ISLAMIC BANKING: HOW IT WILL OPERATE IN NIGERIA

Sultan of Sokoto
The Central Bank of Nigeria (CBN) last week re-issued the latest guideline for Interest Banking (NIB) in Nigeria, otherwise known as Islamic Banking. This was followed by a grant of implicit approval to the country's first Islamic Bank.

This marks the advent of banking according to the divine guidance as given by the Holy Qur'an and the Sunnah of the Holy Prophet which embodies all aspects of the Islamic faith, including beliefs and practices.

CBN Governor, Mallam Sanusi Lamido Sanusi, and indeed other Islamic financial experts have touted NIB as the panacea for the ills of the overly capitalist driven financial systems of the world in the wake of the global economic meltdown. While the truth of this assertion is yet to be proved, there is raging argument on whether the framework is constitutionally, morally and socially acceptable to all Nigerians.

According to the apex regulatory institution, 'transactions, instruments and contracts under this type of services are non-permissible if they involve: Interest; uncertainty or ambiguity relating to the subject matter, gambling; speculation; unjust enrichment; exploitation/unfair trade practices; Dealings in pork, alcohol, arms and ammunition, pornography and other transactions, products, goods or services which are not compliant with Islamic rules and principles.'

Inclusivity, exclusivity of non-Muslims in NIFI services

The guideline, which became operational January, 2011, and signed by the Acting Director, Financial Policy and Regulation Department of the apex bank, Chris.O. Chukwu, interpreted Non-Interest Financial Institution (NIFI) as 'a bank or Other Financial Institution (OFI) under the purview of the Central Bank of Nigeria (CBN), 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.'

But following an extensive review of comments from stakeholders, the CBN re-issued the guideline which definition of NIFI only differs in the last phrase: '…in accordance with any established non-interest banking principles.'

This, the apex bank explained, is to give proper interpretation and allow individuals and groups wishing to practice non-interest banking based on established rules and principles other than Islamic, to apply for a licence to operate such institutions and the CBN will accordingly issue guidelines pertinent to that type of banking.

Chief Executive Officer, Pharez Consulting, Eghes Eyieyen expressed concern that by BOFIA stipulations, Islamic banking is illegal because the Central Bank of Nigeria has no power to make laws or narrow Non-Interest banking to Shariah principles ; stressing that 'CBN should sponsor a bill in the National Assembly if it must add anything to the extant laws. It cannot use a framework to change the law. It is not due process'.

He said though not against Islam, his fears was that the average Nigerian who does not understand the law, only knows at the moment that CBN want to Islamize Nigeria.

Eyieyen traced the origin of NIB to the Jewish practice of lending money by an Isrealite to a fellow Isrealite without charging usury or interest as commanded in Exodus 22:25, of the Holy Bible. In modern times, the principle of NIB is evident in venture capital and private equity funds after the financier have assessed the risk as acceptable.

'It works essentially on the principle of risk/profit sharing between the capital provider and the user and not in anyway, on specific Sharia principles,' he said. This view was shared by some analysts who have complained that the danger of mentioning religion in critical sectors of the economy is that some Islamic fundamentalists can capitalize on this to foment trouble. For instance, if they hear today that CBN has suspended action on Sharia banking, it is enough for them to start another riot in the North on the excuse that non-Muslims have denied them another opportunity to establish their own model of banking.

But in his defense, the CBN deputy governor in charge of financial system stability Dr. Kingsly Moghalu, quickly submitted that the apex bank is not doing anything illegal. 'CBN is using its derivative powers as a government agency operating under the laws of Nigeria. The latest guideline did not narrow NIB to Sharia principles anymore. So, we have to choose whether to discuss the old guideline or the new one. The laws of Nigeria provide for non-interest banking and CBN is obliged under the law to register and licence Non-Interest Financial Institutions,' he clarified.

Quoting from the new guideline, Moghalu stated that: 'Discrimination on any grounds in the participation by individuals or institutions as promoters, depositors or other relevant parties in any transaction regarding a non-interest financial institution, whether based on Islamic or other model, is strictly prohibited. Also, Section 23 (1) and section 66 of the Banks and Other Financial Institutions Act (BOFIA) 1991 (as amended) explicitly provides for the licensing of Non-Interest Banks (NIBs). The CBN is obliged, by law, to issue licenses to appropriate entities for the establishment of NIBs provided they meet the regulatory requirements for licenses. This circular supersedes all previous circulars on Non-Interest Banking in Nigeria.'

A legal practitioner Mr. Wole Shodipo expressed similar view with Eyieyen. He said CBN is not always right as evidenced in the case of Savannah bank Nigeria Plc, which it revoked some years ago only to be asked by the court to return the license to the bank as it erred in revoking it. He gave another instance on the previous CBN framework which he explained that inclusion of Sharia principles was not enshrined in the Nigerian constitution.

A group known as apostles in the market place (AiMP) in a document titled 'Re-purposing Capital: Non- Interest Banking in Nigeria and signed by its Executive Director, John C. Enelamah added that by its earlier interpretation of NIFI, the central bank has not only introduced Religion into banking but also added clauses that contravenes the Nigerian constitution. It explained that the idea of Non-Interest Financial Institutions (NIFI) had earlier been defined by BOFIA, as a profit and loss sharing Bank which transacts investments or commercial banking business and maintains profit and loss sharing accounts.

On this premise, AiMP Network comprising of Legal practitioners and other stakeholders in the financial system faulted the apex bank in several respects. The group reiterated that having mentioned 'Sharia' up to 26 times in earlier framework, CBN was bent on bringing religion into the banking system contrary to the spirit and letter of BOFIA, even though it has cleverly deleted it.

Also, AiMP questioned the rationale behind the proposed regulators like CBN Sharia Council (CSC), Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), Islamic Financial Services Board (IFSB) that are Islam specific in a country under a secular constitution. In this sense, they argued that by rolling out the framework for Islamic NIB, without framework for 'others,' the apex bank's action has narrowed it to Muslim faithfuls only.

'By insisting that Non-Interest Banking products must be Sharia compliant, the CBN has unjustly excluded non-Muslim Nigerians from engaging in Non-Interest banking business,' Aim Network stated. It further pointed section 16 1(d) of 1999 Constitution of the Federal Republic of Nigeria (as amended) which states that 'without prejudice to the right of any person to participate in areas of the economy within the major sector of the economy, protect the right of every citizen to engage in any economic activities outside the major sectors of the economy.'

Moghalu's response was that CBN has no intention to bring religion into banking and has led emphasis on Islamic banking because it is one aspect of non-interest banking out of many that have developed over the years in other countries. It is also an aspect of NIB that the apex bank has received a lot of applications for its establishment over the years. By this, he challenged non-Muslims to come up with applications on any model of non-interest banking, 'and it will be approved.'

Explaining the rationale for such regulators as AAOIFI, CSC and IFSB, the apex bank helmsman said that according to the principles and practice of Islamic NIB, every bank has a board that looks at products that the bank is selling to customers. This he added was to decide whether such products are in compliance to the precepts of Islamic commercial law. 'It is not a bank that is made in Nigeria. It was not invented in Nigeria and if we want to do that type of Non-Interest Bank, we have to have those boards,' he maintained.

Driving economic development
Despite its criticisms, AimP Network believed that going by the original interpretation of Non-Interest Banking, it enables persons, (and projects) whose credit risk is high and unattractive to conventional lenders and who have no collateral for loans to access capital.

Similarly, proponents of NIB have argued that despite an estimated $750 billion value placed on the global Islamic funds market by Standard Chartered Bank of London, a major global Shariah banking services provider, Nigeria is yet to tap into this huge market which is estimated to grow exponentially every year. Some believe that a Shariah compliant bank would actually help small businesses to grow, as people have already been discouraged by the high level of interest charged by commercial banks.

They greed in this aspect with AiMP that NIB enables persons (and projects) with high credit risk or inadequate collateral and hence unattractive to conventional lenders, to access capital. And also, that Non-Interest Banking could attract capital from non-profit seeking international organizations.

While the market awaits the operations of this line of banking, there are concerns about how well such venture would thrive given the limited investment outlet and the difficult business terrain in the country. But Hajara Adeola, Managing Director of Lotus Capital Limited, a pioneer Shariah and ethical investment services advisory firm, does not see this as a problem. She is of the view that Islamic finance is a universal field which applies to everybody and is of benefit to everybody.

According to her, 'Business not based on reality has been the cause of the global financial crisis. What was the reality of the transactions that created these bubbles was because they were allowed to trade in things that did not exist; nothing tangible.' She said the firm is selective of areas to invest in order to keep within the tenets of the Sharia rules. 'In Nigeria, we don't invest in the banking sector; we don't invest in breweries or gambling. People now ask, what else is there to invest? My question is: what is the percentage share of banking, brewery and gambling to our Gross domestic product (GDP)?'

She believes that there are other very viable sectors to invest in the economy that conform to Islamic principles. Agriculture, oil sector, telecoms, manufacturing, food, pharmaceuticals, transportation, beverages, real estate, infrastructure are some viable sectors for Islamic finance in the real economy she said. These are the main drivers of economic development.

Mrs Adeola explained that a major attraction of Islamic finance is that it thrives on genuine business transactions. 'It is a fallacy for people to think that Islamic finance is free finance. It is just finance around reality: Real trade, real service and real added value. There are three ways people make money in Islamic finance. The first one is trade. The other core aspect of Islamic finance is leasing and partnership. Lending money is not a business in Islamic finance. For the first time, it includes some people who have been previously excluded and that includes people who didn't want to invest with interest or in other forbidden sectors of the economy,' Adeola maintained.

Contraventions to BOFIA, Nigerian Constitution
Though, Moghalu said CBN has not announced the composition of the Advisory Council of experts and should not be predicted on this matter, Eyieyen believes that, by the proposed plan to establish the CBN Shariah Council, which he presumes would obviously comprise only Muslims, the CBN would be contravening the Federal Character Principle entrenched in Section 14(3), which states that 'The composition of the Government of the Federation or any of its agencies and the conduct of its affairs shall be carried out in such a manner as to reflect the federal character of Nigeria and the need to promote national unity, and also to command national loyalty, thereby ensuring that there shall be no predominance of persons from a few states or from a few ethnic or other sectional groups in that government or in any of its agencies.'

Also AiMP Network noted that the establishment of NIB was proposed by CBN would be Contravening the secularity of Nigeria 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'; Contravening the constitutionally-guaranteed freedom of religion as stated in Section 38 (1) that 'every person shall be entitled to freedom of thought, conscience and religion.'

Another aspect pointed out by AiMP in which they believed CBN seem to have re-jigged by removing 'Sharia' from the framework is Section 39 (1) of the BOFIA which stipulates that 'Except with the written consent of the Governor (a) no bank shall, as from the commencement of this Decree, be registered or incorporated with a name, which includes the words 'Central' 'Federal,' 'Federation,' 'National', 'Nigeria', 'Reserve', 'State', Christian', 'Islamic', 'Moslem', 'Quaranic', 'Biblical'. Yet, some legal experts have argued that since BOFIA stipulates that 'written consent of the CBN governor', he has every right to give consent to any bank that intends to be registered or incorporated with a name, which includes the words 'Central' 'Federal,' 'Federation,' 'National', 'Nigeria', 'Reserve', 'State', Christian', 'Islamic', 'Moslem', 'Quaranic', 'Biblical.'

Proponents of NIFI
Abdulateef Adegbite, the secretary general of the Supreme Council for Islamic Affairs and a director in the onetime proposed Jaiz Bank in his defence of NIB stated in an article that it is a wrong notion that Shariah banking is open only to Muslims. 'It is true that it provides a platform for Muslims to do their banking according to what the Quran says; no interest. It does not mean that non Muslims cannot also use the facility. In fact, if you read the Bible well, you will find under the old testament, interest was prohibited because it has always been destructive.'

Adegbite believed that Nigerian Constitution has not prescribed secularism for the country. This is premised on the fact that Nigeria is a multi-religious country which allows both Islam and Christianity to thrive. Indeed he argued, the Constitution expressly provides for religious institutions and laws. Sharia-Courts of Appeals are established for the Federal Capital Territory of Abuja (S. 270) and for those States that elect to practise Sharia Legal System (S.275).

'If our exalted Constitution expressly mentions 'Sharia,' what is wrong for a regulation promulgated by a Federal Agency like CBN including 'Sharia' in any of its official circulars or establishing a Sharia Advisory Committee to monitor the operation of a Sharia-based financial institution? The reference to the BOFIA prohibiting the use of religious labels for Banks and other Financial Institutions is only in respect of the registration of such bodies by the Corporate Affairs Commission (CAC). BOFIA, a Statute cannot override the Nigerian Constitution which has not forbidden reference to religious principles, ideas or institutions in any Legislation or Regulation,'

Adegbite revealed that the sponsors of the first Islamic Bank in Nigeria, the Jaiz International Plc in keeping with BOFIA on name restriction, has been registered without an Islamic nomenclature; stressing that the proposed Bank will also not discriminate in its operation in obedience to the Nigerian Constitution. 'Indeed, the Bank's Shareholders (owners) are both Muslims and non-Muslims and the customers of the Bank will be drawn from the adherents of both Islam and Christianity and of any other faith for that matter,' Adegbite said.

No less than 75 countries around the world he said, are operating Islamic Banking. Many of these countries do not have majority Moslem population. Big economic powers like the USA, Japan, Germany, UK, and France have been running Islamic Banks for decades. Up and coming Asian countries like Malaysia, Bangladesh, Pakistan, Iran, UAE (Dubai) have well established Islamic Banks. 'Even in Africa we have no less than 15 countries operating Islamic Banking; these include South Africa, Egypt, Senegal, Gambia, Niger, Kenya and our neighbour Benin. One wonders why Nigeria should be experiencing difficulties in embracing Islamic Bank with all the practices, norms and principles accompanying it, which though religious are not discriminatory,' he reiterated.

Another Islamic financial expert Abdulrahman Adangba, who is head of mission, Al fatul Quareeb Islamic Society of Nigeria said the current charges by commercial banks has made the concept of Islamic bank more expedient. 'It is the misconception that people have about Islam that is scaring them. We have been suppressed and oppressed by the current rate of interest charged by conventional banks. What the central bank is doing is in line with our interest,' Adangba was quoted as saying.

Striking a balance
Founder, Institute for Innovation, Integration and Impact, Brett Johnson, while speaking on Faith-based financing at a seminar in Lagos last week, remarked that non-interest banking is a little part of profit and loss sharing bank, which is a subset of faith- based financing, which is a subset of universal financial principles in morale law that is bigger than any of these. So Nigeria should go for the big picture. He wants Nigeria to go beyond Non-Interest Financing to re-purposing capital, because 'fear of isolation (as expressed by Muslims, Christians or Jews) and ideologies do not fix economies.'

According to him, faith based financing should be upheld, in which case, every financing should fulfill God's purpose including initiatives that create social value. He noted that a good faith-based financing should not isolate any group or religion. This type of financing he explained, should have transparency, serve a noble purpose, clearly articulate the risk for all parties, and generate wealth for the entire population. But it should be regulated from within; and should strive for appropriate interest because in some cases, zero interest may not be appropriate economically speaking, he stated.

However, Johnson advised that people should not rely so much on non- interest financing because even 'Sharia complaint banking products was a 'huge flop' in Britain for instance.' He was emphatic that Islamic banking has not produced necessary great returns over the years. 'Saying that everybody is doing it that is why we have to do it is not good enough reason. Why we have to go beyond Islamic banking is because those in government and those in finance should be doing things that are good for the nation as a whole,' said Johnson.

Any loss to the banking sector
Moghalu did not see any threat to the conventional banking, which the establishment of NIB would have, since he said, the non-interest banking is purely voluntary. According to him, the conventional banks would remain dominant.

Islamic Scholars are unanimous in their belief that Non-Muslim financial institutions or individuals have nothing to lose with Islamic Banks operating in Nigeria and on that premise canvassed for a display of objectivity, maturity, and embrace of tolerance and the spirit of live and let live. 'Non-Muslims have nothing to lose with Islamic Banks operating in Nigeria.

Rather the proven enormous economic advantages of this financial product would avail all, and assist in promoting wealth among the lowly in our society as well as encourage ethical financial behaviour that would reduce speculation and financial recklessness which led to the recent global economic meltdown and the gross financial abuses experienced in our local Banking Sector not too long ago,' said Adegbite.