28 February 2013

Nigeria: The Exciting Future of Non-Interest Banking in Nigeria


There may not be a direct link between the growth of non-interest banking (a.k.a. Islamic Banking) around the world and the credit crunch financial crisis that almost brought down the world financial system in 2008.

It cannot be claimed, either, that Islamic Finance is growing out of the ruins of the Western interest-based financial system that has been suffering one set back or another since the 1980s with the rate of banks' failure rising steadily.

But, there is no denying the fact that, Islamic banking is providing an alternative model or at least redefining the conceptual approach to banking and finance.

It is showing how the edifice of banking needs not to be built around fear, uncertainty and insatiable greed but rather on strong moral and ethical framework with socio-economic justice as the ultimate goal and without jeopardising reasonable profit-making.

For so many reasons, Islamic banking is growing around the world and growing fast in recent times. It is asserting itself as key player in the global financial system.

For instance, in 2011, the Islamic banking worldwide assets grew by 19 percent to $1.3 trillion. Altogether, Islamic banking worldwide increased their profit making by 15 percent during that period.

Resilience of the Islamic banks during the credit crunch crises could also be pointed as another reason for not only growth (through increased patronage) but also the increased confidence in the system as viable alternative to the interest-base banking.

The case has been made of, for example, the Islamic Bank of Britain which has been operating before the 2008 financial crises, and has attracted over 40,000 customers; HSBC Amanah, the Islamic finance subsidiary of HSBC, has been operating for over ten years in London, focusing mainly on institutional clients and business finance and Alburaq, the Islamic finance subsidiary of Arab Banking Corporation, has become the market leader for shari'ah compliant home finance in the United Kingdom. But none of these institutions has been 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 true in Western countries (like Britain where the Muslim population has reached about 2 million) as well as the Muslim countries.

Growth within the Muslim population throughout the emerging markets of Middle East and North Africa and Asia (MENA) are key drivers 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 sub-sector of the industry alone is projected to be worth $990 billion by 2015, a significant growth story from its 2010 position of $416 billion assets.

And globally as mature markets press forward with banking reforms, alternative Islamic finance option will feature more prominently. So as the world bade farewell to universal banking model, it welcomes non-interest banking one.

"The decline of the universal bank will pass unlamented" remarked The Economist in its current publication The World in 2013, adding that "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. Several attempts to establish Islamic Bank in Nigeria in the past has met stiff resistance from religious quarters most of it based on ignorance or fear of the unknown or both.

But confidence in the viability of the non-interest banking model in Nigeria 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 due to the fact that the bank opens its door to both Muslim and non-Muslim (allying the fear that Islamic banking is for Muslims only). It is on record that the first and the third persons to access loan 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 the year 2013.

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 the National Insurance Commission (NAICOM) has in collaboration with Ja'iz designed an Islamic cooperative kind of insurance called Takaful.

- Hassan sent in the piece from Abuja

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