Islamic Banking is predominantly a banking system that is based on the principles of profit and loss sharing, and significantly the prohibition of the collection and payment of interest. It is a true partnership between the bank and its customers where risks and profits are shared on mutual agreement. The principal means of Islamic finance are based on trading, so banks and financial institutions will trade in shari’a-compliant commodities with the money deposited by customers, sharing the risks and the profits between them. In a nutshell, Islamic banks gain profit from the buying and selling of approved goods and services. These profits are deemed to be a reward for the risks the bank is taking. They make profits from utilizing some shari’a compliant banking products and financing services at their disposal.
Islamic banking in Nigeria dates back to 1991. The enactment of the Banks and Other Financial Institutions Decree that recognizes banks based on profit and loss sharing opened the window for investors to start applying for licences. By 1993 applications from investors for Islamic banking licence in Nigeria were granted. From 1996, Habib Bank Plc and some other banks opened a non‐interest banking window, offering a limited number of Shari’a‐compliant products. Due to the country’s lack of regulatory framework to that effect, the initiative was tactically put to halt and the experience did not register any significant success or growth. In January 2011, the regulatory Framework and supervision of Non-interest banking guidelines were finally released by the Central bank of Nigeria, CBN. the then Governor of CBN – Sanusi Lamido Sanusi, state that the regulatory guideline is modeled after the success story of the industry in Malaysia.
The licensing of Jaiz bank plc in 2011, to operate full-fledge Islamic banking system, with numerous Islamic window operators, cleared the way for other future non-interest banking operatives to follow, e.g., Taj Bank Plc and so on. Relatively few in number, these Non-Interest Financial Institutions (NIFI) have successfully placed Nigeria on the global spot light, as Africa’s fastest growing consumer and corporate banking destination. With the current global visibility of Nigeria in the Islamic banking, in addition to the speedy success stories it is recording in Takaful and Sukuk – Islamic Bond, the future projection for Nigeria as regional hub for Islamic Finance in Africa is foreseeable.
Nigeria has the largest Muslim population in sub-Saharan Africa, with about half of its 200 million population ascribed members of the Islamic faith. It has numerous prospects as it concerns Islamic Banking and finance. But these prospects are marred by some irregularities that need urgent redress for best practices and professionalism in the industry. Some of the challenges brought to lime light in this article are:
Islamic banking and finance principles, terminologies and their operational products are such that you need to be an expert to get used to. The poor knowledge of these terms and uses are causing misunderstandings to both the supposed custodians and among non-Muslims. These terms and products ought to be made simpler or better still explained from point of familiarity. The result is that the growing interest is still not yielding expected dividend. Prospective customers simply stay away because they found the terms too difficult to learn. To melt down the terminologies into simpler meaning or translated into local dialects could be a way out.
Lack of awareness is the current state of affair. Nigeria populace has not been made to understand the difference between Islamic banks and their conventional equal. Particularly, the Islamic banks in Nigeria are not doing enough to sensitize the eventual customers or address the lack of basic products knowledge. The most frequent complaints about Jaiz banks for example are rigidity and traditionalism. high level of awareness from the banking institutions, and concerned government agencies are imperative.
There is vacuity in Islamic banking scholarship. Finding Islamic scholars knowledgeable in both Islamic and conventional banking modus operandi are lacking in Nigeria, which places severe constraints on the regulatory Shariah‐compliance machinery. With the introduction of Islamic banking system in Nigeria, there are no much efforts to train specialized Islamic scholars in the act of banking and finance or Islamic accounting versatility. The Islamic Banks should float some grants for willing students and researchers to embark on pedagogical studies to enable future development and informed regulatory decisions of the institution. Per contra, Islamic scholars should seize the opportunity by engaging in self upgrade and improve their human capacity for developmental adequacy.
In a conservative Islamic society like Nigeria, where every appointment opportunities follow a traditional institutions’ endorsement.’ Irrespective of the technicalities involved in the banking sector, the Muslim religious leaders will select their cronies and loyalists as reward for loyalty instead of appointing or employing qualified scholars. This has affected other Islamic institutions in Nigeria, causing stagnation, unprofessionalism and unemployment. The same traditional institutions are extending their grip on Islamic banking and finance sectors, appointing or recommending un-technical professionals for highly technical capacity positions. The skills and technicalities needed to regulate and supervise Islamic financial institutions in Nigeria are lacking. Its adverse consequences may hinder the growth and progress of the nascent financial institution in future. Nonetheless, independent Islamic scholars should constitute regulatory bodies that would independently supervise the activities and operations of these institutions and expose those who are caught in sharp practices in the name of Islamic banks, Takaful, Sukuk or even Halal products.
Islamic banking in Nigeria is completely reliant on the resultant experience of Malaysia. Such dependency may not be in favour of the country at the long run. Believing whatever works for the Malaysians works for Nigeria might be a wrong assumption. The two countries may have climatic semblance, but the cultural orientation and behaviourism are in some ways antithetical. Islamic banking in Nigeria will always be subject to the effect of their economic environment. Yes it may be a launching pad mechanism; to moderate the overly contested banking system in the country. Nigeria needs to start thinking beyond reliance and invest in large scale researches, if they believe Islamic banking and finance has come to stay. Presently, there is no evidence of any form of indigenous research to that effect. It goes beyond to identify that no Nigeria tertiary institution offers Islamic banking and finance specialized graduate degree. Any effort towards independence, gives credence to the country and confidence to the investors. It won’t be a bad idea for Nigeria to contribute in the development of products for the Islamic banking.
The instruments used by the Central Bank of Nigeria (CBN) for monetary policy operations and interbank market is interest based. There are no equivalent government securities or money market instruments designed for Shariah compliant products yet. These could hinder Islamic banks from investing their excess liquidity. Also lack of a Deposit Insurance Scheme for the protection of depositors of Islamic banks, are some of the needs for future competitive advantages of the Islamic banking sector that need to be resolved. It is then the duty of Islamic banks and other regulatory bodies to mount pressure on the federal government through CBN for remedy.
In few occasions of liquidity crises, the Central Bank of Nigeria provided intervention loans to conventional banks. Such loans are disbursed on interest basis and cannot legitimately benefit Islamic banks. Proactively recommending, should a situation of this nature occur in future, it is imperative the CBN mechanizes an interest‐free framework for such assistance.
Islamic financial institution begets accounting and auditing standards pertinent to it. The balance‐sheet structure of Islamic banking is unique. At present there is challenge of inadequate competent personnel to that regard. The need for these institutions to train accountants and auditors in the application of these standards are necessary. Collaborating and Partnering with organizations like ‘Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI)’ on home grown capacity building and technical development is recommended.
Finally, there is no comprehensive legal framework developed to cater for arbitration of conflicts associated with Islamic financial contracts, products or individuals in Nigeria. A lack that needs some Islamic technical scholarship to fix, for in no distant time there will be need for arbitrations and jurisdiction of specialization, of which the shari’a court of appeal may not be suited to handle. On this juncture to recommend for the establishment of a specialist court for Islamic financial arbitration may not be wholly overboard. Alternatively, to create a branch of shari’a compliant section from the existing commercial legal system of Nigeria may suffice.
In conclusion, while the experience is unfolding and more opportunities witnessed, the few issues enumerated need urgent remedial amendments in this early phase of the Islamic institutions. In a highly competitive nation like Nigeria as far as banking and finance are concerned, reliance on sentiment as a marketing strategy is wrong indicator against sustainability of Islamic banking. Jaiz bank for instance, is systematically marketed on religious sentiment. It could be contested that 80% of the current success of the bank’s achievements are based on religiosity. Religious belief and commitment could be a driving force for the early success of any Islamic bank. However, phase of stagnation usually ushers in and when not properly managed could lead to negative balance sheet.
- Suleman A, Afikpo is Director, Global Islamic Research Institute, researchinstitute.glo@gmail.
com
