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As the controversy over the introduction of non-interest (Islamic) banking rages, three experts, Professor Pat Utomi, Dr. Kingsley Muoghalu and Ismail Rawdan in separate analysis of the issue, argue that the banking model has the potential to make significant impact in the nation’s financial services sector. CHRISTIAN OCHIAMA reports
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Suddenly, non-interest banking bursts into the nation’s financial discussion in a manner that suggests it is altogether novel. But Professor Pat Utomi of the Lagos Business School disagrees and insists that the financial model is not new. In a recent interview, he said, “non interest banking as it is called is not a new thing. Non interest banking in the modern era predates Islamic banking.”
To justify his assertion, the university don made reference to Jerks Banking methods used in the Scandinavian countries in the 1930s which were interest free and they were not Islamic banking.
He went on to say that the controversy so far generated by the introduction of Islamic banking in Nigeria was unnecessary if a concerted public education on the matter was carried out prior to its introduction and pointed out that “given the sensitivities in our country, if there had been a little care in the way it was communicated, people would not have become as sensitive as they have become.”
The economic expert disclosed that , ”I personally was a big promoter of the model after I had the opportunity of delivering a lecture on it. I don’t think there is anything in principle wrong with it. Only that it is not being properly sold and it is now creating misgivings”.
An Egyptian World Bank chief, Mr Ismail Rawdan at a seminar on the subject recently in Abuja agreed with Utomi on that score and stressed that the Central Bank, in promoting the banking model, has a lot of public education to carry out to enable the Nigerian public buy into it.
He thinks the CBN still has a lot of work to do in terms of public education regarding what is involved in this non interest banking institution
The World Bank chief stressed that, “I think it should be made very clear from the beginning that it should be open to people of all religions. I think there’s a lot of explaining to do that as a financial institution it should be open to everybody”.
The angle to non interest banking that is generating controversy is its relation to faith. But Rawdan maintains that Islamic finance is not restricted to muslim populations only.
He observed that Africa has witnessed an expansion of Islamic finance across the region with Islamic banks currently operating in Botswana, Djibouti, the Gambia, Guinea, Kenya, Mauritania, Niger, Senegal, South Africa and Sudan.
Rawdan went further to expatiate on the main drivers of this perceived growth. For him, on the supply side, the rush into the Middle East of petro-dollars in the 1970’s and the resultant banking expansion in the region helped fuel this growth. This, Rawdan noted, was followed by the post 9/11 repatriation of capital from Western Europe and the United States of America as well as the expansion into Africa. On the demand side, the World Bank chief said the growth of Islamic banking is driven by the appeal of a “faith based banking system” that is anchored on the principles of Shar’iah coupled with distrust of conventional banking following numerous scandals and frauds.
In Nigeria, the Central Bank of Nigeria,(CBN), Deputy Governor Financial Systems Stability, Dr Kingsley Muoghalu, classifies Islamic financial institutions as specialised banks or non interest bank.
A non-interest bank as defined by the promoters of Islamic banking is a bank that transacts banking business, engages in trading, investment and commercial activities as well as provide financial products and services in accordance with the principles and rules of Islamic commercial jurisprudence.
Non-interest banking is based on the prohibition of giving or receiving of interest. And the key features are deposits in the form of quasi-capital; earnings from financing, investment in an underlying asset for onward leasing or sale; revenue generated from lease rentals or share of profits on sales; returns from depositors who participate in the share of profits and losses of the bank.
By CBN rules, the geographic scope of such a bank must extend to all the 36 states plus the Federal Capital Territory (FCT). The apex bank further explained that the key prudential requirements include “minimum risk weighted asset ratio of 10 percent while its non-permissible activities are products and services that are not Shar’iah compliant”.
On the side of the World Bank, Rawdan said the International Financial Institution has anchored its approach to the issue on five key pillars. One , capacity building, knowledge management, sharing and dissemination. Two, advocacy to influence policy direction in market development, regulatory approaches and new instruments. Three, diagnostic and analytical work in Islamic focused finance. Four, technical assistance to support the development of Islamic finance in client countries ; and, five, Islamic financing by the World Bank Group
Recently, the Central Bank rolled out what is designed to be basic fundamentals for the existence and operation of non profit banking. Some of these are: a licence to undertake Islamic banking business operations might be issued by the CBN upon such terms and conditions which authorise the operation of a non interest financial institution on a regional or national basis for banks or any other basis for other financial institution; an Islamic subsidiary of a conventional bank or financial institution shall be established in line with the licencing requirements for the establishment of a full-fledged non interest financial institution; such banks shall be subject to guidelines on corporate governance for non interest financial institutions issued by the CBN, the provisions of the code of corporate governance for banks in Nigeria issued by the CBN and any subsequent amendments thereto; and all relevant provisions of Bank and Other Financial Institutions Act (BOFIA) 1991 as amended and Corporate and Allied Matters Act (CAMA) 1990 as amended.
The guidelines also stipulate that Islamic financial institutions are required to put in place appropriate policies, strategies and procedures which ensure that they maintain adequate liquidity at all times to fund their operations and noted that non interest financial institutions shall not invest their funds in interest bearing securities or activities.
Still commenting on Islamic banking, Moghalu said in apparent reaction to the public perception of the financial institution that “non interest banks (NIBs) under Islamic banking would address the major reasons why some people were staying away from depositing money in banks” and added that this would help “the non interest banks to play significant roles in the economy”.
He reassured the public that there was no discrimination in terms of operating NIBs and stressed that “from the view of the CBN, we are pursuing banking and finance and not discrimination”
Reinforcing the position of the CBN, Rawdan pointed out that “Islamic banking is probably going to open up a lot of areas for potential Moslem population who didn’t have faith based banking services before and may be they didn’t want to put their money into regular banks. We’ve seen it in Nigeria also. We have very little finances in the North and this is one of the reasons. When you offer new services to an existing population, you expect those services to be taken up.
“I expect it to have a very positive impact on the Nigerian economy whereby many people who didn’t put their money in the banking system will now put them in the banking system. Once you put it in the finance system, then it becomes available to finance other people’s ventures, businesses and enterprises” .
He ruled out any peculiar complications on religious grounds pointing out that “there are complications on all sorts of banking systems and we’ve had a lot of complications in the regular banking systems in the last two years or so. So, I can’t say that there will be no complications. By its very nature, Islamic banking is more sound, has very limited number of products and it is based on faith, people’s willingness and ability to do good things and invest with social conscience. We should expect those in-built features to make it a little more secured”.
The World Bank executive went ahead to give a short history of the origin of Islamic banking. “It started in the 1970’s with a lot of petro-dollars coming into the Middle East. They wanted to do some thing with their money and they started to think about what they could do with it. Islamic financing was one of the things that came after that. Also, it came up in response to a lot of development financing in a lots of developing countries.
“It was a period of great expansion in the financial sector” ,he said and ruled out the possibility of a weakening of the regular banks when people begin to patronize it. Rawdan explained further, “I don’t think that’s a big issue. We expect a lot of more deposits to be raised from people who didn’t have money in the banking sector. People will decide now that there is an alternative. It was a big issue in Saudi Arabia. They banned Islamic banking for a long time because they were worried that once Islamic banks come in, others in the regular sector would collapse. But they established Islamic banks in Saudi Arabia and the others are still operating. The financial sector is a big market and there seem to be room for a lot of players. The competition is healthy, I think”.
One of the tenets of Islamic banking is no interest or usury. But Moslems take money to regular banks and they collect interest. Many see this as a contradiction. He disagreed and said, “you see, that was actually the argument in favour of Islamic banks. They didn’t quite like what was going on in those regular banks and they decided to set up their own banks. Yes, receiving interest is just as bad as paying interest in the Quoran. So, it works both ways.
And that’s why liquidity is a problem for these banks because they are not allowed to take loans. So they have to finance whatever operations through profit sharing investment accounts, you know, what will be like deposit accounts in regular banks.”
The World Bank expert acknowledged the possibility of Islamic banking model exacerbating the country’s religious problem. Addressing this anxiety, he said, “I can see that that’s a danger and I think that’s why the Central Bank is taking a very good stance to approve non interest banking. And I think it should be made very clear from the beginning that it should be open to people of all religions. I think there’s a lot of explaining to do. As a financing institution, it should be open to everybody. But it must be understood that there is really very little difference between Islam and Christianity in terms of the teachings, procedures and the values”.
Rawdan predicted a bright future for Islamic banking model and added optimistically, “ it is growing very quickly worldwide. It’s growing quicker than conventional financing. There appears to be a feeling in it that the customers hadn’t been experiencing until recently”.
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