Islamic Banking and the concept of economic development: The Nigerian perspective
By MUhammAd Babayo
kudos974@yahoo.co.uk
Socio-economic justice and equitable distribution of income are among the paramount goals of an Islamic economy, and these goals must be reflected in an Islamic financial system. There are various institutions and structures Islam has installed through which income and wealth can be distributed to fulfill the basic needs for all in society. Among others Zakah, Awqaf and Qard Hassan have played an important role in the past in increasing the welfare of society and mitigating poverty. The social objectives of Islamic financial system can be fulfilled if these important traditional Islamic institutions are integrated into the contemporary financial sector.
Islamic Banking institutional framework allows the establishment of institutions catering to such diverse needs of the society. Islamic Banking is defined by encyclopedia as "a system of banking or banking activity that is consistent with Islamic law (Sharia) principles and guided by Islamic economics. In particular, Islamic law prohibits usury, the collection and payment of interest, also commonly called riba in Islamic discourse. In addition, Islamic law prohibits investing in businesses that are considered unlawful, or haraam (such as businesses that sell alcohol or pork, or businesses that produce media such as gossip columns or pornography, which are contrary to Islamic values). "
Since the advent of Islamic Banking in the late 20th century there have been a record of tremendeus achievement both in terms of wealth creation and socio-economic development in there respective societies.
The western analyst suggested the folly of adapting such a system. But by 1988 the challenge was met when research, using modern analytic financial and economic theory showed that:
A modern financial system can be designed without the need for an ex ante determined positive nominal fixed interest rate.
No debt contract, did not necessary mean that there would have to be zero return to capital.
It was that expected return which determined investment.
It was also the expected return, and income, which determined savings.
Therefore, there is no justification for assuming that in such a system there would be no savings and investment.
Finally, it was shown that, in an open-economy macroeconomic model without an ex ante fixed interest, but with returns to investment determined ex post, there was no justification to assume that there would be a one-way capital flight.
One factor that might influence the need of Islamic Banking in Nigeria is the size of Muslim population. Nigeria’s recent census shows that Muslims make up 55 per cent of the country’s population. Thus, the estimated number of Muslims stands at 77 million. This represents a potential market for financial service providers as these people are likely to engage in one economic activity or the other.
Islamic Banking in Nigeria was first introduce when the central Bank of Nigeria approved to Habib Nigerian Bank Ltd to operate non-interest banking on 4th of March 1998 which the idea was conceived since 1995. This was not realistic due to method and operational system that was adapted then.
Platinum Habib Bank Plc:
After the 2005 banking reform, Platinum Habib Bank Plc, Bank PHB (former Habib Nigeria Bank Ltd) in August 2007 achieved a complete integration of Islamic Banking principles into the structures of the conventional Banking system with its interest-free (Riba) financial products designed to ensure that Muslim faithful can operate bank account in accordance with there religion injunctions. These products includes Hajj target which enable the Muslim to save gradually for the annual Hajj, investment, deposit and current accounts.
Jaiz International Bank Plc
This bank was incorporated on 1st April 2003 as a public limited company with an authorized share capital of 2.5 billion naira, with main objective to be an investment holding company to set up non interest financial institution such as Islamic Bank, Takaful pension fund administration among others.
Some of the products and services of the Bank include current, regular savings, Hajj, investment accounts and also micro finance, leasing (Ijara), trust fund financing (Mudarabah), Equity participation (Musharaka) and Istisnah which is contract of acquisition of asset by special order. Among other services are financial advisory, letters of credit, bills of collection, foreign exchange, funds transfer and letter of guarantee.
Islamic banking and financing has gained a foothold nationally with both the Muslim and the non Muslim’s that have interest in non-interest financing. As the vast number of the Muslim in the country who reject the conventional banking system since it does not tailor with their faith by dealing with interest rate, then the outreach will be very low, leaving the poor in poverty.
The need of providing an alternative banking system in Nigeria cannot be overemphasized. Diverse approaches are needed because a one-size fits-all solution will not work. Diverse channels are needed to get diverse financial services into the hands of diverse range of people who are currently excluded.
Islamic banking survival in Nigeria depends on its economic viability, its stability, its response to challenges to its identity and confidence of depositors.
First, its economic viability, i.e. Islamic Banking will always be able to address financial concerns of its client, because it has different financing options that will address all people from different backgrounds. It is also noteworthy that Islamic financing implies direct linkage between financial flows and real flows in the economy. i.e. funds will flow from Islamic Banks only against real economic activities.
Second, since Islamic banking is based on risk sharing and its spreads risk between bank depositors and bank capital, it is inherently more stable. If this inherent quality is coupled with prudential regulations and supervision, transparency and good governance, Islamic banking in Nigeria can practically become an ideal alternative to traditional banking system in achieving equity, stability and efficiency.
Third, Islamic banking will provide a distinction between Islamic financing and interest-based financing in identity which will face out the challenges from conventional banking.
And lastly, the depositors will have more confidence since they are sure of their deposit as against the conventional banking that the deposit is riskier. The prospects of Islamic banking in Nigeria cannot be all analyzed in this essay because of the wide economic effects it has on the populace and the country at large.
It will become pure financial institution that will fill financial gaps standing in the way of real economic transactions at the grassroots level. It will be transparent in transactions with the clients due to compliance with the shari’ah as well as contribute to the social welfare of the economy. Islamic banking in Nigeria will grow to become a separate industrial entity that will comprise of normal banking institutions, micro finance, mutual funds, insurance companies and their equivalent and pension funds administrators.