Nigeria: Interest in non-interest banking

Nigeria's plans to further develop its Islamic finance sector received a major boost on June 20 when the Central Bank of Nigeria (CBN) granted a local bank provisional approval to operate as an Islamic bank and unveiled plans to issue a sovereign sukuk in the coming years.

On the sidelines of the International Islamic Finance Forum in Dakar in late June, it was announced that Jaiz Bank International has six months to comply with terms laid out by the CBN to get a final licence. The central bank rolled out guidelines on sharia governance for Islamic banking earlier this year, although later clarified the regulations by ensuring they applied to all non-interest banking services.

During a speech at the conference, CBN’s governor, Malam Sanusi Lamido Sanusi said Islamic banking has the potential to boost Nigeria's economy and provide financial solutions for the country’s 60m Muslims. “Islamic banking is a model of non-interest banking and profit and loss sharing banking recognised by our laws," Sanusi said.

Islamic banking is a $1trn global industry operating in more than 75 countries, with nations like Malaysia, Bahrain and Turkey benefitting from the system. Even countries without significant Muslim populations, such as the UK and South Africa, are successfully taking part in the industry, which proved to be resilient during the financial crisis.

Mohammed Lawal, a Deutsche Bank vice-president and specialist in Islamic derivatives, told Reuters in May that the lack of regulatory frameworks has meant that the sector had yet to achieve the same growth in Africa as in other regions with large Muslim populations.

According to draft CBN guidelines, domestic banks offering non-interest banking products and services shall not include the words “Islamic” as part of their registered or licensed name. Non-interest banks must pay a non-refundable application fee of N500,000 ($3157) and deposit at least N25bn ($157.9m) with the regulator. Furthermore, six months after provisional approval, a proposed bank must submit an application for the final banking licence with a non-refundable licensing fee of N5m ($31.57m) payable to the CBN.

The central bank is also planning to issue its first sovereign sukuk, or Islamic bond, within 18 months. However, the process has just started and the finance minister and the Debt Management Office have yet to decide the amount issued by the bond.

“Hopefully by the end of the year, we will have one Islamic bank in operation, about five banks operating Islamic banking windows and we will start looking at developing an Islamic money market,” Sanusi said at the Dakar conference.

Jaiz, who for the past seven years has been offering profit-sharing non-banking financial services in the country, is expected to offer micro credit finance, cost-plus financing (Murabaha), leasing (Ijarah), trust financing agreements (Mudarabah), equity participation (Musharaka) and Istisnaa (a contract for the acquisition of manufactured goods), alongside typical banking services.

Despite the CBN’s assertions that Islamic banking will benefit the economy, there are challenges to implementing the system. These include a lack of knowledge and skills in the areas of regulating, supervising and operating non-interest banks. Additionally, there are few workers with experience in project management and Islamic jurisprudence, which are required for financing and marketing activities.

The initiative has also met with religious controversy. The prominent Anglican Bishop of Enugu, Reverend Emmanuel Chukwuma told media this month that a religious bank “would pose a serious threat to the unity of the country” and that his church opposed the move due to its “religious connotations.”

The remarks were swiftly rebuffed by Muslim Rights Concern (MURIC), a non-governmental organisation. “At present, Muslims are forced to patronise financial institutions which operate riba [charging interest on loans] and which compel Muslims to act against their faith. This is a clear indication of a lack of religious freedom,” the group’s director, Is-haq Akintola, said in a statement reported in the local press.

Sanusi himself has told media that Islamic banking has nothing to do with promoting religion, but is simply another financial product designed to diversify and broaden the scope of banking services available to customers.

The momentum behind the Islamic banking initiative is hoped to help encourage diversification and competition in the banking sector after the CBN admitted that eight banks rescued in a 2009 bailout remained in a “grave situation”, though all eight showed positive earnings in 2010 results. The CBN has set September 30 as the deadline for a recapitalisation of the banks.

The central bank’s strong line on the rescued banks comes alongside plans to introduce a daily withdrawal/deposit limit of N150,000 ($947) for individual account holders and N1m ($6314) for corporate bodies. The limit, according to the CBN, is designed to reduce the cost of cash processing in the industry and encourage the use of electronic payment options.

With new options opening up for Islamic finance alongside rebounding earnings in conventional institutions, growth in the sector appears to be something Nigerians can bank on.