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Evolving healthy financial system through Islamic banking



Even as the Central Bank of Nigeria (CBN) has indicated that it will henceforth allow banks to operate in their core areas of competence, not a few finance sector analysts have applauded that it is a development that would herald the birth of international, national, regional, mono-line and specialised banking system, such as Islamic banking.


Non-interest banking, interest-free banking, profit and loss sharing banking, now practiced in many countries across continents of the world is classified as 'Islamic Banking.' Owing to the high level of injustice and other problems associated to 'interest rate,' it was prohibited by most major religions, as Islam, Judaism and Christianity had condemned taking 'interest' in all its ramifications. A clue can be taken from specific chapters in the Bible that categorically forbid the taking of 'interest.' For instance, Exodus 22:25, says: "If you lend money to any of my people who are poor among you, you shall not be like a moneylender to him; you shall not charge him interest." Leviticus 25:35-37, states: "If one of your brethren becomes poor, and falls into poverty among you, then you shall help him, like a stranger or a sojourner that he may live with you. Take no usury or interest from him, but fear God, that your brother may live with you. You shall not lend him your money for usury, nor lend him your food at a profit."


From the Islamic point of view, the Holy Qur'an explicitly and emphatically forbids taking interest. There is complete unanimity among all schools of thought in Islam that the term "Riba" stands for 'interest' in all types and forms. At a workshop on Islamic Banking for West African bankers, Deutsche Bank had noted that the market potentials of non-interest banking in Nigeria was very high as both Muslims and non-Muslims have interest in the non-interest financing system.


Sani Aminu Dutsinma, managing director/chief executive officer, Islamic Banking and Finance Institute (IBFI), Nigeria, said "Islamic banking survival in Nigeria, like every where else, depends on its economic viability, its stability, its response to challenges, to its identity and confidence of depositors.


"Islamic banking will always be able to address financial concerns of its clients, because it has different financing options that will address all people from different backgrounds. It is also noteworthy that Islamic financing implies direct linkages between financing flows and real flows in the economy, that is, fund will flow from Islamic banks only against real economic activities.


"Since Islamic banking is based on risk sharing and spreads risk between bank depositors and bank capital, it is inherently more stable. If this inherent quality is coupled with prudential regulations and supervisions, transparency and good governance, Islamic banking in Nigeria can practically become an ideal alternative to conventional system in achieving equity, stability and efficiency.


Islamic banking will provide a distinction between Islamic financing and interest-based financing in identity, which will face out the challenges from conventional banking. Also, depositors will have more confidence since they are sure of their deposits as against the conventional banking that the deposit is riskier." Currently, a vast number of Muslims in Nigeria reject the conventional banking system on the ground that it is not tailored to their faith by dealing with interest rate.


Musa Jubril, who works in a bureau de change, confirmed that in the northern part of Nigeria, the conventional banking system was not highly patronised because of 'interest,' which is an integral part of the conventional banking system.


Another northern Muslim said: "The truth is that our current banking contravenes the belief of most people, Muslims and Christians alike. The result is excess liquidity (owing to low patronage of the banks) outside the banking system, hence the problem of liquidity control and management." 


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