THE NATION FRIDAY, JUNE 10, 2011
58
DISCOURSE
Islamic banking: Challenges and prospects Text of the address delivered by the Secretary-General, Nigerian Supreme Council for Islamic Affairs (NSCIA), Dr. Lateef Adegbite, at the Colloquium on Islamic banking at the Ayo Ajomo Auditorium, University of Lagos, Akoka, Lagos, on June 6. Protocol
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feel greatly honoured to be asked to chair this important Colloquium. It is commendable for the Institute to convene the Forum aimed at beaming a searchlight on Islamic Banking, as Nigeria contemplates introducing the world-acclaimed banking product into our financial system. This step by the Institute is in keeping with its historic mandate to conduct research into law and related disciplines I attest to the excellent performance of the Institute over the years in the fulfilment of its statutory functions and I am proud to recall the supporting role of some of us to the initiative of the erudite and eminent jurist, the Late Honourable Judge Professor Taslim Elias, the founding father of this Institute in the mid-seventies of the last Century, which paved the way for the Authourities of the University of Lagos and Law Faculties of other Nigeria Universities to establish the Institute with the subsequent strong backing of the Federal Government of Nigeria.
The Nigerian situation and Islamic banking system The growing importance of Islamic banking in the global financial system today cannot be over-emphasised. Countries all over the world are falling over themselves to establish the banking product. Nigeria, therefore, cannot be an exception. Indeed, as we aspire to be among the 20 leading economies of the world, we need to equip our financial system adequately by providing the facilities which the extremely mobile world investors would require anytime and anywhere, they find themselves in the conduct of their businesses. Indeed, such is the status of Nigeria in the world that she must not lag behind in financial creativity and must avail itself of all opportunities the global financial system has to offer. In Population, Nigeria is sixth largest Muslim Country in the World coming after Indonesia, Pakistan, India, Bangladesh and Egypt. Such a leading Muslim nation cannot rightly carry on without Islamic Banking System for her teaming Muslim population, and a good number of non-Muslim Nigerians and non-Nigerians alike who desire to have access to non-interest banking. There are however, some grumblings in certain quarters that the adoption of Islamic Banking in Nigeria would be unconstitutional and illegal. The main objection relates to the so-called status of Nigeria as a secular state. This is a most erroneous stand, because the Nigerian Constitution has not prescribed secularism for the country. Section 10 of the Constitution which is often cited in support of this position provides: The Government of the Federation or of a State shall not adopt any religion as State Religion. The provision is often misconstrued, interpreting it to mean that Nigeria has been declared a secular state. Nothing can be farther from the truth. The correct meaning of the Section is that neither the Federal Government nor any State Government can adopt a particular religion as the religion of the state to the exclusion of all others. In other words; Nigeria cannot be declared an Islamic state, abolishing Christianity or any other religion, or declared a Christian state, abolishing Islam or any other faith. Therefore, in reality, Nigeria is at once a Christian country and a Muslim State. It is a multi-religious Country operating under a liberal political order which protects all religions, and assures equality of treatment to all persons regardless of religious orientation. This is why the Constitution expressly guarantees the right to freedom of thought, conscience, and religion. Thus Section 38 emphatically states that every person either alone or in community with others and in public or private, has the right to manifest and propagate his religion or belief in worship, teaching, practice and observance.
The Nigerian Constitution also clearly recognises religious institutions and laws. Thus Shari’ah Courts of Appeal are established for the Federal Capital Territory Abuja (Section 260) and for those States that choose to operate Shari’ah Law System (Sec. 275). If religious issues arise in litigation in any general court of the land, the Court shall determine the issues according to the religious law, applying the doctrine of choice of law as appropriate. It may be added that many English Judges and Jurists have declared that English Law is Christian-based. Yet, English Common Law is one of the main sources of Nigeria Law. Does this make Nigeria a Christian Country? In the light of the above submission, it would be mischievious and an exercise in religious intolerance for any one to argue that Islamic Banking should not be adopted in Nigeria and that the insertion of Shari’ah Clause in the relevant non-interest banking Regulation to be promulgated in Nigeria would be unconstitutional and illegal. In as much as the Islamic banking system envisaged for Nigeria would be nondiscriminatory, making its facilities open to and available to all Nigerians regardless of faith, the institution would be legal and constitutional. It should be emphasized that the pioneer non-interest Bank which Jaiz International Plc is poised to establish in Nigeria as soon as it receives a banking licence from the Central Bank of Nigeria, may be Islamic in concept and nature, it is certainly not a closed shop, available to Muslims only. Rather it would be a bank owned by Muslims and non-Muslims; its customers will also be drawn from all sectors of the community regardless of faith.
Understanding Islamic banking
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S noted above, Islamic Banking and Finance has become very popular and widely accepted as a reliable financial system that has been integrated into the global financial system. For over three decades it has appeared on the world scene as an active player. As most of us know, Islamic Banking and Finance is based on the principles of Shari’ah, and this notwithstanding, its application and benefits do not discriminate between Muslims and non-Muslims. In fact, its ethical and transparent nature, its simplicity, and its emphasis on fairness and accountablility, etc endear it to many. Three most distinguishing factors that make Islamic Finance unique from the conventional system are: (a) Prohibition of Riba (interest) in all its forms; (b) Risksharing; (c) Asset-backed. The last factor eliminates speculation, extreme uncertainty, etc in financing and encourages growth of the real economy – this made it (Islamic Banking & Finance) more resilient during the world economic meltdown!
Global acceptance Islamic Banking and Finance practice is no longer limited to the Arab and the Muslim Worlds but has spread to the Far East, Asia, Europe, America and Africa. It is estimated that there are more than 200 non interest financial institutions operating in about 75 countries across the globe. Global financial institutions offering Islamic Banking services include HSBC, Citigroup, Deutsche Bank, Standard Chartered Bank, Barclays Capital and ABN Amro. These institutions are leveraging on their skills, resources, expertise and access
to capital to drive the Islamic finance industry to higher levels. There are also other local/regional banks especially in the GCC countries which have started to expand their operations across their borders into other countries. These include Al-Rajhi Bank of Saudi Arabia, Dubai Islamic Bank, Kuwait Finance House, and Al Baraka Group. In Africa, the countries that have embraced Islamic Banking include South Africa, Egypt, Senegal, Gambia, Niger, Kenya, Tanzania, Algeria, Tunisia, and Benin Republic.
Market size – $1 trillion Although it constitutes less than five percent of the global financial market, the Islamic Banking & Finance market was growing between 15 & 20 percent before the world economic recession of 2008 and thereafter at an average of 15percent p.a. In the last four decades, the system has evolved from a small niche visible only in Islamic countries to a profitable, dynamic and resilient competitor at an international level. The size of Islamic banks around the world was estimated to be close to US $850 billion at the end of 2008. While Islamic Banking remains the main component of the Islamic financial system, the other elements, such as Takaful (Islamic Insurance), Mutual Funds and Sukuk (Islamic bonds and financial certificates), have witnessed strong global growth, too. According to a reliable estimate, the Islamic financial industry now amounts to over $1 trillion and projected to hit $1.6tr by 2012. Given its fast-growing nature the industry is estimated to double in size in less than a decade – other things being equal.
Regulation Although there are still challenges regarding uniform regulation of Islamic Banking and Finance, a lot has been achieved by countries that have been in the forefront such as Bahrain, Malaysia, UK, as well as other or organizations purposely established to help regulate and standardize Islamic Finance practice. Malaysia has been developing the necessary infrastructure to support the legal and regulatory framework for Islamic Finance industry since the 80’s. The Islamic Banking Act was enacted in 1983 and Takaful Act in 1984. The UK (FSA) has also reviewed some of its statutes to accommodate Islamic Finance since 2003. The Industry has also developed self regulatory bodies such as the Accounting & Auditing Organisation for Islamic Finance Institutions (AAOIFI), the Islamic Financial Service Board (IFSB), International Islamic Financial Markets (IIFM) and International Islamic Rating Agency (IIRA) among others. The AAOIFI which is based in Bahrain issues standards governing accounting, auditing, corporate governance and capital adequacy for the industry. Similarly the IFSB is an international body headquartered in Malaysia with more than 150 members including the IMF, IDB, World Bank for International Settlements, Central Banks, market players and professional firms. The body issues Standards and Guidelines on risk management, capital adequacy, corporate governance, etc. In Nigeria, as part of the ongoing reforms of the banking industry, the Central Bank (CBN) has abolished the Universal Banking Model (of the one-size-fit-all minimum capital of N25bn introduced in 2005) and released new guidelines for different
‘The growing importance of Islamic banking in the global financial system today cannot be over-emphasised. Countries all over the world are falling over themselves to establish the banking product. Nigeria, therefore, cannot be an exception. Indeed, as we aspire to be among the 20 leading economies of the world, we need to equip our financial system adequately by providing the facilities which the extremely mobile world investors would require anytime and anywhere, they find themselves in the conduct of their businesses’
•Dr. Adegbite
categories of conventional banks as well as that of the Non-interest Banking (NIB) or Islamic Banking. The introduction of NIB is to deepen the Nigerian financial system and integrate it with the global financial system. The new reforms adequately contain serious regulatory issues especially poor corporate governance and other sharp practices that bedevilled the banking industry. HE CBN is now encouraging conventional banks to open NIB windows and others to establish fullfledged banks that offer NIB such as Jaiz International Plc.
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The challenges The establishment of Islamic Banking and Finance in Nigeria faces a lot of challenges; and the main ones are: • Lack of skills/expertise and awareness • Absence of regulatory/supervisory framework •Lack of liquidity management instruments • Huge capital – entry barrier (until recent reforms) • Fiscal and Taxation issues • Absence of Shari’ah Scholars. Ladies and Gentlemen, many of these challenges have either been overcome and/ or being addressed through conscious efforts particularly at the CBN which is now the main driver of this initiative. The CBN has embarked on extensive capacity building in readiness for proper supervision of the new system. Jaiz has also directly or indirectly, within its limited resources, invested fairly in capacity building and in collaboration with other stakeholders to create awareness for Islamic Banking in Nigeria.
The benefits/opportunities
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SLAMIC Banking and Finance has many benefits and opportunities for the entire population of Nigeria – Muslims and nonMuslims alike. Some of these include: • Ethical, transparent, non-discriminatory financial offering; • High potential market size –Muslim Pop. > 50% of the 155m population; • Large unbanked & informal sector > 55% of GDP; • Profitability – over 30% return on equity (b/4 crisis) • Resilience – IMF study shows that Islamic banks performed better in 2008 in terms of profitability, credit and asset growth.
Conclusion Nigeria is strongly committed to its vision 20:2020 i.e becoming among the top twenty economies by the year 2020, and the Millennium Development Goals to engender strong and sustainable economic growth and development. I wish to end this Address as I started, that the integration of Islamic Banking and Finance into the Nigerian financial system will not only enhance the realization of this vision but open a new window of opportunities for both local and foreign investors to partake. And this is the right time to move. In fact, Islamic Banking and Finance is long overdue in Nigeria!