Islamic Banking in Nigeria: Problems, Principles and Prospects

Islamic Banking in Nigeria: Problems, Principles & Prospects

What is Islamic Banking? Wikipedia defines Islamic banking (Arabic: مصرفية إسلامية‎‎) as banking or banking activity that is consistent with the principles of sharia (Islamic law) and its practical application through the development of Islamic economics. As such, a more correct term for Islamic banking is sharia compliant finance.

Islamic banking initially started in Pakistan and Egypt. Presently, its principles are now practiced in virtually all Arab countries and is even evident in the Northern states of Nigeria. The difference between Islamic banking and other forms of banking is that its operations are based on Sharia rules (Figh al-Muamalat). Hence, people see it as an Islamic or Muslim affair because the rules for Islamic transactions are applied in its operations.

Concept/Features/Principles of Islamic Banking in Nigeria

The concepts in Islamic banking includes: safekeeping (Wadiah), joint venture (Musharakah), cost plus (Mubarahah), leasing (Ijarah), and profit sharing (Mudharabah). I shall briefly discuss each of these features below:

1. Musharakah (Joint venture): in this type of venture the finances investments in the business is provided by the owner, while extra finance is provided to the party which may be an individual or group that already have some funds for investment.

Additional funds is made available with a condition of sharing profits realized in the business by the provider of the finance with the ratio of sharing based on fixed and predetermined which is also made known to all concerned.

2. Mudharabah (Profit sharing): This financing technique is the one in which the owner of the capital makes funds available to the capital user for some productive activity on the condition that the generated profits will be shared between them.

The loss of the business is bear by the capital owner while the predetermined and fixed ratio for the sharing of profit is also in place. Islamic banks have a norm which is to access the profitability of a project, back projects with higher profit rates and this is taken to be safest and most beneficial for the society

3. (Ijarah) Leasing: This is a financial technique in which an individual who is short of funds may approach another with a surplus (financier) in order to fund the purchase for the productive asset involved.

This can be done by renting or buying it out to the one who needs the asset which enables the investor to overcome the financial difficulties that has to do with purchasing the required asset.

4. Ijarah wa l iqtina (Higher Purchase): This involved a higher purchase agreement between the clients and its banks. In which, the bank agrees to rent or buy a building, equipment or other facility for the client in union with the undertaking that is signed by the client to make incremental payments into an account.

However, profits are added to the paid installments at the end of the year in order to purchase the facility or equipment but the owner of the financed equipment becomes the client at the end of the contract.

5. Bai ’al Mu’ajjal (Deferred Payment): in this terms there is immediate delivery of goods, inputs or implements while the agreed price is paid by the purchaser at a particular date in the future. The components of the price include the cost, plus the reasonable margin that covers the administrative costs.

Other features include:

• Reduction on bank exploitation by charging interest
• Attraction of idle money
• Promotion of employment
• Promotion of the Nigerian economy through non-interest banking
• Adoption of asset-backed finance

Major Problems Of Islamic Banking In Nigeria

1. Inefficient Support From Central Bank: The Islamic banking system in Nigeria is yet to receive effective support from the Central Bank Of Nigeria. These have reduced the impact of this banking system on the Nigerian economy and their development.

2. Low Western Patronage: Islamic banks are yet to be given proper assistance from banks like the World Bank as they give to conventional banks.

3. Legal Factor: Most Islamic banks in Nigeria operate without using an Islamic name as a result of the Banking Decree which has been preventing banks from using direct Islamic names as bank names.

Reference: infoguidenigeria.com, Wikipedia