The Central Bank of Nigeria (CBN) recently released the revised guidelines for the operation of non-interest banking in the country. IKECHUKWU EZE and ALEX CHIEJINA write that the development has generated a lot of controversy in line with the growing concern ahead of its introduction
In recent times, Nigeria’s banking system has steadily evolved, following wide reaching reforms embarked upon by the Central Bank of Nigeria (CBN). At the inception of these reforms, the policy thrust was not only targeted at growing the banks and positioning them to play pivotal roles in driving development in other sectors of the economy, it was also directed at inducing improvement in their operational efficiency.
The major banking reform which began in 2004 during the reign of Charles Soludo as Governor of the apex bank, saw the strengthening of Nigerian banks through mergers and acquisitions even as the capital base of these banks rose from N2 billion to a minimum of N25 billion. This development saw the reduction in the number of banks from 89 to 25 in 2005 and later to 24.
The appointment of Sanusi Lamido Sanusi as the new CBN Governor in June 2009, following the expiration of Soludo’s four year term, also ushered in a spate of reforms in response to the global financial crisis and the mismanagement of certain banks in the country.
From improved corporate governance in Nigerian banks to the categorization of banks (regional, national and international banks), the rather dramatic reforms had been hinged on four pillars; enhancing the quality of banks, establishing financial stability, enabling healthy financial sector evolution, and ensuring the financial section contributes to the real economy.
However, recent moves by the CBN to abolish the Universal Banking Model (of the one-size-fit-all minimum capital of N25bn introduced in 2005), and the granting of license for non-interest banking (NIB) or Islamic banking, has engendered reaction from the public and the business community.
Non-interest and Islamic banking
According to a recent publication by the CBN on a final set of regulations on non-interest banking, which includes Islamic banking, the apex bank maintained that the introduction of Islamic banking is part of its drive to propel Nigeria’s economy and promote financial inclusion by introducing alternative products without undermining any group or interest in the country.
The CBN said it recognised two types of non-interest banking: non-interest financial products and services based on principles of Islamic commercial jurisprudence, as well as financial products and services based on any other established rules and principles.
The CBN however assured its readiness to issue guidelines pertinent to other types of banking to individuals and groups wishing to practice non-interest banking based on established rules and principles other than Islam.
Banking the unbanked
Making this known recently at a seminar with the theme “Repurposing Capital: Non-interest Banking in Nigeria” organised by Apostles in the Market Place (AiMP) in Lagos, Kingsley Moghalu, CBN deputy governor, financial systems stability, disclosed that Islamic Banking model was introduced as part of the reform agenda to improve access to capital and advance financial inclusion in the country.
While explaining further the need for non-interest banking, Moghalu stated that financial inclusion is a major challenge, as almost 50 percent of adult Nigerians do not have access to capital; and this was keeping these group of individuals out of banking practices.
In his words “I like to clearly reassure Nigerians that non interest banking is part of our plans to increase the inclusion into the financial system of those who have stayed out of the banking system for various reasons. I like to assure Nigerians very clearly that there is no agenda. It is simply finance, it is not about religion.”
He noted that the CBN was open to receive applications from other firms that wish to operate other variants of non-interest banking.
The deputy CBN Governor revealed that the initial guideline was capable of being misinterpreted which is why the new guidelines were introduced to cater for other operators interested in seeking other forms of non interest banking.
Moghalu maintained that the apex bank issued the Islamic banking guidelines first since application for non-interest banking that has been received over the years were for firms interested in operating as Islamic banks. He said other models of non interest banking would be done when application are received for such variants.
The Deputy Governor CBN added that in line with specialised banking model, minimum capital for firms wishing to operate as regional and national Islamic banks are N5 billion and N10 billion respectively.
Meanwhile, this recent development to grant licence to banks to commence Islamic banking by the apex bank has elicited diverse reactions from Nigerians. While some school of thought believe that there is a hidden agenda behind the institution of the bank, other believe that this move to commence Islamic banking will avail the opportunity to people who may want to carry out their business activities but are constrained by funds/capital.
Speaking during her screening session at the National Assembly last week, Ngozi Okonjo-Iweala, World Bank Managing Director, and new finance minister acknowledged non-interest banking as another form of banking.
On the viability of non-interesting banking model in Nigeria, the former World Bank boss said: “From the evidence, it seems to be functioning relatively well in various parts of the world,” and with proper implementation, it should also work in Nigeria.
Muslims in support
Echoing the sentiments of the World Bank MD, the Muslim Lawyers Association of Nigeria (MULAN) has thrown its weight behind the CBN governor, Sanusi Lamido Sanusi, for sustaining the dream behind the establishment of Islamic banking in Nigeria.
The group dismissed insinuations that the motive of the CBN governor was aimed at promoting the northern agenda and bringing back the northern elite into the mainstream of banking, following the collapse of northern banks in the wake of the consolidation exercise.
They decried the attempt to kill the idea of non-interest banking in the country, describing allegations against the CBN governor as baseless and totally uncalled for.
Tajudeen Olaseni Oladoja, National President of the body, who made this known to BusinessDay, encouraged Nigerians irrespective of faiths to invest their money in the up-and-coming banks and to become partners in order to share profits and risks in the business. Oladoja stated that Islamic banking will not amount to ‘Islamising’ the country, but will be beneficial to all Nigerians in the long run.
Why Christians are against it
However, Olubunmi Okogie, Catholic Archibishop of Lagos, in disagreeing with this view claimed that efforts to ensure a speedy take off of the scheme was part of the grand plan to turn Nigeria into an Islamic state.
According to Okojie “We are against the operation of Islamic banking in Nigeria because we see it as another deliberate move to subjugate Christians in Nigeria. Nigeria is a secular state. We must be very sensitive to the religious beliefs of others. Introducing Islamic banking in Nigeria will further aggravate the culpable religious tension in the country already being hoisted by the radical sect Boko Haram.”
Femi Adekomi, a chartered accountant, opined that he would like the CBN governor and other stakeholders to understand that Nigeria is presently combustible, as every development, political and otherwise, have been tied to religion.
“Nigerians are very religious and the stakeholders involved should know and respect this. If the Christians say we want to have Christian banking, or Babalawos say it is time for Ifa banking, would they make professional provision for it? So, don’t get me wrong, it is worldwide and generally accepted, but not widely practised, due to its religious nature and there is nothing saying we should not respect that in Nigeria too,” Adekomi esplained.
Islamic banking as a community banking niche
According to Wikipedia, the online free encyclopaedia, Islamic banking (or participant banking) is banking activity that is consistent with the principles of Islamic law (Sharia) and its practical application through the development of Islamic economics. “Sharia prohibits the payment or acceptance of specific interest or fees (known as Riba or usury) for loans of money. Investing in businesses that provide goods or services considered contrary to Islamic principles is also Haraam (forbidden). While these principles were used as the basis for a flourishing economy in earlier times, it is only in the late 20th century that a number of Islamic banks were formed to apply these principles to private or semi-private commercial institutions within the Muslim community.”
The emergence and growth of the Islamic finance industry is a phenomenon that has generated considerable interest in the financial world in recent years. Given its ability to offer innovative financial solutions to an under-served market, many believe that it functions as a community banking niche with considerable growth potentials.
In the Muslim world, and increasingly in the West, significant segments of the institutional and retail markets are actively considering this alternative for their financing and investment needs. However, the general availability of information remains limited for what is still a young and evolving industry.
Today, more than 250 Islamic banks (90 institutions of them are in the Middle East) are operating from China to the US. Western banks, through their Islamic Units in U.K, Germany, Switzerland, Luxembourg, and others countries also practice Islamic or non-interest banking.
Non-Islamic interest free model
However, it has to be pointed out that in some places in the West non-interest banking is practised strictly as a banking model with no relation to Islam or Sharia penal code. A good example is the Swedish JAK Medlemsbank (Members’ Bank) that has gained popularity as a success story in the interest-free banking niche. It is obvious from the operations of this bank that such models succeed through firm regulatory control and strict corporate governance. strict monetary discipline. (See box on how JAK operates). Given the local banking environment and the weaknesses of the operational framework, it is doubtful if the strict monetary discipline necessary for the success and viability of such venture could be attained.
In spite of the growth potential in Islamic banking, recent studies show that several challenges facing Islamic financial institutions include shortage of experts in Islamic banking, uncertainty in accounting principles involving revenue realization, disclosures of accounting information, accounting bases, valuation, revenue and expense matching to Islamic banks. Thus, the results of Islamic banking schemes may not be adequately defined, particularly profit and loss shares attributed to depositors.
Furthermore, it has been observed that Islamic banks have no appropriate standard of credit analysis. Aside this, potential conflict between domestic banks and foreign banks in adopting Islamic banking practices, and the development of high quality short term investment instruments which has been hampered by their ability to generate assets, by their credit ratings, and by liquidity.
For Sanusi Lamido, Governor of the Central Bank, “Islamic banking is part of its drive to propel Nigeria’s economy and promote financial inclusion by introducing alternative products. The non-interest regime offers veritable incentives and attractive options for investors.
“A rapid development and increasing wealth in the Middle East is driving the appetite for assets in the region and other parts of the world. Given the positive market environment and latent opportunity in Nigeria, we anticipate that Nigeria will be seen as an investment destination,” Lamido Sanusi explained at a conference recently to promote Islamic banking in Abuja.
While the CBN has so far come out with a framework for the operation of Islamic banking and is receiving the response of stakeholders on it, Nigerians at large are still uncertain as to what becomes of the idea by the apex bank to have such banking practice operational in the country. So far, banks which have been cleared to operate Islamic banking include Jaiz International and Stanbic IBTC, a subsidiary of South Africa’s Standard Bank.