18 July 2011

Nigeria: Islamic Banking - Perceptional And Conceptual Understanding


Non-Interest (Islamic) banking may be seen as a recent financial system improvised as alternative to tackle the turmoil inherent in conventional banking system.

However, there were earliest references which suggest that Islamic banking came into the picture first in Egypt in 1963. This pioneering effort was achieved by Ahmad El Najjar who brought the idea into existence, whose key principle was profit sharing (non-interest based philosophy of Shariah).

By the end of 1976 there were 9 such banks in Egypt alone. These banks neither charged nor paid interest but their activities were mostly limited to trade and industries where these banks invested directly or as partners of depositors.

Currently, almost all international banks, members of the Walberg's principles group and international correspondence banking service providers e.g. HSBC, Standard Charted Bank, Chase Manhattan, ABN Ambro, Dutch Bank, Citi Group, BNP Paribas, etc have adopted Islamic banking (as tested and trusted) system either as a wholly owned subsidiary or at least a window in the international financial arena.

These banks have declared their appreciations on the continuous benefits they derived day-in-day-out and in every financial year. The west (Americas and Europe inclusive) have already realized the tremendous benefits out of Islamic banking as an unswerving business vehicle that is capable of reaching a financial business goal.

The first bank explicitly based on Shariah principles was established by the Organization of Islamic Countries (OIC) in 1974, called Islamic Development Bank (IDB). IDB was primarily engaged in intergovernmental activities for providing funds for development projects in member countries.

Its business model involved fees for financial services and profit sharing financial assistance for projects. During the 1970s several Islamic banks came into existence, including the Dubai Islamic Bank (first Islamic private commercial bank, 1975), the Faisal Islamic bank of Sudan (1977) and the Bahrain Islamic bank (1979).

Others from the Asia Pacific region include the Philippine Amanah Bank (PAB), formulated under presidential decree. Since then, Islamic finance is spreading all over the world at a tremendous pace from virtual anonymity to becoming a powerful competitive force in the world today.

Interest, according to renowned dictionary (Funk and Wagnall Standard) collections, is the "payment for the use of money, or money so paid, and agreed statutory compensation accruing to a creditor during the time a loan or debt remains unpaid." Or "something added in making a return; something more than is due." Interest is a system where money loaned generates money as principal of service. It ranges from soft loans in our thrift and cooperative societies to individual and corporate lending in the financial institutions.

The legal and regulatory frameworks in the Nigerian financial system have already coined "Islamic banking" as "Non-Interest banking" for spiritual tranquility and coexistence in the Nigerian society in general and financial system in particular (BOFIA 1991 section 23 (1) and section 66 as amended). This all new system is often refers to a banking concept that is consistent with Islamic law (Shariah) principles and guided by Islamic jurisprudence and economics.

To name a system with a particular spiritual morality or identity does not distort the underlying ingredients and benefits but rather a comeback with resonance to societal value and ethical reverberation and chiefly going by the Nigeria society that is characterized by religious (Islamic) phobia.

To the ignorance of many this system has onerous objective of achieving social and economic justice to the society in general and not to the equity holders or management and staff of the bank.

It's a system that emphasizes on justice, fairness and equality in every business deal selflessly. Islamic financial system is purely business that concerns economy but not religious or sentiment; an all inclusive relationship with equal rights on the side of the banks and their clients embedded in cooperation and partnership; an alternative to the endless "interest charges" but not a deviation from the norm.

In particular and practically, Islamic banking will go a long way to serve as the real saviour in the endless "trial and error" programmes by the governments (and or private-partnership) on poverty alleviation and attempts by the financial system to impact on the real economy.

This is the most reliable system that encourages real projects' development and clearly discourages "money changing hands". To a large extent this will stamp out the corruption tendencies associated with almost all businesses in Nigeria; as this system does not believe in cash advances but ensures all transactions have underlying asset/commodity/project/etc.

In spiritual perspective, all mankind are admonished in a divine manner to be distrustful of the severity and dangers associated with "Riba" (interest), as mentioned in The Holy Qur'an (Al Baqarah 2:275-281; Al-Imran 3:130; Nisaa 4:161; Ar Rum 30:41-42) and other scriptures such as the Holy Bible (Deuteronomy 23:19; Leviticus 25:36; Exodus 22:25; Luke 6:34-35). they prohibit usury (the collection or payment of interest) and this is also commonly called "riba" in spiritual discourse. Interest payment on conventional facilities can be termed as degradation which many a times hinders ability to honour obligations, promotes dishonesty and inhibits justice and equity in businesses. Hence, The Holy Qur'an and Bible both clearly have placed interest to be a SIN. Therefore, all faithful Muslims and Christians MUST NOT partakes in it.

Affa is an Islamic banking professional and anti-money laundering specialist based in Bahrain

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