Is Islamic banking relevant to Nigeria’s economic development

There is a palpable apprehension in the Nigeria following the announcement by the Governor of the Central Bank of Nigeria, Mallam Sanusi Lamido Sanusi, to establish Islamic banking in the country. Given an explicitly religious dimension to Islamic banking, and given also a priori consideration of the nation’s secular status, I did harbour great doubts whether the nation’s apex bank, as an agency of the Federal Government, has the moral right to attempt to complement the existing banking systems with a full-fledged faith-based bank.

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Of course, new times require new ideas. With high-profile collapses and bailouts by governments in developed world in the aftermath of the global banking crisis in 2008, almost all economic literate persons will concede that outworn economic dogmas of yesteryears have to be abandoned and new paradigm for financial markets stability embraced.

However, while conventional banking may have taken a battering for excesses in the financial markets, can a standalone Islamic banking in Nigeria bring in a new dimension to the problems of providing and mobilising capital for economic and social development in the country?

In terms of good governance and risk management rules, and in terms of credit expansion and stimulating investments, is there any evidence that Islamic banking can really make a difference and/or create additional value to the lives of Nigerians? How is an Islamic banking different from its conventional counterpart? The answers to these questions profoundly affect, not only Islamic banking’s underlying principles, but any religious-inspired effort of every kind.

For a start, it is important to note that Islamic banking is a financial institution that is in consonance with the ethos and value system of Islam. At its most inclusive, it is governed by the principles laid down by the Islamic Shariah (or Islamic law), principally forbidding the receipt and payment of interest on any of its transaction. However since no doctrinal standards exist in Islam, Islamic banking’s financial aspects of Shariah is open to interpretation – the principles of Shariah derive from interpretations of two sources: the Qur’an and Hadith (the body of documents that records the practice, or life example of Prophet Mohammed – and some instruments may be offered or practices accepted by some institutions, but not by others, depending on where one is in the Muslim world.

For instance, Muslims in East Asia, especially in Indonesia and Malaysia, are more open-minded and less restrictive in their interpretations of Islam than their counterparts in the Middle East, particularly in Saudi Arabia which hosts the Jeddah-based ‘granddaddy’ of all Islamic banks, the Islamic Development Bank. Yet, in banking practices, harmonisation is needed at national and international levels. The lack of uniformity in Islamic banking practices makes it difficult to apply the same prudential regulatory standards – such as structuring financial instruments and financial transactions.

In any Islamic banking, it is mandatory to have a Shariah board consisting of religious scholars who will formulate permissible means of financing and oversee that the banking products are Shariah-compliant.

The critical element in all the Islamic banking modes of financing is the presumed prohibition of interest, and this, it is said, constitutes a fundamental dividing point between Islamic and traditional banking practices. However, it should be noted that over 90 per cent of Islamic banking’s portfolio is in Ijarah and Murabahah, and yet like other products, they are both based on interest, although in the case of murabahah transactions this is clearly disguised as profit or mark-up. For example, various results of the survey, and the examination of the literature and data available on those Islamic banking around the world, show that the whole package of global Islamic banking is just economic window dressing for conventional banking system. In other words, virtually all Islamic banks engage in conventional banking type of charging interest disguised in ingenious ruses.

Muhammad Saleem, is a Muslim and former president and CEO of a major international bank in New York, and a senior member of the bank’s credit and loan policy committee, headed the Middle East division and worked with a leading Islamic Bank based in Bahrain. In his book, Islamic Banking: A $300 Billion Deception, Saleem with a first-hand experience and an advisor with an Islamic bank, subjected every mode of Islamic banking to a process of critical analysis and the conclusion he reached is that Islamic banks are clearly charging interest but interest payments are masked. Amazingly, he stated: “When conventional banks, acting in a transparent manner charge interest, Islamic banks charge an equal percentage point or an amount and call it a ‘commission, fee, profit or mark-up’. This is outright deception … this exercise does nothing to promote economic development, justice, fairness or honesty.”

Also, two business professors, Beng Soon Chong and Ming-Hua Liu of Auckland University of Technology, New Zealand studied the main features of Islamic banking in Malaysia, the largest Islamic banking, capital, and insurance markets in the world (World Bank, 2006), and where a full-fledged Islamic banking system already developed alongside a conventional banking system. In their findings, published in the Pacific-Basin Finance Journal, under the title, “Islamic Banking: Interest-Free or Interest-Based?”, they declared that Islamic banking practices differ only cosmetically from those of conventional banking systems, concluding that: “In practice, however, we found that Islamic banking is not very different from conventional banking from the perspective of the PLS [profit-and-loss sharing] paradigm. On the asset side of Islamic banking, we found that only a negligible portion of financing is based on the PLS principle. Consistent with Islamic banking experiences elsewhere, a large majority of Islamic bank financing in Malaysia is still based on non-PLS modes that are permissible under the Shariah law, but ignore the spirit of the usury prohibition. On the liability side, the PLS principle is more widely adopted in structuring Islamic deposits. Our study, however, provides new evidence, which shows that, in practice, Islamic deposits are not interest-free.”

There is no denying that with almost $822 billion in assets, Islamic banking constitutes a burgeoning financial phenomenon in the world. Indeed, apart from Muslim-dominated countries such as Bahrain, Bangladesh, Brunei, Egypt, Jordan, Iran, Malaysia, Pakistan, Indonesia, Saudi Arabia and Sudan which have either partially or wholly ‘Islamised’ their banking systems, there are also banks in Europe and North America, including HSBC, Deutsche Bank, JPMorgan, Standard Chartered Bank, University Bank in Ann Arbor and Devon Bank in Chicago that have set up Islamic banking windows or subsidiaries for the benefits of growing Muslim population wanting to invest according to the guiding principles of their faith. China too has recently awarded its first licence for Islamic banking to Bank of Ningxia, paving the way for Shariah-compliant financial transitions, especially in the country’s vast retail and wholesale sectors. The visible international character of Islamic banking could also be noted in the creation of the Dow Jones Islamic Market US Index in 1999, of the Dow Jones Islamic Fund (IMANX) owned by the North American Islamic Trust– a Saudi-controlled non-profit institution that holds title to hundreds of American mosques – in 2000, and of the Dow Jones Citigroup Sukuk (Islamic Bond) Index in Kuala Lumpur, Malaysia in 2003. Similarly, European Islamic Investment Bank , the first Shari’a-compliant investment bank in Britain was authorised in March 2006 to invest and take deposits. Overall, Islamic banking is practised in more than 50 countries worldwide.

On the other hand, it must be stressed that Islamic banking still represents just one per cent of the global financial system. And as much as many Muslims may want to believe, the growth of Islamic banking in the West is not driven by the desire to promote interest-free Islamic financial products. Rather, the West is interested in the supply of funds and the opportunity to make money from wealthy Muslim countries in the Middle East.

The Western owned banks know quite well that the stated principles of Islamic banking system – sharing risks and partnering with their clients on truly profit and loss sharing basis – are not, in reality, happening and that Islamic banks are charging interest disguised in a creative way. If an Islamic bank, labels its ‘Mr Big’ a Makkah burger, so far that it has the same ingredients as ‘Mr Big’s burger, is there any difference in substance? Take for example, when a presumed interest-free Islamic bank buys its customer a car for £30,000, and requires the customer to pay back £33,000 in a year’s time or that the customer should pay five equal annual instalments of £7,913.92.

* Ajetunmobi is a lecturer in Law, University of Portsmouth, United Kingdom. He can be reached on [email protected]

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