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Islamic Banking in Nigeria, Another Option

Started by bamalli, April 29, 2013, 11:38:42 PM

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bamalli

Islamic Banking in Nigeria, Another Option

By

Sani Adamu Danbatta

sanidanbatta@yahoo.com

Islamic banking has the same purpose as conventional banking except that it operates in accordance with the rules of Sharia, known as Fiqh al-Muamalat (Islamic rules on transactions). The basic principle of Islamic banking is the sharing of profit and loss and the prohibition of riba´ (interest). Amongst the common Islamic concepts used in Islamic banking are profit sharing (Mudharabah), safekeeping (Wadiah), joint venture (Musharakah), cost plus (Murabahah), and leasing (Ijarah).

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 fact that it is 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 arrangement is called Murabaha.

Another approach is Ijara wa Iqtina, which 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 deals. Islamic banks lend their money to companies by issuing floating rate interest loans. The floating rate of interest is pegged to the company's individual rate of return. Thus the bank's profit on the loan is equal to a certain percentage of the company's profits. Once the principal amount of the loan is repaid, the profit-sharing arrangement is concluded. This practice is called Musharaka. Further, Mudaraba 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 lender to monopolize the economy. And finally, Islamic banking is restricted to islamically acceptable deals, which exclude those involving alcohol, pork, gambling, etc. Thus ethical investing is the only acceptable form of investment, and moral purchasing is encouraged. JAIZ International is trying to see that it has establish an Islamic bank in this country, however with the review of Capital adequacy in Nigerian banks, the Islamic bank is delayed. Although the N25B Capital base is one condition for the establishment of an Islamic bank in Nigeria, but we see that there is more to meeting this CBN condition. The most important required conditions are: Managerial commitment, sharia supervisory board, safeguarding Muslim investor's fund and compliance with AAOIFI standards. Managerial commitment: The management must be fully convinced of the concept and fully committed and dedicated to it. Unless the entire management is committed and convinced, the business activities and the enterprise will not be foul free or will not escape irregularities and deviation. Regardless of how strict and stringent fatwa and contracts are, this will not ensure sound practices if there is no one sufficiently SINCERE and committed to implement the principles.

• Sharia Supervisory Board: There should be a sharia supervisory board for any Islamic bank, and that board should consist of trustworthy scholars who are highly qualified to issue fatawa on financial transactions.

Giving our present situation within the MUSLIMS today how do we constitute the members of the board? Another issue is TRUST from the customers who may use the banks fund, when it comes to profit sharing. Last but not the least is ENLIGHTEMENT, many people even within the Muslim are not aware of how Islamic banks operate. Therefore there is urgent need for a serious enlightenment to the public on operational modalities and requirement of an Islamic bank. Other options that may be considered by JAIZ or even states like SOKOTO, KANO BORNO, KATSINA etc is to establish an ISLAMIC MICRO FINANCE at local government level. The recently approved MICRO FINANCE BANKS can be converted to an Islamic one. In a symposium held at Harvard University on FINANCING THE POOR: Towards Islamic Microfinance some time last year, Nazim Ali has pointed out that Microfinance is not reaching the poorest of the poor, even though this is its purpose, and loans are going to activities unrelated to entrepreneurship. Islamic finance could, in principle and in practice, correct these defects. Robert Annibale, global director of microfinance for Citigroup, shared his insights into both Islamic finance and microfinance. He described microfinance institutions as self-styled "bankers of the poor `, originally rooted in domestic, local markets but increasing expanding into larger markets and offering a broader range of services. He noted that the high operating costs, passed on to the customer in the form of high interest rates, are a hurdle for the poor. He felt that this was where there is potential for Islamic finance to make a difference. Under conventional microfinance, risk is borne by borrowers and rarely held by the institutions. Islamic finance focuses on interest-free methods of providing capital, because the shari'ah holds lending to be a purely charitable exercise, rather than a means of making a profit, Islamic finance is also accustomed to methods of risk-reward sharing between the institution and the borrower. Islamic microfinance banks have grown significantly in countries like Pakistan, Indonesia, Malaysia, and Bangladesh. In fact, Islamic microfinance institutions enjoy greater penetration than traditional commercial banks in Bangladesh. It is high time for us here in Nigeria (particularly in the north because the south have started) to start introducing Islamic microfinance banks which will graduate to a full BANK in future.