24 July 2011

Nigeria: Sanusi - Islamic Banking is Not Answer to Rogue Banking System


MY dear Christian brothers and sisters, and Nigerians in general, I write to confirm that we have absolutely nothing to fear with the proposed Islamic Banking coming to our shores. I agree with the Governor of the Central Bank, CBN, Mallam Sanusi Lamido Sanusi, that the fear of the word "Islamic" should not be of a major concern and should not deter from the merits of the underpinning philosophy of Islamic finance. As for me, there are two cosmetic rather than major differences between Islamic banking and the traditional based approach:

• Koran's prohibition of receiving or paying interest

• Islamic compliant contracts, which requires that contracts adhere to Islamic law

Islamic banking alleges the need to do good and forbid evil in the use of financial tools, particularly the prohibition of Riba and the prohibition of Gharar (risky or ambiguous sales). In Islam, one does not lend to make money, and one does not borrow to finance a business -loans are a charitable contract, which differs from a sales contract. But, if one lends you money he or she can request the money back at any time, if you cannot repay, the repayment time is extended, if you never pay back, it becomes charity. The essence of social and economic fairness in Islamic banking is the notion of "equality", and what I might denote as "shared sacrifice". This is captured in the following profound statement:

"I shall meet Allah before I give something owned by anoter without his consent, for a trade requires mutual consent". This suggests the need to traffic and trade by mutual goodwill.

Some Basic Principles of Islamic Banking

Permit me, if you may, to acknowledge that Islam recognizes that the best forms of income generation are a person's labour, and every legitimate sale. Other notable principles according to a friend of mine, and an Islamic finance scholar at Rice University, include:

• Cost-Plus Sales -the buyer knows the price at which the seller obtained the product or item to be financed and agrees to pay a premium over that initial price. For example, purchase this car in my behalf at this price and I shall give you a profit margin of 10%. I would contend herein that this is akin to interest payment in traditional banking, but in Islamic banking, interest payment is relabeled "rent or profit".

• Leasing - the leasing agency must own the product/item and not use other financial intermediary as is the case in traditional banking. The Qur'an forbids charging late rental payment in a lease, or late payment in a credit sale. However, similar to traditional banking is the regular rental payment and the lessor's promise to sell the leased product at the end of the lease at a pre-determined residual value.

• Partnership in profit and loss sharing - there are two parts to this so called joint ownership much like a traditional mortgage payment, which encompasses interest and principal payments, but in Islamic banking the first part (interest) is labeled rental payment, but the underlying principle in my mind is the same.

• Islamic credit cards where purchases are automatically financed over a fixed period (usually 12 months) and earlier payment results in reduced charges. This is also in my opinion similar to traditional banking.

My analysis thus far suggests that there are no major differences between Islamic banking and traditional banking, and I would go as far as stating that Islamic banking does not afford the consumer any improved financial and consumer benefits. And, might I add, if there is a disadvantage with Islamic banking, it is the fact that the consumer should have some understanding of Islamic law to ensure that contracts adhere to Islamic legal requirements and state requirements. In addition, Islamic scholars differ on some key aspects of Shariah, making it difficult to standardize financial products across the Islamic world and some investments have no interest free equivalent. Nonetheless, to pacify many Christians, BloombergBusinessweek recently published an article suggesting that in Malaysia fondly called the "Mecca of Islamic banking" that one-quarter of all Islamic banking business is being transacted by non-muslims.

How do you build Islamic banking system on interest free loans?

The operational reality is that you cannot because it is a misnomer. The differences between Islamic and traditional banking are semantic, and some managerial historians would say merely symbolic at best. Islamic scholars may disagree that paying "rent or profit "in any agreed transaction does not equate to paying interest, but be it as it may, the lender in both transactions( traditional or Islamic) expects something in return. Thus, the labeling or relabeling of terms, interest or profit does not matter. I am therefore very surprised that Mallam Sanusi is "gung-ho" about Islamic banking; and the statement that - "Islamic banking would enhance the quality of life and improve the economy" does not make any economic sense or based on any factual economic data. The fact remains that Islamic banking in spite of its recent embrace by some major banks like HSBC, Citigroup, and Lloyds TSB are mostly located in Islamic countries (Malaysia, Dubai, Pakistan, Indonesia, etc) or targeted at the Islamic population as is the case in Britain. Therefore, it would make operational and strategic sense to pilot the first set of Islamic banks in Sokoto, Jos, Kaduna, Kano, Lagos and Bauchi, but we should have nothing to fear and welcome Islamic banking as another form of banking to compete with traditional banks.

Islamic banking would not stop the rapid economic decline and would not improve our primitive and rogue consumer banking system. What the CBN governor must do is talk less and lead by example through policy execution and in defining strict banking regulations and then policing the adherence to those regulations by the banking and financial community. Such result oriented regulations should include: a convertible currency, increased interest rates and reserve requirements for banks and tightening of the money supply. It must not include the retrogressive N150, 000 and 1 million Naira daily individual/corporate cash withdrawal. How does this policy square with Mallam Sanusi's notion of equality and fairness? The ridiculous idea that forced reduction in consumption rate and the control of flow of money, which is what this rule represents would grow the economy and prevent capital flight from the country is voodoo economics.

The consequence in reality is that citizens would be discouraged from participating in consumer banking, destruction of our traditional banking system, leads to tyranny, and an infringement on people's rights and freedom. Mallam Lamido Sanusi, you are reminded that in basic economics the best way to encourage savings is to provide people with the incentives to save and not penalize then for having money in the bank. There is a proven and alternate economic model which you are poorly espousing that would be more productive in disagreeing with neo-Keynesian theory that savings are dangerous to economic health, and that economic model, is not based on "forced savings". While the abundant supply of savings would push interest rates down in other countries, in Nigeria it would result in siphoning of money and related corrupt practices by bank officials. What I find problematic about the uncontrolled utterances of the CBN governor is his ideological differences with the incoming minister of finance, Dr. Ngozi Okonjo-Iweala. It is my hope that President Jonathan would be decisive in action if ideological differences, personal egos and turf wars between the ministries of finance, commerce and investment, and the central bank threaten economic realignment and growth.

To grow economically, Nigeria must imitate the Chinese by lifting a 100 million people out of poverty and it would require going beyond artificial reform of the banking sector. Like the Chinese, we need a blueprint of government reforms of which the overarching objective will be the rebalancing of our economy from overreliance on oil toward agriculture, manufacturing, investments in infrastructure and innovation, developing.

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