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Islamic Banking Products and Challenges in Nigeria

December 25, 2016

In January 2012, the Central Bank of Nigeria granted Jaiz Bank an approval in principle to operate as a regional interest-free bank in northern Nigeria.  As a result of that, Jaiz bank became the first and the only full-fledged Islamic banking in Nigeria.  Islamic banking is based on the principles of profit and loss sharing.

Aliyu Abdullahi is an Abuja-based businessman who is into real estate and importing and selling of inverter generators. He is a beneficiary of Jaiz bank loan called contract financing.  He has been a customer of Jaiz Bank since 2013; he mentioned that he heard about Jaiz bank through advertisement and through Jaiz bank outreach to people through the mosque. Abdullahi is currently working on a project with Jaiz bank to develop their staff housing, and he got sixty million naira loan financing from Jaiz bank for his project.

“They fund the project and charge me money because it is a short term loan for duration of six months,” said Abdullahi. One thing that veered Abdullahi towards Islamic banking is the principles of profit and loss sharing which many clients like him perceived to be considerate. He said Jaiz bank opens door for him to do other things and also provided him with layers of extra transactions and offered him products ranging from home, auto and business financing, unlike the practice at conventional bank where Abdullahi says “customers are tied to the banking terms and conditions.”

According to Mr. Muhammed Nurul Islam, a manager at Jaiz bank, the bank offers what is called a mudaraba (profit- and loss-sharing deposit). And Jaiz bank does not finance any customer without a purpose; he  explain further that the primary means of Islamic finance are based on trading, and the bank trading activities are Sharia-compliant investments with the money deposited by customers. The customers and Jaiz bank share the risks and profits between them.

Moreover, Nurul Islam said  Jaiz bank does not charge interest, but the bank does make profit from helping customers to purchase a property by using what is called Ijara: ( lease to buy)  or Murabaha (cost-plus-sale)  scheme.  In accordance with an Ijara scheme, the bank makes money by charging the customer rent, however, with a Murabaha scheme; a price is agreed at the outset, which is often more than the market value.  They described this profit as a reward for the risk that the bank is undertaking.

Like any other Islamic banking, Jaiz bank is structured to retain a clearly differentiated status between shareholders capital and clients’ deposits in order to make sure profits are shared correctly. In 2012, Jaiz bank started with three branches namely in Abuja, Kaduna, and Kano. Aside Jaiz bank there are two international banks in Nigeria that also got license to operate a window of Islamic banking from the Central Bank of Nigeria, they are to conduct banking operations based on the system of Islamic Shariah law.  The banks are Stanbic IBTC Bank, and Sterling Bank Plc. They offered Islamic Finance Services and they are not full-fledged Islamic bank like Jaiz bank. The Central Bank of Nigeria recapitalization policy in 2004 required Deposit Money Banks minimum capital base of 25 billion naira required to obtain banking license to operate Islamic bank.

A new customer of Jaiz Bank is AbdulMuminu Shehu, a civil servant who works with the Federal Ministry of Works, in Abuja. Shehu opened an account with Jaiz bank in early June.  He got introduced to Jaiz bank through newspapers and billboards advertisements.

Shehu said he has a Jaiz bank debit card, and he is making use of Jaiz bank online services for his transactions. 

However, in the Jaiz bank provisions on the rules of Islamic finance, profit and loss also apply to foreign currency savings and the bank added that it is not responsible for foreign currency transaction exchange risks. 

According to the regulation of Central Bank of Nigeria, Islamic banking such as Jaiz must have an advisory committee to apply certain criteria of trustworthiness. The Bank’s Advisory Committee of Experts meticulously review the proposed products of Islamic bank to ensure they are Shariah compliance so that they will satisfy the overall objectives of Shariah in terms of bringing benefit and eliminating harm to the society as well as protecting the interest of all stakeholders.  Dr. Monzer Kahf, who is the Chairman Advisory Committee of Experts for Jaiz Bank, and also a professor of Islamic Finance at The Qatar Faculty of Islamic Studies under the umbrella of Hamad Bin Khalifa University, mentioned that the experts advised the bank on the contracts made from the Sharia point of view not from the commercial point of view. “We offer advice on the Shariah aspect.”  He said.

Dr. Kahf also said that according to the regulation of Central Bank of Nigeria, a member of the advisory committee of experts of Jaiz Bank or any other Islamic bank cannot be on the board of another Islamic bank or finance in Nigeria as an expert.  In essence, they cannot be an expert in more than one bank.

Dr. Kahf said under Jaiz Islamic banking arrangement a depositor becomes partner with the bank, and they shares liability together with the bank. He called the depositors dormant partners and they trust Islamic banking to deposit their money for them.  He said money is not an asset in Islam which is ethically permissible to earn a direct return.  Dr. Kahf continued that Islamic bank does not lend money in the real sense of it because there is no real lending in Islam. He said all “lenders” like Jaiz bank  obtain ownership interests in the assets  that they finance,  by obtaining an equity, or ownership , interest in a non-monetary asset enables the lender to also participate in the sharing of the risk.

One of the reasons why Isah Sani a taxi driver in Abuja transferred his money to Jaiz Bank about a year ago was because he thought their service was outstanding compared to conventional banks in Nigeria. “Jaiz bank is safer because of my experience with the First Bank via my branch at Mararaba,  I walked up to my branch ATM to withdraw my money, in fact; the machine sent an error signal to me including a receipt of payment while in reality I did not receive anything.  That is why I left the First Bank.”

Coming from a Muslim background has been an important reason why some felt they needed to open an Islamic bank account because it was a religious preference.   AbdulMuminu Shehu, a civil servant, said, “As a Muslim, I felt I needed to open an Islamic bank account and Jaiz been the first of its kind, I decided to take the opportunity of opening one.”

 According to Professor Ahmad Bello Dogarawa of the Department of Accounting at Ahmadu Bello University in Zaria, Islamic banking in Nigeria will prevent the ring of monopoly that conventional banks are enjoying in Nigeria, and it will, in turn, prevent banks from charging prohibitive interest rates as well as hidden charges.

Dogarawa who is also on the Jaiz bank Shariah advisory committee board of experts said Jaiz bank products are interest-free, and devoid of gambling and unacceptable risk, and are of benefit to investors and customers. Dogarawa discussed the untapped business potential in Nigeria that Islamic banking will generate. He cited the 2011 Central Bank of Nigeria report that said a total of 39.2 million adult Nigerians (46.3 percent) of Nigeria’s population were financially excluded in 2010.

The analysis revealed further that in 2010,  54.4 percent of the excluded population were women, 73.8 percent were younger than 45 years, while 34.0 percent had no formal education, and 80.4 percent resided in rural areas. Northern Nigeria is further disadvantaged, with 68 percent of adults excluded in both the North-East and North-West regions.  

As Dogarawa put it, “Financial exclusion is voluntary where non-users have access to financial products and or services but decide not to use them because they do not need them or because they do not want to use such services due to religious, cultural and other reasons.”

Dogarawa opined that voluntary exclusion due to religious belief has been a phenomenon among Muslims which constitute slightly more than 50 percent of Nigeria 170 million populations.  And he is of the view that Islamic banking has the potential to tap a large chunk of the savings and businesses belonging to Muslims and non- Muslims in the country who voluntarily exclude themselves from financial services due to religious and ethical reasons.

Certainly, Islamic banking also has appeal to students such as Aisha Abubakar who got introduced to Jaiz bank through her brother.  She said she gave up conventional bank and opened Jaiz Islamic bank account because she intends to use it for her future savings. Not all   Jaiz bank customers are Muslims, the bank also has some Christian customers, an anonymous Abuja-based businessman and a Christian customer of Jaiz bank who spoke for this interview said his friend car and mortgage were financed by the Jaiz bank. The anonymous Christian customer also explained why he decided to bank with Jaiz bank. “It is always better to bank with Jaiz and basically for some of us who wants to do business, although I am a Christian, when we came into the bank to see how the finance operations are being done and from our findings, we saw that all process are open not subject to terms and conditions. When Jaiz bank offers you its financial services, you know the time it is expiring, it made life easier.”

According to Jaiz bank financial disclosure in 2014,  Jaiz bank witnessed year of remarkable growth with total assets moving in double digits by about 24 percent from ( 33.9 billion naira) in 2013 to 42 billion naira in 2014 while total income increased by 220 percent.

One of the challenges for Islamic banking in Nigeria is to make sure they are not mixing funds meant for Islamic investment with interest based operation such as the electronic payment mandate for the production of the Permanent Voters Card that The Independent National Electoral Commission (INEC) paid to the contractor ACT Technologies Limited, in 2013 and 2014 through Jaiz bank and the conventional bank known as the First City Monument Bank.

According to Dogarawa, funds meant to be used for Shariah-compatible investments are expected not to be mixed with those of non-Islamic investments in order to satisfy the important principle of sanctity and moral purity of all transactions for Islamic financial institutions. “The Central Bank of Nigeria has clearly spelled out this requirement in its guidelines for non-interest financial institutions in Nigeria.  All the banks operating Islamic banking windows in Nigeria has the duty to ensure compliance with that requirement. However, studies have found that generally for conventional banks that operate Islamic banking window across the globe, adherence to this requirement is sometimes difficult.”

Regulatory challenges are another issue facing Islamic banking in Nigeria.  Banking regulations in Nigeria works on a market-driven model, and the institutional and legal framework for the banking system in Nigeria are structured in the line of the conventional financial system, and the enforcement of Islamic banking operations in the court of law would pose a problem without implementing Islamic laws in Nigerian legal system.

There are some misconception that Islamic banking believes in redistribution of wealth and income. But scholars like Dogarawa and Kahf explain that Islamic bank support wealth creation, enhancement, management and distribution. According to them, Islamic banks often extend benevolent loans called (Qardul Hassan) to deserving members of the society from deposits that are not meant for investment with the permission of depositors of such funds in order to facilitate wealth and income distribution. Islamic bank like Jaiz also encourage and remind Muslim investors and shareholders to give out what is called Zakat from their wealth. (Zakat is obligatory annual payment under Islamic law on certain kinds of property for charitable and religious purpose).

Finally, I wondered why Jaiz bank like most Islamic banks doesn’t have a woman on its advisory board of experts. And why are Jaiz bank directors that believe in the ethos and value system of Islam, interest-free banking are among the highest paid bankers in Nigeria?

 Some critics pointed out that Islamic banking only created a monetary world with claims on claims of assets rather than used money for production of physical assets. However, Dogarawa disagrees, “The modus operandi of Islamic banking knows that realism is a unique feature of Islamic banking. Islamic banks deal with real assets or products. On the contrary, conventional banks largely create debt and deal with fictitious, in-existent assets.”

Ademola Bello, the author of this article, lives in New York City. Salamatu Sule in Abuja also contributed reporting.