Islamic banking!

Even though a draft framework for non-interest banking was issued in March 2009 by the Central Bank of Nigeria (CBN), its position on Islamic banking did not become much of an issue until a few months ago when the final guidelines were released.

According to the acting director of banking supervision at the CBN, D.A. Eke, "The objective of the framework is to provide minimum standards for the operation of non-interest banking in Nigeria while serving as an exposure for comments, suggestions and/or inputs by stakeholders."
The suggestions and/or inputs from stakeholders never came. More than two years after, the CBN released the final guidelines which cover only non-interest banking according to Islamic commercial law and jurisprudence ‑ and all hell was let loose.

The furore was such that the regulator could not ignore even though a few weeks before the CBN governor, Lamido Sanusi, had said the complainants were in the minority.
Doing a volte-face, Mr Sanusi said he has instructed that the guidelines be re-written and re-issued after examining all of the criticisms that have trailed the initial guidelines, as it was capable of being misinterpreted to mean that Islamic banking is the only type of non-interest banking that is allowed.
"It was never our intention to restrict non-interest banking to Islamic banking but we understand why it would be viewed that way," Mr Sanusi said.

Revised guidelines

In the revised guidelines, the CBN recognised two types of non-interest banking: non-interest financial products and services based on principles of Islamic commercial jurisprudence, as well as financial products and services based on any other established rules and principles. The regulator added that in line with its objective of promoting financial inclusion in Nigeria, it will issue guidelines pertinent to other types of banking to individuals and groups wishing to practice non-interest banking based on established rules and principles other than Islamic.

The Central Bank said it was introducing Islamic banking in order to open up the financial space to those who were locked out. "Financial inclusion is a major challenge. Almost 50 percent of adult Nigerians do not have access to capital. What is keeping them out? Many things. But to the extent that non-interest banks can address some of the reasons for their staying out, we should encourage them," said CBN deputy governor (financial systems stability), Kingsley Moghalu, while assuring Nigerians on the genuine intentions of introducing the variant of non-interest banking.

At a seminar organised by Apostles in the Market Place (AiMP), a group of Christian professionals, in Lagos last week, Mr Moghalu said the CBN was open to receive applications from other firms that wish to operate other variants of non-interest banking. "I like to very clearly reassure Nigerians that non-interest banking is part of our plans to increase the inclusion into the financial system of those who have stayed out of the banking system for various reasons. I like to assure Nigerians very clearly that there is no agenda. It is simply finance; it is not about religion." Participants agreed that while there was a need to redefine the function of capital, it was equally necessary to ensure that such redefinition is not seen to favour one religion over another.

Capacity and the lack of it

One of the speakers, Brett Johnson, founder of Institute for Innovation, Integration and Impact, said the impact of the global financial crisis has necessitated a re-purposing of capital in order to correct some of the negative fallout of the crisis. Tracing the history of profit-and-loss sharing banking to faith-based financing starting in Biblical times, he said the concept of exorbitant interest payments was responsible for the current global economic glut.

He said that while Nigeria is excited to join other countries in Islamic financing, it may not offer an automatic solution unless the regulator steps up its regulatory prowess. He alluded to capacity as a constraint in Nigeria, adding that, "Islamic banking has not necessarily produced great returns." Referring to a report last June by the New York-based World Street Journal, he said the regulators must do a thorough job before approving any application for non-interest banking, or Islamic banking for that matter. According to the report, Sharia-compliant banking products have been a flop in Britain. Quoting Junaid Bhatti, part of the team that set up Islamic Bank of Britain (IBB), the first Sharia-compliant bank approved by the Financial Services Authority, he said the sector has been a big disappointment.

"As we now approach the sixth anniversary of IBB's launch, I'm sad to finally have to admit that Islamic finance in the UK has been a huge flop," he said. "IBB may still be limping on as probably the last bastion of the cause, but it's difficult to imagine it holding out for much longer," Bhatti said.
Back in Nigeria, given the place of regulatory failure in the financial crisis two years ago, it may be too soon to jump into another game. This is particularly so as just a few competent hands currently exist in the field. According to Hajara Adeola, the chief executive officer of Lotus Capital, an ethical investment firm specialising in Sharia-compliant asset management, capacity crunch is crucial, "even at the Sharia advisory board level. At the operator level, training can take care of it. It will take time, so I don't think any institution should rush into this business."

Mr Moghalu said the Central Bank was aware of the problem of capacity which is why it has stepped it up in-house in order to match the demand of the market. "This is a new thing in Nigeria. We have thought of capacity and have equipped our regulatory officers. We have sent them on a lot of training. So we are addressing the issue of capacity in the industry."