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Islamic Banking: The CBN’s Role

By newswatchngr.com 21/08/2011 10:23:00

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The Central Bank of Nigeria is not a promoter of Islamic banking but only issued guidelines concerning its introduction

The most contentious policies of the CBN is the non interest (Islamic) banking, which is geared at widening the scope of financial inclusion in the country as well as enabling the Moslems to conduct financial transactions in a mode that best suits their religious belief. It is so contentious that steps taken recently to realise the setting up of Jaiz Bank polarised the country along the Christian-Islamic divide. However, the overriding question should be; Why do we need it?

One, it is another means of attracting the much needed foreign investment to develop infrastructure in Nigeria. It is a means of guaranteeing financial inclusion for more Nigerians. Secondly, non-interest (Islamic) banking is a form of specialised banking like merchant banking, investment banking or micro-finance banking that could be used as positive catalysts in the banking sector. Thirdly, it is a global financing business worth over $1trillion.

More importantly, Islamic banking is for anyone who desires a non-interest, profit-sharing form of banking and finance irrespective of his or her religious affiliation. If it is so, why call it “Islamic banking” then? Because it is a type of non-interest banking system whose guidelines are based on the Islamic Commercial Jurisprudence. It refers to a system of banking or banking activity that is consistent with Islamic law principles and guided by Islamic economics. This is how it is called in all the countries where the product has been introduced around the world, whether secular or Islamic.

Islamic jurisprudence means that the operations and activities of Islamic banking must conform to prohibition of financing businesses in the areas of alcohol brewing, pornography, gambling, excessive risk-taking. However, you do not have to be a Muslim to benefit from the non-interest Islamic banking product. In addition, Islamic banking is also non-discriminatory in terms of employment and ownership.

At this point it is important to understand that the CBN is not promoting Islamic banking. However, as the regulator of the Nigerian banking industry, the CBN is obligated to issue guidelines for any banking product that is lawfully introduced within the banking system and also educate and inform the Nigerian public on it. The business of promoting the product is up to the commercial banks offering non-interest/Islamic banking to carry out themselves and attract customers. And this is not what the CBN is doing.

The history of Islamic banking in Nigeria dates back to the 1990s, when Habib Bank applied and got CBN’s approval to set up an Islamic banking window. In 2004, the Jaiz International Bank applied to set up a non-interest bank based on Islamic principles and was given an approval-in-principle in 2005 by the CBN. The draft framework/guideline for the operations of non-interest/Islamic banking was approved in 2009. This guideline was left for comments from stakeholders for eight months and was subsequently updated and released in January 2011. However, it was further revised in June 2011 to address some stakeholders’ observations.

Legally, the evolution of non-interest banking in Nigeria actually began in 1991 with the amendment to the Banks and Other Financial Institution Act, BOFIA. Hence, in 1996, the CBN granted approval to Habib Nigeria Bank to deal in Islamic banking products. In 2004, Jaiz International Bank Plc applied for a full fledged Islamic banking license and was granted approval in principle, AIP, to that effect. However, it could not meet the new capital requirement.

Also, in 2004, a team led by a CBN Deputy Governor went to Malaysia to study the operations of Islamic banking in the country. In 2008, Islamic Finance Working Group comprising of Nigeria Deposit Insurance Corporation, NDIC, National Insurance Commission, NAICOM, Pension Commission, PENCOM and Security and Exchange Commission, SEC, was established. And in 2009, the CBN under the immediate past governor, Professor Charles Chukwuma Soludo, applied for membership of Islamic Finance Service Board and got admitted.

In taking cognisance of the fact that operational licence cannot be granted without a supervisory/regulatory framework, the CBN decided to expose the draft framework on Non-Interest Banking for comments and inputs by industry stakeholders. However, by the time the CBN released the guideline, some gaps were noticed as it was discovered that no variant was mentioned about the dichotomy between non-interest Islamic banking and other form(s) of non-interest banking.

Moreover, the phrase ‘Sharia Advisory Council’ was repeatedly used in the document. Hence, the CBN has revised the guideline to take care of the variants between the non-interest Islamic banking and the other forms of non-interest banking while at the same time replacing the ‘Sharia Advisory Council’ with ‘Advisory Council of Experts’.

The legality of the non-interest Islamic Banking is derived from Section 33 (B) of the Central Bank of Nigeria Act of 2007, which states that “in addition to any of its powers under this Act, the Bank may –Issue guidelines to any person and any institution under its supervision.”

Currently, non-interest Islamic banking is in vogue in many countries that share the same secular environment like Nigeria. While it is true that moslems majority states are leading in Islamic finance, it is currently being operated in more than 75 countries across the globe. These countries include the United Kingdom, France, Luxemburg, Japan, USA, Kenya, Zambia, Senegal to name a few. Indeed, UK ranks 8th above many predominantly Muslim states like Turkey and Sudan in terms of Islamic global banking assets.

There is a major difference between a non-interest Islamic banking and other forms of non interest banking. While a non-interest banking model carries out banking devoid of interest charges, a non-interest Islamic banking is ethically oriented in the sense that it is practised in accordance with Islamic Commercial Jurisprudence which prohibits dealings in unethical products such as gambling, alcohol, prostitution, unjust enrichment and speculation. It is also based on profit and loss sharing concept where it makes most of its profits apart from administrative charges.

The major benefit of non-interest banking in Nigeria is the financial inclusion of millions estimated to be above 50 percent of the population into the formal banking system by presenting them with an alternative form of banking. It will also further the much needed deepening of Nigerian financial system with the introduction of new financial instruments.

Above all, the beauty of non-interest Islamic banking is that it does not discriminate in term patronage, employment and ownership. As stated earlier, France, UK and Luxemburg are all competing to become the hub of Islamic Finance in Europe. Statistics have shown that between 40 and 50 percent of customers of Islamic banks in some of these countries are non- Moslems.

Here in Nigeria, majority of the customers of Islamic banking products in Habib Bank are Christians. Also one of the major shareholders in Jaiz Bank is a Christian. For the Moslems, it is an alternative to conventional banking but for Christians, it should be seen as an additional product.

The regulation of the non-interest bank would be an additional task for the CBN. Yet, the apex bank is making use of the experts at its disposal to ensure that its implementation would be a success. It has also embarked on continuous training and retraining to boost the capacity of its staff in all aspect of banking. In this regard, the CBN is also collaborating with established international institutions and consultants to ensure a seamless and adequate supervision of the institutions.