While modern banking in Nigeria has evolved over the years, the establishment of Islamic banking in Nigeria was not just an expansion of the banking system following Nigeria's return to democracy but a provision of an alternative banking model to Nigerians.
Islamic banking, otherwise known as non-interest banking, was never a new concept. Though it originated from the Arab world, the concept has been adopted worldwide in Europe, America and Asian nations.
The first attempt was in 2004 when the then Central Bank of Nigeria (CBN) Governor, Charles Soludo granted an Approval-in-Principle Licence to Jaiz International Bank PLC to carry on business as a Profit and Loss Sharing Bank.
The bank later commenced operations in 2012 after it was licensed by the Sanusi Lamido Sanusi-led CBN.
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However, there was controversy from religious bodies especially the Christian Association of Nigeria (CAN) which accused the CBN of attempting to Islamise Nigeria by introducing Islamic banking.
But the legal standpoint upon which the establishment of the non- interest banking system was premised is stated in Section 61 of the Banks and Other Financial Institutions Act of 1991 which provides for profit and loss sharing which the non-interest banking is all about.
Since the debut of jaiz Bank several non-interest banks have been operating in Nigeria. These include Lotus Bank, TAJBank, Summit Bank and The Alternative Bank. Also Sterling Bank offers a non-interest window.
Non-Interest Banking (Islamic Banking) has now become the new bride in Nigeria's financial services system as customers are now tilting towards banking alternatives that suit their faith and belief.
Data from two leading non interest banks showed phenomenal growth in their fortunes, which signified acceptance of the system by Nigerians.
According to information on the bank's website its asset base rose from N30 billion in 2012 to N671 billion in 2024. Also the Balance Sheet Size as of December 31, 2024 was N1.08 trillion, up from N12 billion
The bank also stated that it has expanded its branches from three to over seventy.
Another bank, which started operation on December 2, 2019 with two branches now boasts 63 branches across different states of the federation. It has also grew its total assets to N953.10bn as at the end of 2024
Other gains of Islamic financial system
The establishment of non-interest banking has given rise to an instrument like Sukuk which has helped in revolutionising the nation's infrastructural funding.
Sukuk represents Sharia-compliant bonds, which give partial, undivided ownership in tangible assets or projects, rather than a debt obligation.
Instead of earning interest (riba), which is forbidden in Islam, investors receive profits generated by the underlying asset (e.g., rent or fees), with the principal returned at maturity when the issuer buys back their share.
They offer an ethical, non-interest-based way to raise funds, linking returns to real asset performance, making them popular for governments and corporations.
Recently the federal government completed the payment of the N100 billion SUKUK bond it subscribed to in 2018.
A Professor of Islamic Law of Banking and Finance, University of Ilorin, Ilorin, Prof. AbdulRazzaq A. Alaro, said the last payment for the seven-year bond was paid on December 31, 2025 and it brought credibility to Nigeria in the Islamic finance market.
"The implication of this is huge. For the second consecutive year, Nigeria has proven to be a reliable partner in the global sukuk market, and that itself will boost its chances of attracting more investors in the emerging global Islamic Finance market."
The Director-General of the Debt Management Office (DMO), Patience Oniha disclosed that through the Sovereign Sukuk Bond, which debuted in 2017, the Federal Government successfully raised N1.09 trillion.
"With this amount, over 4,100km of roads and nine bridges across Nigeria's six geopolitical zones and the Federal Capital Territory (FCT) have either been constructed or rehabilitated," Oniha said.
With the decision by the CBN to double capital base of Nigeria Islamic lenders: Jaiz bank plc, Taj Bank and Lotus Bank Limited are expected to support industry growth in the coming years, according to Fitch Ratings note.
The global rating agency expects the Islamic finance sector in Nigeria to continue growing over 2024-2025, driven by the anticipated increase in equity issuance for Islamic banks to comply with the Central Bank of Nigeria's (CBN) significantly increased paid-in capital requirements.
While Islamic banks' lower capital requirements compared to conventional banks could provide an advantage, with lower barriers to entry, Fitch expects their market share to remain below 2% as conventional banks are likely to grow faster.
The CBN announced in March 2024 that Islamic (non-interest) banks, commercial banks, and merchant banks must meet significantly higher paid-in capital requirements by end of Q1 2026.
The Islamic finance industry in Nigeria is estimated at USD3.8 billion at end-2023. It is predominantly Sukuk, at 59.3% of the total industry value, followed by non-interest banks (39.8%), and Islamic funds and Takaful (together 0.9%).
Long-standing challenges include gaps in the distribution network compared to conventional banks, a smaller, but growing, capital base, low public awareness and demand for Islamic products, and segments of the public strongly opposing Islamic finance.
However, there is significant potential for growth in Nigeria's Islamic finance industry, underscored by Nigeria having the largest Muslim population (53% of total population in Nigeria) in Africa, and by over a fifth of the Nigerian population being unbanked.
This emphasises the potential for Islamic finance to cover the financial inclusion gap. Islamic banking in Nigeria is supported by less stringent prudential regulations than for conventional banks, with Islamic banks having a lower liquidity ratio requirement set by the CBN.
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Furthermore, Islamic banks have a 50% 'alpha factor', which effectively reduces the amount of risk-weighted assets, a benefit not extended to conventional banks.
Those regulatory reliefs could enhance the capital ratios of Islamic banks, facilitating their ability to expand their market presence without being constrained by capital requirements as for conventional banks. In addition, the government continued to issue domestic Sukuk bond
While Nigeria's Sukuk market is small domestically, it is the largest in Africa, with 42% of the continent's sukuk, followed by Egypt (29%) and South Africa (20%).
Korede Demola-Adeniyi said NIB accounts for only 1.7% of Nigeria's banking assets, stressing the need for advocacy, innovation, and public education to deepen adoption and dispel misconceptions about overcollateralisation.
Speaking in an interview with Web TV's Ramah Mohammed on Islamic Finance Viewpoint, Korede Demola-Adeniyi, Executive Director, South, said the NIB sector remains significantly underpenetrated, accounting for just 1.7 per cent of Nigeria's total banking assets as at 2024, despite rising demand for ethical and value-based financial services.
She noted that while modest growth was recorded in 2025, the industry must intensify advocacy and innovation to unlock its full potential.
Non-interest banking is not a niche banking. It is ethical banking designed for inclusion. We are not selling to Muslims alone. We are offering a value proposition that works for everyone," Demola-Adeniyi said.
