Nigeria: Investigating Islamic Finance In Nigeria

Last Updated: 17 April 2014
Article by Rahman A. Oshodi

Islamic finance refers to a profit and loss sharing economic policy based on Islamic commercial jurisprudence which promotes ethical and social responsibility and forbids: Interest (Riba); investment in activities characterised as "sinful" (Haram); speculation, betting and gambling (Maisir); and preventable uncertainty (Gharar). Also, hoarding and other trade practices regarded as unfair and exploitative are prohibited.

The Islamic financial model draws inspiration from the Quranic injunction in Chapter 2: 275 that "God has permitted trade and has forbidden interest". This prohibition on interest is not unique to the Quran and similar idea is contained in the authoritative texts of Judaism, Hinduism, Bhuddhism and in the Bible. In fact, the words of Jesus Christ as recorded in Luke 6:35 instructs Christians to "lend freely hoping for nothing again". Deuteronomy 23: 19 – 20 and Exodus 22:25 denounce interest as well. Thus, for the Christians who lived in the middle ages, the church considered interest as a sin of usury. Earlier, the Greek Philosopher, Aristotle, had criticised interest, calling it: "the most hated sort of wealth getting".

In Nigeria, the practice of Islamic finance was introduced in 1992 by the former Habib Bank (Bank PHB, and now Keystone Bank) following the promulgation in June 1991, of the Banks and Other Financial Institutions Decree (BOFID – as amended). Section 66 of that law introduced the term "SPECIALISED INSTITUTIONS" for which Islamic finance is a model. Other forms of specialized institutions recognised by BOFID include: Nigerian Industrial Development Bank, Nigeria Agricultural and Corporative Bank, Nigerian Export and Import Bank, Nigerian Bank for Commerce and Industry, the Urban Developmental Bank, Federal Mortgage Bank, Microfinance banks, Mortgage banks, Community Banks and such other banks as may be designated from time to time.

The profile of this type of banking was again raised between 2008 and 2009 when Nigeria joined the Islamic Financial Services Board (IFSB). Later, the CBN issued framework dated January 13, 2011 to regulate Islamic finance in Nigeria. That framework was re-issued in June 21, 2011; replacing the old one and offering two forms of Non Interest Financial Institutions (NIFIs) to wit: (i) NIFIs based on principles of Islamic commercial jurisprudence; and (ii) NIFIs based on any other established rules and principles.

The legal basis for this regulation is section 33 (1) (b) of the CBN Act which permits the CBN to issue guidelines to any person and any institution under its supervision. In this connection, it is submitted that guidelines issued by the CBN Governor from time to time, including this one are BYE LAWS or SECONDARY LEGISLATIONS and forms part of Nigerian law. A secondary legislation occurs where an executive authority makes laws under powers given by a primary legislation (as enacted by the legislature); and can be challenged by way of Judicial Review.

Section 66 of BOFID introduced the idea of a "PROFIT AND LOSS SHARING BANK". This opened the way for banks in Nigeria to engage in commercial banking business and maintain a profit and loss account. In July, 2011 the CBN granted licence to Stanbic IBTC Bank to operate an Islamic banking window and subsequently to Sterling Bank in 2013; the CBN had earlier granted approval for the establishment of Jaiz Bank to operate as the first full-fledged Islamic bank in Nigeria.

The CBN's regulation tolerates the establishment of nine versions of an Islamic financial institution to wit: (i) Full-fledged Islamic bank or full-fledged Islamic banking subsidiary of a conventional bank; (ii) Full-fledged Islamic merchant or full-fledged Islamic banking subsidiary of a conventional merchant bank: (iii) Full-fledged Islamic microfinance bank: (iv) Islamic branch or window of a conventional bank; (v) Islamic subsidiary, branch or window of a nonbank financial institution; (vi) A development bank regulated by the CBN offering Islamic financial services; (vii) A primary mortgage institution licensed by the CBN to offer Islamic financial services either full-fledged or as a subsidiary; and (viii) A finance company licensed by the CBN to provide financial services, either full-fledged or as a subsidiary.

With the implementation of this regulation, it is open for investors of varying philosophies to establish NIFIs based on, for example Christian perspectives - and commonly known as "FAITH BASED FINANCING". Faith Based financing (including those that are based on Jewish standpoint) have existed long before the formal introduction and adoption of Islamic banks in Dubai and the UAE in 1975. First Hope Bank, New Jersey USA; is an example of faith based financial institution and has been operating since 1911. The Hebrew Free-loan Society; JAK Members Bank, Sweden and other small Faith-Based Credit Unions exist around the world providing low-income communities, families and individuals with access to a range of financial products and services including but not limited to: (i) loans for first-time home buyers; (ii) small business development and (iii) loans financing for college education or other job trainings.

The starting point for the establishment of Islamic banks is the Nigerian Constitution. Section 4 empowers the National Assembly to make laws; the National Assembly made the CBN Act and BOFID (which was originally a Military Decree and now forms part of Acts of the National Assembly). The CBN Act created the office of the CBN Governor and empowers him to issue guidelines; thereby delegating law making powers to the CBN Governor who issues guidelines from time to time to regulate economic policies, interest rates in order to properly supervise banking and other allied matters. The CBN Governor rightly exercised his powers by making regulations to promote and establish Micro-finance banks, Mortgage banks, Developmental banks and now Islamic banks (or Non-Interest Financial Institutions as the case may be). It is submitted therefore, that the CBN regulation on NIFIs forms part of Nigeria's law on banking matters and can only be set aside by a Federal Judge if found to be: (i) unreasonable, (ii) irregular and (iii) made in excess of jurisdiction.

In sum, Islamic finance supplies credible, rational and accessible model of non-interest banking. It has been tested successfully in other jurisdictions, but for Nigeria to benefit from this economic model (that exists in over 75 countries and has over 435 institutions managing almost US$1 trillion as at 2010 - and projected to rise to about US$4 Trillion in 2020) to grow in Nigeria, the governing laws and regulations must be written and subject to interpretation and analysis.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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