Zero Interest Banking in Nigeria: Identifying a Sustainable Module

25 December 2010

By Salim Salihu Muhammed

Nigeria experienced a tremendous lift in its financial sector with the giant strides and people-oriented reforms by the Central Bank of Nigeria (CBN). Although there are mixed feelings about this reforms in some quarters, others opined for a banking regime that will compliment the ills of the commercial banking with a zero interest based banking system, also known as the Islamic Banking System. No doubt, past banking policies had had their respective effects on the economy both positively and negatively; however, most policies were incorporated without considering a plausible module that suites the Nigerian economy or populace. Lest we forget in a hurry, the Micro Finance Institution, which saw some Community Banks metamorphosing into Micro Finance Banks (MFBs) leading to a near death after birth proved to be ill planned; no modus operandi was streamlined to guide operators on how to manage in the intermediary industry. 

Over a quarter century since the establishment of the Islamic Banking and Finance in the United Arab Emirate (UAE), there has been a continuous increase in the market share despite the expressed dissatisfaction by many Muslims on the inefficiency of the institution compared to their conventional counterparts. More so, there is widespread fear that with the dominant interests in the field of money, conventional banking and finance would soon gang up to kill the initiative. Currently in Nigeria, there are aggrieved money managers whose “businesses as usual” had been disrupted by the CBN reforms in recent times; like the fears in the UAE, they could gang up and spam the initiative by instilling their representative into the Non-Interest Institution making it cumbersome to meet the objective for which it was instituted. On the contrary the system for which the Islamic Banking is operated runs in tandem with the Islamic beliefs that prevent them from dealings that involve usury or interest (Riba). 

Islamic banking, based on the Qur'anic prohibition of charging interest, has moved from a theoretical concept to embrace more than 100 banks operating in 40 countries with multi-billion dollar deposits world-wide; it is estimated that $US 70 billion worth of funds are now managed according to Shari'ah. The best known feature of Islamic banking is the prohibition on interest; however, it could interest us to further study the management of overheads costs of these institutions. The first thing which comes to mind is the principle of lending by Islamic banks: as defined in the Shari'ah, or Islamic law, Islamic finance is based on the belief that the provider of capital and the user of capital should equally share the risk of business ventures, whether those are industries, farms, service companies or simple trade deals. Translated into banking terms, the depositor, the bank and the borrower should all share the risks and the rewards of financing business ventures. 

Although Islamic banking is widely regarded as the fastest growing sector in the Middle Eastern financial services market, it does not recognises making money from money. Money is only a medium of exchange, a way of defining the value of a thing; it has no value in itself, and therefore should not be allowed to give rise to more money, via fixed interest payments, simply by being put in a bank or lent to someone else as being the practice of conventional banking in Nigeria and around the world. Why is this so? Muslim jurists consider money as potential capital rather than capital, meaning that money becomes capital only when it is invested in business. Accordingly, money advanced to a business as a loan is regarded as a debt of the business and not capital; and as such, it is not entitled to any return (i.e. interest). One may say it could be better to keep money at home (or what you may consider as self deposits); the Islamic Banking considers that unacceptable too, because in Islam, money represents purchasing power which is considered to be the only proper use of money. 

Investments of money from Islamic Banking only support practices or products that are not forbidden. Trade in alcohol, for example would not be financed by an Islamic bank; a real-estate loan could not be made for the construction of a casino, bars, brothels, Night clubs or Night Bar Gardens; royalty payments for services not rendered like bribes, or used to finance inflated contracts are also prohibited; neither will Islamic bank enter into inter-bank lending with the conventional banks as interest is said to be involved. Except for a redefined module, which of course may violates Islamic or Shari’ah law, one is left in an awe which industry could comfortably accommodate these principles in the Nigerian economy. 

In today’s business world, risk and uncertainties engulf the business process; a Naira today is seen to be more valuable than a future Naira, as such, capital investments are evaluated with discounting techniques in order to access their real values. Provisions are made for risk and uncertainties as well inflation; this is not applicable to the Islamic Banking model which expects any form of transaction to be free from uncertainty, risk and speculation. Contracting parties should have perfect knowledge of the counter values intended to be exchanged as a result of their transactions. Also, parties cannot predetermine a guaranteed profit. This is based on the principle of 'uncertain gains' which, on a strict interpretation, does not even allow an undertaking from the customer to repay the borrowed principal plus an amount to take into account inflation. The rationale behind the prohibition is the wish to protect the weak from exploitation. Therefore, indexation of indebtedness to inflation, options and futures are considered as un-Islamic and so are forward foreign exchange transactions because rates are determined by interest differentials.  

In identifying a workable and sustainable module, the CBN must consider the law which created the Islamic Banking System and its inciting provisions. Although this piece could not be exhaustive in streamlining out the indices at which the system is run, it should be note worthy also that a major supervisory and management role of the government on the Islamic Banking System aside the use of Zakkah as a tool for the redistribution of wealth is that of providing subsidy. However, if Nigeria must consider the possibilities of establishing Islamic Banks it should also note that it would bear the cost of operation through subsidy as it has done on petroleum products over the years. More so, the managers of this institution will have to work in close relations with Islamic Scholars to seek advice and explanations on transactions which are not within their religious knowledge. 

What is more? Greater emphasis must be given to the philosophical concepts and beliefs of Nigerians if this system is to work with lesser hitches. The assumptions underlying the Islamic Banking Model include: honesty among participating parties; devoted and well-trained cadre of bank workers who must not only work within the ambit of the banking environment, but must also ensure they comply with the legislations in their own private investment dealings; the people’s readiness to accept the system; a well organised system of Zakkah or wealth re-distribution, etc. To achieve the immense benefits of the Islamic Banking System we may need to consider some pre-conditions such as redesigning the present educational system so as to inculcate in young minds the Islamic Banking values side by side with modern education and research; a special training institute for the non-interest banking workers; propose and create a fund similar to reserves in the CBN to help cater for balance of payments problems. 

Without minding words, the reality of Islamic Banking System in Nigeria in not known. Although we cannot hide from the fact that some of the underlying conditions and pre-conditions may not be feasible and that the economic environment may not be worthy of such a system, it seems as if we should give all hopes for an interest-free banking system. That is not true, but we may as well welcome the idea that may prepare a better ground for our future generation to lead a more pious, honest and Godly life. If that is what we want, then what is the sustainable module for an Interest-free Banking System that will flourish with the Nigerian economic, social and political system?

Salim Salihu Muhammed salimmed16@yahoo.com

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