Revisiting Islamic Banking


Sanusi Lamido Sanusi knows fate on May 20

 Supporters and antagonists of the controversial Islamic banking model argue their positions at a session organised by the Nigerian Institute of International Affairs

No policy statement by the Central Bank of Nigeria, CBN, has generated so much controversy like the proposed Islamic banking. Since January this year when the apex bank issued the first guidelines on the banking model, the draft framework has continued to receive knocks from many quarters. Many critics have been lampooning the CBN for what they call its assumption that Islamic banking is synonymous with the profit-and-loss sharing banking model and foisting an Islamic banking practice on a secular country.

In that guideline, the word “shariah compliant” was used 26 times. Following a series of debate by some stakeholders, the CBN made a reversal by issuing fresh guidelines in June this year. The fresh guidelines recognised Islamic banking and other variants of non-interest banking. However, the document was faulted for dwelling extensively on Islamic banking.

As the controversy raged, the Nigerian Institute of International Affairs, NIIA, seized the initiative of organising a brainstorming session titled Islamic Banking in International Relations: The Case of Nigeria to allow friends and enemies of the model debate it. At the event, eight papers were presented and debated. Muslims, christians and key stakeholders from the banking and manufacturing sectors were in attendance. Professor Bola Akinterinwa, acting Director-General, NIIA, noted that one major dynamic for organising the session was the controversy and the extent of threats emanating from it. Contending positions, largely driven by religious sentiments rather than by the viability of the practice or the extent to which it can assist national economic growth and development, have been threatening national security and integrity.

The CBN defines non-interest financial institution, NIFI, as “a banking or otherwise financial institution, OFI, under the purview of the Central Bank of Nigeria, which transacts banking business, engages in trading, investment and commercial activities as well as the provision of financial products and services in accordance with Shariah principles and rules of Islamic commercial jurisprudence.” According to the NIFI framework, Shariah principles refer to “the divine guidance as given by the Holy Quran and the sunnah of the Holy Prophet and embody all aspects of the Islamic faith, including beliefs and practices”

In a paper presented by Pastor Ayo Oritsejafor, President, Christian Association of Nigeria, CAN, the clergyman argued that non-interest banking pre-dated Islam. And that non-interest banking has its origin in the Jewish practice of lending money by an Israelite to a fellow Israelite without charging usury or interest as commanded in Exodus 22:25 and Deuteronomy 23: 19-20. In modern times, the principle of non-interest banking is evident in venture capital and private equity firms where projects and businesses are financed through equity funds after the financier has assessed the risk as acceptable, Oritsejafor remarked.

Non-interest banking works essentially on the principle of risk-sharing between the capital provider and the user. The profit or loss arising from the transaction is shared on an agreed basis. And since it enables persons (and projects) whose credit risk is high and unattractive to conventional lenders and who have no adequate collateral for loans to access capital, the CAN, Oritsejafor remarked, fully supports it. Christians, he said, see it as a way of ensuring financial inclusion since people and businesses that cannot attract funding due to the strict lending criteria of conventional banks can access finance through non-interest financial institutions.

Christians are advising that Islamic banking should just simply be called non-interest banking where Shariah principles would not be applicable. The CAN president posited that the revised NIFI guidelines are not acceptable as some of the provisions have been limited to only NIFIs which provide “non-interest financial products and services based on principles of Islamic commercial jurisprudence.” He described such provisions as unacceptable and a curtailment of the rights and privileges of non-muslim Nigerians.

Oritsejafor also faulted the CBN’s list of non-permissible transactions which he argued is purely Islamic. He queried why the CBN should declare illegal businesses that are legal and legitimate under Nigerian law. Why should a non-muslim who engages legally in gambling, share-trading or stockbroking (which could be seen as “speculation”), piggery farming, sale of alcohol and even arms and ammunition be discriminated against by a non-interest financial institution just because Islam prohibits these areas of business? What legal and constitutional right does the CBN have to affect these matters negatively under the guise of Islamic banking, the cleric asked

Another source of concern for CAN is the establishment of the CBN Shariah Council. While the first draft guideline provided for the establishment of the CBN Shariah Council to advise the CBN on Shariah matters for the effective regulation and supervision of NIFIs in Nigeria, the revised framework merely renames the CBN Shariah Council as “Advisory Council of Experts”. By this, CAN believes the CBN is being disingenuous and the cosmetic change of name is unacceptable. Who are these experts, Oritsejafor queried. The CBN is believed to have appointed paid consultants who are Shariah scholars from Egypt and Malaysia ostensibly as the experts.

Also in contention is the branding section 39 (1) of the Banking and Other Financial Institutions Act, BOFIA, which stipulates that “except with the written consent of the Governor of the CBN, no bank shall be registered or incorporated with a name which includes the words “Central”, “Federal”, “Federation”, “National”, “Nigeria”, “Reserve”, “State”, “Christian”, “Islamic” “Moslem”, “Quaranic” and “Biblical”. Curiously, the fresh guidelines indicate that Islamic NIFIs shall not include the word “Islamic” as part of their registered or licensed names. Rather, they shall be recognised by a uniform symbol designed by the CBN. All the signages and promotional materials of NIFIs shall bear the symbol to facilitate recognition by customers and the general public. CAN wants only Islamic NIFIs to bear that symbol name.

Another contention has to do with audit, accounting and disclosure requirements. The new guideline shows that Islamic NIFIs are required to comply with the relevant standards or disclosure issued by standard-setting organisations like the Accounting and Auditing Organisation for Islamic Financial Institutions, AAOIFI; Islamic Financial Services Board, IFSB and the Nigerian Accounting Standards Board, NASB. Contentiously, all NIFIs are required to carry out an internal Shariah audit on a periodic basis to examine and evaluate the extent of compliance with Shariah rules. NIFIs are also mandated to comply with the IFSB’s guiding principles of risk management for institutions offering only Islamic financial services. The CBN guidelines do not indicate what NIFIs offering non-Islamic products will comply with in their risk management issues.

By promoting what it considers mainly the beliefs and practices of Islam to the exclusion of other religions, the CAN argues that the CBN is contravening the secularity of Nigeria as enshrined in section 10 of the Constitution of the Federal Republic of Nigeria which states that “the Government of the Federation or of a state shall not adopt any religion as State Religion.” To this end, the CBN, CAN says, should have a uniform and religion-neutral framework for non-interest financial institutions.

Expectedly, proponents of Islamic banking at the talkshop did not see any wrong in the model. Dr. Ahmad Dogarawa, lecturer, Department of Accounting at the Ahmadu Bello University, Zaria wrote in his paper that Islamic banking has become systemically important and too big to ignore in many countries. The university don opined that Islamic banking has become the banking norm in many muslim-dominated countries and has made inroad into even the USA and Europe and most parts of Asia and Africa. Dogarawa argued that the model has proved its worth and relevance to the international financial system and attracted support from the World Bank and International Monetary Fund, IMF. It has become appealing to leading international banks like Standard Chartered, Citibank, HSBC, ABN Amro, UBS, American Express, BNP Paribas, Bank of America, Commerzbank, Barclays, Deutche Bank, Goldman Sachs and Royal Bank of Canada. These banks, Dogorawa disclosed, have since opened Islamic banking windows or subsidiaries in different parts of the world to indicate how the financial model has become part of the global financial system.

In Nigeria, UBA plc and Standard Chartered Bank are believed to have requested the CBN to allow them operate Islamic bank branches. Stanbic IBTC is also expected to have an Islamic banking window.

The financing method under Islamic banking falls into three categories. They are the equity-based method (the normal or ordinary partnership) in which the bank acts as a sleeping partner but provides capital for an entrepreneur for investment purpose; the sales-based financing or cost plus and the lease-based financing. Dogorawa described the introduction of Islamic banking into Nigeria as timely and very important as the system has proven to be a viable financial intermediation channel in supporting economic growth. He posited that the proposed Islamic banking benefits far outweigh whatever demerits it may have. According to him, the system is expected to, among other things, act as a vehicle for mobilising funds that have been outside the interest-based banking system for productive purposes, in particular for Muslim communities, attract investment especially from Middle East and provide opportunities for manpower development, capacity building and expertise exchange.

It would also generate additional employment, promote quality service and healthy competition, and fulfil the demands of not only the teeming muslim but also non-muslim population. Islamic banking is expected to help arouse the interest of bankable muslims who have hitherto been lukewarm toward the system to actively participate in banking. It is also expected to avail unbankable members of the society the opportunity to be part of government’s effort to achieve financial inclusion. Financial inclusion refers to access to finance at reasonable cost to a wide range of financial services.

The university don, however, was quick to highlight the likely challenges of introducing Islamic banking in Nigeria. He said the introduction of the banking practice into the existing conventional system comes with a number of challenges to policy makers and bank operators. On the part of the policy makers, the challenges are regulatory and supervisory. Bank operators are to face largely operational challenges.

The CBN has provided for three types of non-interest banking arrangements in Nigeria – full fledged, subsidiary and window. Under the window arrangement, conventional banks wishing to offer interest-free financial products are expected to separate both the funds and accounts of the two different types of banking activities. Where a conventional bank opens an interest-free window, it means the bank is establishing a separate entity from the rest of its activities. Although the arrangement is popular in many countries, experts have proved that in practice, non-interest banking window is often abused and compromised as many conventional banks find it difficult to satisfy the requirement of maintaining a separate account for their non-interest banking activities. In Nigeria, where banks are well known for unprofessional activities, Dogarawa feared that the provision for window arrangement would be grossly abused.

The requirement for banks desiring to provide Islamic financial services to comply with relevant standards issued by AAOIFI and IFSB poses a great challenge of manpower development to the industry. At the moment, there is a dearth of knowledge about the reporting procedure of interest-free banking and very little is known about AAOIFI and IFSB in Nigeria.

Managers of banks desiring to offer interest-free banking services were advised to develop confidence in the system and demonstrate commitment and dedication to its course if the model is to succeed. They are also expected to be sincere in implementing the principles of interest-free banking and cooperate with the Shariah advisory board for effective supervision and regulation of the particular financial products and services.

Dr. Shamsudeen Busari, Registrar/Chief Executive, Certified Institute of Islamic Public Finance and Accountancy, Ilorin, argued that the business case for setting up an entirely separate institution to set accounting standards for the Islamic finance industry can be seen by the fact that the very basic premise of an Islamic financial institution’s business operation is based on the need to comply with Shariah principles. Every product offered by an Islamic financial institution is attached to underlying Shariah-compliant contract. And since Islam does not recognise the separation between spiritual and temporal affairs and views commercial transactions in an equally moral and ethical light, several matters considered salient in forming the framework of accounting principles have been thrown off balance when it comes to Islamic accounting.

Divorcing ethics from economics and religion from social lives, as well as distinguishing between well being and wealth have always thrown Islamic banking into crisis. Although the Shariah prohibits paying and receiving interest, it does not discourage profit or encourage reverting to an all-cash or barter economy. It also encourages all parties in financial dealings to share the risk and profit or loss of the investment in a business venture. Depositors in Islamic finance can be compared with investors/shareholders who earn dividends in companies. The rationale is to link the return in an Islamic contract to productivity and the quality of the project. Islamic financial instruments are aimed at investors who want to comply with the Shariah which requires financial dealings to be based on real economic activity and prohibits certain investment practices.

In practice, a current account under Islamic banking is similar to one in conventional banking except that no interest would be paid to depositors. It is essentially a safe keeping (al-wadiah) arrangement between the depositor and the bank, which allows depositors to withdraw their funds at any time. Cheque books shall be issued to depositors in this account while the bank will provide a wide range of payment facilities and clearing mechanisms, bill of exchange and traveller’s cheque. For this service the bank will not charge commission on turnover, but a nominal administrative charge is payable.

Savings deposits could be divided into a regular savings account, a hajj savings account and one called mudarabah. All will operate like conventional savings account with balances payable on demand. But under a mudarabah arrangement, the depositor may allow the bank to invest deposits in short term initiatives and thus share in proportion of the general profit. Islamic banks also run an investment account similar to fixed term accounts. Islamic banks offer two types of investment account: the joint investment account and the specified account.Proponents of Islamic banking argued that its introduction will not islamise Nigeria. The CBN, they said, is not promoting any bank to the detriment of Nigerians just as it is not meant to destabilise the country. The pointed at professors of Islamic finance who are non-muslims.

Mr. Eghes Eyieyien, Chief Executive Officer, Pharaz Consulting, a financial consultancy outfit, wants the CBN to make changes in the guidelines and leave the faith-based aspect to operators.

Conventional banks received knocks from Dr. Ike Abugu, president, National Association of Small and Medium Enterprises, NASME. Abugu posited that SMEs are subjected to high cost of funds; a loan that should ordinarily attract 18 per cent interest is offered at 25 per cent with a tenor of nine months. Abugu believed a NIFI will not engage in this stringent credit requirements.

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—Clement Oriloye

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