Non-Interest Banking in Nigeria Has an Exciting Future

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For so many reasons, Islamic banking is growing at a fast pace around the world. It is asserting itself as a key player in the global financial system. In 2011, for instance, Islamic banking worldwide assets grew by 19 percent to $1.3 trillion. Altogether, Islamic banking worldwide increased profit-making by 15 percent during that period.

The first private Islamic bank, the Dubai Islamic Bank, was set up in 1975 by a group of Muslim businessmen from several countries. Two more private banks were founded in 1977 under the name of Faisal Islamic Bank in Egypt and Sudan. In the same year, the Kuwaiti government set up the Kuwait Finance House. Since then, Islamic banking has grown steadily. Although majority of the banks exist in Muslim countries, there are now a significant number of them in Western countries, such as the United Kingdom, Denmark, Luxembourg and Switzerland, as well as elsewhere.

One reason for not only growth (through increased patronage) but also increased confidence in the system as a viable alternative to the interest-based banking is the resilience of the Islamic banks during the credit crunch crisis. The case has been made, for example, of the Islamic Bank of Britain, which has been operating before the 2008 financial crisis and has attracted over 40,000 customers; HSBC Amanah, the Islamic finance subsidiary of HSBC, which has been operating for over 10 years in London, focusing mainly on institutional clients and business finance; and Alburaq, the Islamic finance subsidiary of Arab Banking Corporation, which has become the market leader for Sharia-compliant home finance in the UK. None of these institutions was affected by the global financial crisis.

Another reason could be the growth of the Muslim population and the increasing demand for Sharia-compliant banking services. This is as true in Western countries (like the UK, where the Muslim population has reached about 2 million) as it is in Muslim countries. Growth in the Muslim population throughout the emerging markets of Middle East and North Africa and Asia (MENA) is a key reason behind increasing demand for Islamic financial service.

If looked at from generally underpenetrated market position, Islamic banking has considerable growth opportunities when compared to the more developed economies. The growth of Islamic banks in the Middle East and North Africa (MENA) alone is projected to be worth $990bn by 2015, a significant growth story from its 2010 position of $416bn assets. And globally, as mature markets press forward with banking reforms, alternative Islamic finance option will feature more prominently.

“The decline of the universal bank will pass unlamented,” remarks The Economist in its current publication The World in 2013. “The promise of the cross-selling financial supermarkets has long been eclipsed by the destruction of the shareholder value after the (2008) crash.”

Sub-Saharan Africa offers a tempting growth opportunity for Islamic banking. The African states are joining the Islamic banking club. Post-Gaddafi Libya is moving towards Sharia-compliant banking, Tunisia is mulling Islamic banking regulations, while Kenya is emerging as Islamic finance gateway of East Africa, according to the 2011-2012 World Islamic Banking Competitiveness report. These are all in addition to the more experienced members – Egypt, Sudan and South Africa.

In 2011 Ja’iz Bank, Nigeria’s first Islamic bank, opened shop. And confidence in the viability of the non-interest banking model in the country is growing by the day. Since it opened shop, Ja’iz has witnessed phenomenal growth in customer base, assets and branch network. This confidence is accentuated by the fact that the bank opens its door to both Muslims and non-Muslims (allaying the fear that Islamic banking is for Muslims only). It is on record that the first and the third persons to access loans from the bank were of Christian faith, not coincidentally. From a humble start of three branches in 2011, today the bank operates from 10 branches and it is eyeing to double that number before the end of 2013.

Jaiz Bank Plc makes profit from three different service offerings. Foremost is trading, which means the bank buys and sells items. The second method is leasing. This implies supporting entrepreneurs with sufficient capital to, say, acquire machinery. The bank does this by buying the required machine and leasing it to the entrepreneur. As the entrepreneur uses it, he pays the lease rental. The third method is called partnership. If an entrepreneur cannot raise the entire needed fund for his or her business, the bank will come to the rescue. Profit and loss will be shared in the ratio of 60 percent for the bank and 40 percent for the entrepreneur.

The prospect of the Ja’iz model of Islamic banking, for me, lies in the third service offering. The prospect looks brighter if we realise that the loan sharks have long threatened the socio-economic life of the Nigerian business community, especially the struggling Small and Medium Enterprises (SMEs). So, the sky is the limit for Ja’iz Bank if it can provide financial assistance to the SMEs, as long as it is not acting like the loan sharks too but is striving to protect the struggling entrepreneur from unfair loan contracts.

The future of non-interest banking in Nigeria is bright. Ja’iz as the pioneering non-interest-based deposit money bank (DMB) is proving a good model to build and test the regulations regarding non-interest banking. For instance, the Central Bank of Nigeria (CBN) has launched Liquidity Management Instruments to assist non-interest banks to be able to manage their liquidity since they cannot put their funds in interest-bearing treasury bills, while National Insurance Commission (NAICOM) has, in collaboration with Ja’iz, designed an Islamic cooperative kind of insurance called Takaful. Similarly, Securities and Exchange Commission (SEC), Debt Management Office (DMO), Nigerian Deposit Insurance Corporation (NDIC) and Infrastructure Concessioning and Regulatory Commission are mulling how to come up with non-interest-based bonds for financing infrastructure.

As the first Islamic bank in Nigeria, Ja’iz cannot afford to fail. It must be well managed for people to have faith in the new system. It must continue the cooperation it has already started with the CBN and other regulatory bodies like the NDIC. It must also leverage its association with established Islamic banks to adopt best practices. It must stick to the Islamic banking model. As Ja’iz leads the way, it must sow the seed for other non-interest banks to grow and blossom in Nigeria – and the future looks excitingly promising.

Finally, credit must go to the managing director/CEO of Ja’iz Bank, Mustapha Bintube, a quintessential banker with several years of experience, and his team and, of course, the shareholders, among them some of Nigeria’s finest bankers, who provided the fund to establish the bank.

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