Islamic Banking:Can We Afford Not To Have It?
By Yakubu Aliyu     Newsdiaryonline  Wed Aug 3,2011

There is no doubt that Islamic banking is now a global phenomenon. With presence in over 60 countries, Islamic banking has steadily evolved overtime to dealing with whole gamut of financial services, including: leasing of assets, bonds (Sukuk), structured products and wealth management. It has indeed, grown rapidly in the past five years; total assets of the 500 largest banks grew on year by almost 29% in 2009, to an estimated US$1.3 trillion (EIU, 2011).

In considering the merit of Islamic banking in the context of Nigeria, we need to consider demography. The current Muslim population in Nigeria is about 78 million representing about 50.4% of the total population according to 2009 Pew Research Centre estimates. Nigeria has the sixth largest Muslim population in the world. Despite this demographic standing, Nigerian Muslims are most financially marginalized and excluded not just due to unavailability of Non-interest banking, but because majority of them are the poorest, and, hence, lack the requisite credit worthiness to engage the modern financial economy. 

There is also the question of historically entrenched disparities in Nigeria, in terms of region, religion and ethnicity, etc, which provide us with a Blue Ocean that can be exploited to make a positive mark on the banking landscape of the country. This would definitely help to increase the size of the banking industry manifold, a development that would in turn lay the foundation for more innovations and healthy competition in the financial services industry in Nigeria, in the future.

One may argue that Nigerian Muslims have been using existing conventional banking system since time. But this is because for many of them, there is no alternative, which indeed, compounds their financial exclusion. Our conventional banks, in the manner they are presently configured cannot address the financial needs of such a huge segment of the Nigerian population. There is no way we can deepen our financial markets under these circumstances.

We must bear in mind, of course, that it is not only the majority of the Muslims that are financially excluded. Majority of the non-Muslim population too suffer the same fate. Both lack access to financial services.  The bulk of Nigerian small- and medium-scale enterprises (SMEs) have no guaranteed access to credit, not to talk of small agricultural producers that will produce the raw-materials for these SMEs to thrive and survive.

Even more crucially, the back of the envelop calculations by Former Minister of FCT, Nasir El-Rufa’i, in his two-part discourse on Nigerian infrastructure needs (Thisday of 15/7/2011 and 22/7/2011) clearly highlights the huge requirement of capital by Nigeria. He showed that both federal and state governments would require additional US$20 to US$30 billion annually for the next ten years at least to bridge the infrastructure deficit. In addition, there is increased requirement of housing and other loans and investment capital. Obviously, Islamic banking may not be the only solution in this context, but it surely provides for us a ready vehicle for resource mobilization that will help push outward, the development frontier.

Now, we are still left with the question: what would be the future potential of Islamic banking for the Nigerian economy? Obviously, by providing alternative sources of cheap and interest-free sources of finance for the economy, Islamic banking has the potential for promoting the development of the economy. Specifically, it could serve as a catalyst to attract the much needed foreign direct investment (FDI) in the economy, particularly now that FDI is on the decline (UNCTAD estimates a FDI decline to US$6.1 billion in 2010, as against US$8.28 billion in 2009).  A recent report by the EIU (2011) titled: GCC Trade and investment Flows: The Emerging-Market Surge, shows that these GCC countries are coming on strongly on the global financial landscape. They are setting their focus on Africa to provide financing in wide-range of areas, like energy and services industries and sectors, such as port operations, tourism, retail, financial services (especially Shari’a-compliant finance) and telecommunications; as well as direct financial investments in agriculture, minerals and real estate.  Islamic banking could serve as entry point, and as platform, for tapping the huge resources available in these GCC countries. .

Through its unique methods of micro-finance, Venture Funding and housing finance, Islamic banking would help bring about the much needed financial inclusion, while boosting the growth of SMEs and expanding housing ownership. Through its emphasis on the real economy, Islamic banking can help Nigeria unlock the potential of the population, Muslims and non-Muslims alike, by providing access to credit to those that due to low collateral strength, lack access to loan and credits to expand their operations.

Islamic banking has innovated on the fast lane and has developed best practices along wide range of financial transaction, including information technology that we all stand to benefit from. We would all recall how the entry of new generation banks in the 1990s transformed banking business in Nigeria. Indeed, according experts, Islamic banks have developed high standards and capacity in the area of countering of money laundering, in countries like the UK, China and Malaysia more than most conventional banks.

In several ways, Islamic banking has the potential to contribute to macroeconomic and financial market stability. By enabling the deepening of the financial markets and expanding the range and scope of financial transaction, Islamic banking contributes significantly to the growth of the domestic capital markets and the corporate sector.

At its core, Islamic banking puts premium on the concepts of transparency, cooperative ventures, shared risk and social and ethical principles. It treats depositors like equity shareholders that enable them earn a portion of profits instead of interest. It also requires that all financial transactions be based on real economic activity rather than on speculation, critical practices and elements that brought to the fore the intrinsic weaknesses of conventional banking as we know it, particularly in the context of recent 2008 global financial meltdown that adversely affected economies and individuals and indeed, shaken public confidence in these conventional financial institutions.

Quite a number of the high-level objections to Islamic banking harp on the label Islamic, which is seen as exclusive. Even if we do not explicitly call it Islamic bank we cannot strip it of the foundational principles underpinning its operations, which derive from the Shari’a (the Qur’an and Hadith being the primary source). These principles are clear and include: the prohibition of interest (usury) in financial transactions; fair profit sharing in financial and commercial transactions; avoidance of uncertainty and undue ambiguity in business transactions; as well as the prohibition of financial involvement in businesses such as those related specifically to gambling, alcohol, adult media and any other thing deemed injurious to individual and/or collective welfare. We need to seek fuller understanding of these principles.

Second, Islamic banking is not just about Non-interest banking. Islamic banking encompasses a wide-range of financial services and products, as well as financing options that are compliant with Islamic finance principles. Given that Islamic banking incorporates moral principles in commercial and financial transitions, we can say that Islamic banking is also about ethical investing, which now is gaining currency globally, with the proliferation of ethical funds all over the place.

Third, Islamic banking is not just for Muslims, as it is being alleged. It is estimated, for example, that Islamic banks typically have non-Muslim customers in the region of 10% to 40%. In countries like Malaysia, many of the Islamic banks are venturing to target specifically the non-Muslim market.

It will be tragic if the on-going controversies surrounding the proposal to introduce Islamic banking in Nigeria degenerate to a point where we are unable to take advantage of what many have regarded as biggest financial opportunity on the planet earth at this very moment, which is Islamic banking.

Nigeria has novel idea at hand, which even many developed and developing countries have found it worthy to embrace, at the highest level, and sometimes even with fanfare, such as: for example, Gordon Brown’s vow as Britain’s Prime Minister, “to make Britain the gateway to Islamic finance and trade” or Christine Lagard’s declaration as France’s Finance Minister (now IMF Managing Director) that: “We are determined to make of Paris a great center for Islamic finance.”  These comments, indeed, raised the question as to whether: is there something they have seen that we that we in Nigeria are unable to see?  Nigeria has paid the price for being late in catching the globalization train in the 1990s and 2000s. It should not repeat the same with Islamic banking.

Aliyu, a former editor of New Nigerian, wrote from Abuja.

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