over the money lent. In conventional terms, it means a bank will not change interest on loan or stipulate a certain amount to be paid back together with the loan given. What is more? The lender (the bank) also shares in the profits or losses arising out of the enterprise for which the money was lent. Islam encourages the economy of wealth redistribution; customers (Depositors) are thus encouraged to invest their money and to become partners in order to share profits and risks in the business instead of becoming creditors. This is unlike the interest-based commercial banking system, where all the pressure is on the borrower: he must pay back his loan, with the agreed interest, regardless of the success or failure of his venture.

The present day multi-rich Nigerians can hoard money, thereby limiting or eliminating the purchasing power of money. This practice have negatively marred the efforts at keeping inflation at bay, as this idle money are not utilized in economic events that could improve the country’s Gross Domestic Product (GDP) over time. Under the Islamic Banking system, human effort, initiative, and risk involved in a productive venture are more important than the money used to finance it. Customers are encouraged to purchase and are discouraged from keeping money idle so that, for instance, hoarding money is regarded as being unacceptable. This purchasing power (money) cannot be used to make more purchasing power (money) without undergoing the intermediate step of it being used for the purchase of goods and services. Although the system encourages customer to purchase, it also prohibits or discourage investment in practices and products that are considered forbidden.

The Apex Bank could make policies for the financial system and operators, as much as it is provided by enabling laws, the country’s Constitution, the Bank and Other Financial Institutions Act (BOFIA) and other relevant financial laws. We must understand that the country’s Assembly need not pass a bill for the proposed banking system (Interest-free banking), which is a product of CBN, to take effect if the listed legal provisions and other careful indices are put in place to make the system meet the economic objective for which it is meant for. All that is needed is a careful and extensive capacity building through collaboration among various stakeholders to develop cognate expertise in non-interest banking, development of an adequate regulatory and supervisory framework for the effective operation of non-interest banking in Nigeria. As it stands, it is fair to say that Interest-free banking system and Islamic banking system refers to the same policy as they operates in line to the provisions and jurisdictions of the Islamic Shari’ah system; nevertheless, it does not connotes a means of enthroning control over the sovereignty of Nigeria but a mere banking policy aimed at salvaging the country’s financial system as seen to be practiced in the United Kingdom, America and parts of Europe.

In many countries where series of financial crisis had led to the implementation of monetary and financial policies, the adoption of an Interest-free regime was considered. London is the leading Islamic banking centre in the West, HSBC, Lloyds TSB, and Citigroup have opened Islamic banking units and branches throughout England. Middle Eastern Islamic banks have also set up shop in the United Kingdom (UK). These banks also targeted non-Muslims with the message that their services are ethically superior to those of the West, pushing the idea that interest – and capitalism – is unethical and should be replaced in Europe by the Islamic financial model; patronage by non-Muslims have received a continuous increase in the UK. Wasn’t England the birthplace of the Industrial Revolution and creator of the common law, the most successful and equitable legal system in history?

One thing I must emphasis here is, any bank, be it Islamic or conventional, risks running losses if it does not charge some form of interest; Islamic banks circumvent this danger by extending a type of Islamic “credit” that shifts risk to the borrower in a manner similar to interest. In the UK Islamic Banking model, the banks’ Shari’ah boards legitimate the charges by renaming them “commissions” or “profits.” Some of us could be wondering why Islamic banks could remain profitable – or ideologically influential – if they complied with the Qur’anic injunction again interest. An Islamic bank is no different. It must partake in
the money creation business. And it must therefore fix its financial rate of return at the outset in most of its business. That’s why Islamic banking cannot succeed in being Islamic, at least, not in the way that we understand the terms “banking” and “Islamic” today.

Islamic finance is not a product to be offered to a niche market. It is a system. It must be promoted and implemented as a system as did the UK. Nigeria could buy from the West, especially with the United States’ strategy in understanding the system and how US Deputy Secretary of the Treasury Robert M. Kimmitt showed the world that the U.S. was interested in learning more about Islamic finance through holding an “Islamic Finance 101” course in Washington to educate government officials on its ins and outs. Whatever the system that the Apex Bank deems fit to aid in strengthening the banking reforms, it is left for the customers and Nigerians to decide on which financial product to explore. As it stands today with Nigeria’s conventional banks increasing minimum cash balance in savings (deposit) accounts to N25,000.00 and thereabout, the Islamic Banking could be a succour towards Sustaining Competition in Banking Reforms for a surviving economy whose average citizens earns far less than N18.000.00 per month.

Salim Salihu Muhammed
[email protected]

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