Several years of religious and sectarian crisis have ensured that Nigerians are wary of anything remotely associated with religion; this has been the bane of controversies that have trailed the Central Bank of Nigeria’s (CBN) drive for Islam system of Banking. However, from the interactions in the mainstream and social media it has become rather obvious that those who are suspicious of this financial system do not have the requisite information, rather their opposition stems from the single fact that it has religious colouration.
Islamic banking or participant banking or as the more popular name it is being known as in Nigeria –non interest banking is banking or 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 on 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 was 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.
An early market economy and an early form of mercantilism were developed between the 8th-12th centuries, which some refer to as “Islamic capitalism”. The monetary economy of the period was based on the widely circulated currency the dinar, and it tied together regions that were previously economically independent. Many of these early capitalist concepts were adopted and further advanced in medieval Europe from the 13th century onwards.
Islamic banks and banking institutions that offer Islamic banking products and services (IBS banks) are required to establish a Shariah Supervisory Board (SSB) to advise them and to ensure that the operations and activities of the banking institutions comply with Shariah principles. On the other hand, there are also those who believe that no form of banking that involves interest payments can ever comply with the Shariah.
One of the major features of ISB is the word “Riba” means excess, increase or addition, which according to Shariah terminology, implies any excess compensation without due consideration (consideration does not include the time value of money).
The criticism of usury in Islam was well established during the lifetime of the Prophet Muhammad and reinforced by several of verses in the Qur’an dating back to around 600 AD. The original word used for usury in this text was Riba, which literally means “excess or addition”. This was accepted to refer directly to interest on loans so that, according to Islamic economists by the time of Caliph Umar, the prohibition of interest was a well-established working principle integrated into the Islamic economic system. This interpretation of usury has not been universally accepted or applied in the Islamic world. Nevertheless, there has been a gradual evolution of the institutions of interest-free financial enterprises across the world” They cite, for instance, the current existence of financial institutions in Iran, Pakistan and Saudi Arabia, the Dar-al-Mal-al-Islami in Geneva and Islamic trust companies in North America.
Islamic banking has the same purpose as conventional banking: to make money for the banking institute by lending out capital but because Islam forbids simply lending out money at interest (see riba), Islamic rules on transactions (known as Fiqh al-Muamalat) have been created to avoid this problem. The basic technique to avoid the prohibition is the sharing of profit and loss, via terms such as profit sharing, safekeeping, joint venture , cost plus and leasing.
In an Islamic mortgage transaction, instead of loaning the buyer money to purchase the item, a bank might buy the item itself from the seller, and re-sell it to the buyer at a profit, while allowing the buyer to pay the bank in installments. However, the bank’s profit cannot be made explicit and therefore there are no additional penalties for late payment. In order to protect itself against default, the bank asks for strict collateral. The goods or land is registered to the name of the buyer from the start of the transaction; this is similar to real estate leasing. Islamic banks handle loans for vehicles in a similar way (selling the vehicle at a higher-than-market price to the debtor and then retaining ownership of the vehicle until the loan is paid).
There are several other approaches used in business transactions in Islamic Banks, one of them is venture capital funding of an entrepreneur who provides labor while financing is provided by the bank so that both profit and risk are shared. Such participatory arrangements between capital and labor reflect the Islamic view that the borrower must not bear all the risk/cost of a failure, resulting in a balanced distribution of income and not allowing the lender to monopolize the economy.
Islamic Banking is growing at a rate of 10-15% per year and with signs of consistent future growth, they have more than 300 institutions spread over 51 countries, including the United States through companies such as the Michigan-based University Bank, as well as an additional 250 mutual funds that comply with Islamic principles. It is estimated that over US$822 billion worldwide sharia-compliant assets are managed according to The Economist. This represents approximately 0.5% of total world estimated assets as of 2005. According to CIMB Group Holdings, Islamic finance is the fastest-growing segment of the global financial system and sales of Islamic bonds rose to almost 24 percent representing $25 billion in 2010. The Vatican has also put forward the idea that “the principles of Islamic finance may represent a possible cure for ailing markets.”
Shariah-compliant assets reached about $400 billion throughout the world in 2009, according to Standard & Poor’s Ratings Services, and the potential market is $4 trillion. Iran, Saudi Arabia and Malaysia have the biggest sharia-compliant assets.
Aside opening up the frontier of financial services, ISB has greater benefits than disadvantages to the average Nigerian looking to invest money in non-interest and vice free sectors. However, it still remains just a choice amongst many other financial packages and as such it does not spell the end of mainstream commercial banks.