The concept of Islamic Finance is currently expanding globally at an astronomical rate and gaining grounds in various Islamic and non-Islamic markets alike. This is evident in a recent forecast by Moodyâ€™s rating agency, which estimates that the current size of the Islamic Banking Industry at the global level is $1 trillion, and could grow to $5 trillion over time.A
Nigeria is disposed to this global trend, as relevant regulatory frameworks have in recent times been put in place to enhance the effective growth of the concept of Islamic Finance in the country. It was also reported in March 2011 that the country had recently signed an agreement with Malaysiaâ€™s Central Bank to cooperate in Islamic Financial Service1.
What is Islamic Finance?
Also known as Participant Banking, Islamic finance refers to a system of banking that involves the provision of Islamic financial services, instruments and transactions in accordance with Islamic commercial jurisprudence and shariâ€™ah principles which prohibit the payment or acceptance of interest fees for loans of money for specific terms, as well as investing in businesses that provide goods or services considered contrary to the shariâ€™ah principle.Â
Principles of Islamic Finance
Under the Islamic economic system, everyone desirous of return on money must assume the risk inherent in the stated commercial enterprise.Â Thus rather than earning fixed income irrespective of the success or otherwise of the venture, the owner of capital partakes in the profit or loss from the venture.
The main principles of Islamic Finance include the prohibition of:
interest earnings, money lending or usury (riba);
sinful activity (haram), such as direct or indirect association with lines of business involving alcohol, pork products, firearms, tobacco, and pornography;
speculation, betting, and gambling (maisir), including the speculative trade or exchange of money for debt without an underlying asset transfer;
trading of the same object between buyer and sellerÂ (bayâ€™ al inah); andÂ
Â preventable uncertainty (gharar) such as all financial derivative instruments, forward contracts, and future agreements.
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.
What is the difference between Islamic Finance and the Conventional Interest-Based Financing?
The basic underlining difference between Islamic finance and conventional interest-based financing is in the understanding and treatment of money. While the conventional interest-based finance holds that money has intrinsic value of its own and as such can generate return without recourse to asset creation, Islamic finance recognizes no intrinsic utility for money except where it is used in the creation of assets.
Islamic Finance in Nigeria
Nigeria being the home to the largest Muslim population in sub-Saharan Africa has a high potential of establishing itself as the African hub for Islamic Finance.
According to the Governor of the Central Bank of Nigeria (CBN) - Alhaji Lamido Sanusi in a recent interview, Nigeria is playing an active role on the Islamic Financial Services Board, and is studying various regulatory regimes around the world.
Recently, the CBN granted license to Jaiz Bank International Plc (JBI), making it the first fully fledged Islamic Bank in Nigeria, and according to Governor Sanusi, CBN is not interested in licensing just one bank. He also revealed that CBN currently has applications from conventional banks who desire to operate the Islamic Finance window.
Regulatory Frame Work in Nigeria CBN and the Securities and Exchange Commission have both released provisions towards regulating Islamic Finance in Nigeria.Â
CBN’s Framework for the Regulation and Supervision of Institutions offering non Interest Financial Services in Nigeria, was released on the 13th of January 2011.
The Framework is supported by two guidelines which are the Guidelines on Shariah Governance for Non-Interest Financial Institutions in Nigeria; and Guidelines on Non-Interest Window and Branch Operations of Conventional Banks and other Financial Institutions.
The Securities and Exchange Commission followed suit by releasing on the 8th of February, 2011, the Rules on Islamic Fund Management.
Both frameworks provide acceptable instruments or Islamic Financing modes including: ijara (leasing) murabaha (cost-plus) musharaka (co-ownership) and mudaraba (joint venture). Others are istisna, sukuk, salam, wadia, wakalah and any other instrument approved by CBN or SEC.
The release of these documents by the relevant regulators is expected to drive the development of the Islamic financial market in Nigeria.
The introduction of the guidelines and rules notwithstanding, there are some issues which pose challenges and would need to be addressed for the successful operation of the concept of Islamic Finance in Nigeria. These include:-
1. Instruments for liquidity
The current interbank market is riba based i.e. not in compliance with shariâ€™ah principles, and there are also no equivalent government securities and other money market instruments which are shariâ€™ah compliant. The CBN has however promised to issue these instruments. There would therefore be a need to create an Islamic interbank market, as well as secondary markets for the Islamic compliant financial instruments to avoid liquidity traps.
2. Double taxation
Stamp duties and capital gains tax are payable upon transfer of assets in Nigeria. This poses a great challenge to Islamic finance in the country, since the concept is asset based and financiers are expected to take ownership of assets either wholly or partly as joint owners.Â In land transactions, stamp duties and capital gains tax would be required both upon the transfer of the land to the financier by the vendor, and also upon the completion of transaction and subsequent transfer of the property from the financier to its customer.Â
There may therefore be a need to amend the relevant tax legislations, as is currently obtainable in jurisdictions where Islamic Finance is being practiced, so as to avoid double taxation burdens on such transactions.
3. Consent and Registration in Land Transactions
It is a well know fact that obtaining governor’s consent for the alienation of land and registration of such alienation as required by the Nigerian Land Use Act, can be a costly and a time-consuming activity.
This poses a challenge to Islamic Finance in the country, as its nature would require such consent to be obtained and registration to be undertaken by the financier, both upon the initial acquisition of the land, and again upon any subsequent transfer.
4. Reliefs on Shariâ€™ah Compliant Financing Debt Instruments
For Islamic financial instruments and financing to be as competitive as its counterpart in conventional finance, shariah compliant instruments, for instance â€“sukuks - must also benefit from reliefs granted to similar debt instruments. Debt instruments issued in Nigeria are currently exempted from taxes including income taxes and value added tax. Also, interests payments on loans advanced are also tax deductible. The same status should be granted to monies advanced as repayments.
5. Islamic Insurance (Takaful)
While it is noted that some insurance companies in Nigeria are currently providing or routing to provide Islamic Insurance (Takaful), there are currently no guidelines for the provision of Takaful in Nigeria. This poses a challenge to Islamic Finance in the country as commodities or assets which are the subject matter of an Islamic financing transaction may require insurance, and such insurance must be in compliance with the principles of shariâ€™ah to be valid. Shariâ€™ah compliant insurance is based on the concept of al-Takaful which is a policy of mutual co-operation, solidarity and brotherhood against unpredicted risk or catastrophes, in which the parties involved, are expected to contribute genuinely.
There is therefore a need to fully develop the insurance industry in Nigeria, to ensure the provision of takaful services.
Shariah compliant transactions are based on real assets and are of benefit to the nation as they provide an alternative financial gateway to people who for religious reasons are inclined to Islamic finance or people who are seeking such alternatives.
It is recommended that the relevant authorities undertake sustained efforts to emplace the required regulatory framework and create the necessary financial products to create a robust foundation for Islamic Finance in Nigeria.
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