After two years of its introduction into the Nigerian banking arena, non–interest banking has not yet fully permeated the financial system. Despite the licensing of two full-fledged non-interest banks, many Nigerians appear to still be groping in the dark as to how it operates. What is non-interest banking (and which in this case seems to be quite synonymous with Islamic banking) and how does it operate? These are questions that many Nigerians and even those who claim to be financially literate continue to ask.

Non-interest banking, experts say, operates on defined principles such as interest prohibition in debt and exchange contracts, the prohibition of uncertainty or speculative behaviour in business transactions and the prohibition of any form of gambling. It also prohibits funding of what are considered to be unethical concerns such as alcohol, tobacco, ammunition manufacturing and adult entertainment institutions among others.

These qualities set them apart from the conventional banking system though it still survives on the principle of profit-sharing.

On a historical swing, it is to be noted that it was in 1963 that the first modern Islamic bank on record was established in rural Egypt by the economist,  Ahmad Elnaggar, with the stated intention of appealing to people who lacked confidence in state-run banks.

 In recent times, and as part of a more deliberate revival of Islamic identity, several Islamic banks have been formed to apply these principles to private or semi-private commercial institutions within the Muslim community. Ever since then, the number of Islamic banks has grown in number and size. As at 2009, there were over 300 banks and 250 mutual funds around the world complying with Islamic principles, and around $2 trillion was sharia-compliant by 2014. Sources say this figure may have even been tripled at the moment.

Advocates of Islamic banking believe that banking practice must return to the path of “divine guidance” and the rejection of the “political and economic dominance” of the West. They also note that it is about the “most visible mark” of Islamic revivalism, even as they promise “no inflation, no unemployment, no exploitation and no poverty” once it is fully implemented. Islamic banking operations and products are gradually growing in Nigeria with two full-fledged non-interest banks and about 21 other commercial banks scrambling to obtain licenses to sell some of its products.

Also from a point of history, it is to be observed that Islamic banking crawled into Nigeria in 2007 when the guideline for its operations emerged according to the non-Interest banking regime under Section 33 (1) (b) of the CBN Act 2007. This became necessary also to deepen financial inclusion as well as accommodate the Muslim religious believers who were not very comfortable with the operations of the conventional financial institutions.

Jaiz bank is the first non-interest (Islamic) bank operating in Nigeria. Being that Islamic banking is grounded in Sharia or Islamic principles and morals; the financial institution does not support businesses that could impact society negatively.  A second Islamic financial institution, TAJ Bank, has recently been licensed.

“As part of government’s financial inclusion policy, Jaiz Bank is founded to tap the existing banking opportunity’’, says Sapovadia Vrajlal of the American University of Nigeria, AUN.

By expanding the range and reach of financial products, Islamic finance could help improve financial access and foster the inclusion of those deprived of financial services. Islamic finance emphasizes partnership-style financing and could foster entrepreneurship, reduce poverty. It could help improve agricultural finance, contributing to improved food security. Islamic finance can help meet the needs of those who don’t currently use conventional finance because of religious reasons,’’ Sapovadia Vrajlal of the American University of Nigeria also said.

Despite the challenge of its seeming complicated features in terms of efficiency and unconvincing, Islamic banking has been said to harbour a few impressive attributes.

 The first is the widespread dissatisfaction with the performance and consequences of the monetary and financial sector all over the world since the end of World War 2, especially since the 1970s.

Second is the perception that there is much more inequality in the distribution of income and wealth today than at any other time in the entire past of mankind.

However, there are fears that what could sustain Islamic banking and finance until now can hardly be expected to guarantee its continued progress in the future.

One other issue that favours Islamic banking is its moderate capital base of N10 billion to operate in every state of the Federation including the Federal Capital Territory (FCT).

In 2017 when the Nigerian government issued its maiden N100 billion 7-year debut Sukuk bond to raise money to fund infrastructure, the Debt Management Office (DMO) said it was oversubscribed.

‘’Investors across a broad spectrum comprising pension funds, banks, fund managers, institutional and retail investors subscribed to the FGN offer is an indication of the wide acceptance of the instrument’’, said the DMO of the offer.

Commenting on the growth of Islamic banking in Nigeria, Mr Jude Chiemeka, Divisional Head of Trading Business at the Nigeria Stock Exchange (NSE), reckons that the Islamic finance sector has grown noticeably over the years, from about $1.5 trillion in 2016 to about $2 trillion in 2018, driven by growth in Islamic banking assets as well as growth in Sukuk issuances on the stock market.

Similarly, Jubril Salaudeen, Managing Director of Citiserve and an expert on Islamic finance, says sensitisation efforts are necessary due to the various misconceptions that surround Islamic finance instruments introduced in Nigeria’s capital market.

Jaiz as Islamic banking success stories

Jaiz Bank has defied all odds to enjoy another good year. This is evidenced in its 2019 end of year results which was made public on the floor of the Nigerian Stock Exchange (NSE).

The only bank in the country that is run on the principles of Islamic ethics, it posted a profit of N2.443 billion, representing 193 per cent growth above the N834billion achieved in the corresponding period of 2018.

Similarly, the first fully-fledged non-interest financial institution in Nigeria had its gross income from financing transactions grow by 68 per cent; from N7.515 billion in 2018 to N14.715billion in 2019.

Industry analysts observe that the double-digit growth achievement in the bank’s top and bottom lines were fuelled by income investment activities and fees and commissions. While the bank’s total assets jumped by 54 per cent to N167.273billion, its total expenses also rose 38 per cent from N6.161billion in 2018 to N8.541billion in 2019.

The increase in the bank’s revenue was attributed to growth from Murabaha transactions. (In Islamic finance, Murabaha is a sales contract in which a bank buys an item from a client for a predetermined profit over the cost of the item, then sells the item back to the client in instalments. It is similar in structure to a rent-to-own arrangement.)

The bank also enjoyed a huge advantage from the Sukuk investment.

While the Murabaha Receivables rose 46 per cent from N25.330billion in 2018 to N37.110billion in 2019, Sukuk investment rose 107 per cent to N41.086billion in 2019 from N19.819billion in 2018.

Over the last few years, Jaiz bank’s performance, however, has been mixed. For instance, the bank reported a total income of N9.9billion against N4.3 billion in 2014, N4.534bn in 2015, N4.688bn in 2016, N6.296bn in 2017 and N7.059bn in 2018, before rising to N10.643billion in 2019. Its expenses increased to N4.6 billion in 2016 from N3.5 billion in 2015. Expenses also increased to N5.402 billion in 2017, N6.161billion in 2018 and leapt to N8.541billion in 2019 while operating profit for the 2016 financial year was reported at N343million and then N894million in 2017.

The bank ramped up its total assets as of December by 28 per cent to N67.6 billion from N52.6 billion in 2015. It rose to N87.312billion in 2017, N108.462billion in 2018 and N166.8billion in 2019 as shareholder’s funds appreciated to N14.7billion from N11.4billion recorded in 2015. Its shareholders’ funds stood at N13.679bn in 2017 and dropped to N13.109bn in 2018 and further dropped to N11.109billion in 2019.

From a loss position in 2012 and 2013, Jaiz Bank has grown its profit after tax to N311.2 million in 2016, N537.1million in 2017, N834.3million in 2018 and N1.786billion in 2019.

There is a consensus that there are growth opportunities for Islamic Banking in Nigeria given her relatively large market.

Experts explain that Islamic Banking (Non-Interest Banking) is a profitable growing global phenomenon practised in nearly 70 countries across the globe. These countries include the United Kingdom, Canada, the United States of America, the United Arab Emirate, Malaysia, China, Singapore, South Africa, Kenya etc.

Global Banks like HSBC, Citibank, Barclays Bank etc. also have windows for it. It is an alternative financial service offering which is open to all irrespective of race or religion.

The first Islamic bank was established in Malaysia in 1983 while in 1993, commercial banks, merchant banks and finance companies begun to offer Islamic banking products and services under the Islamic Banking Scheme (IBS banks).

The growth of Islamic banking has outstripped that of conventional banking in recent years with total Islamic banking assets crossing the US$1.5 trillion mark in 2013.

Other Nigerian Banks that have equally explored Islamic Banking opportunities include Stanbic IBTC (a unit of Standard Bank Group Ltd) and Sterling Bank.

Practitioners insist that non-interest banking is based on the ethical principles of fairness, transparency and integrity. This variant of banking offers almost all the services of conventional banks. The difference is that non-interest Islamic Banks do not give or receive interest, nor finance anything harmful to society from an Islamic point of view, such as alcohol, tobacco and gambling etc. They also seek to avoid gharar – excessive speculation, uncertainty in a contract and lack of transparency.

Despite the seemingly overwhelming successes recorded by the bank in a short period of operation, the organisation has been grappling with numerous challenges which also seem strong enough to dampen its progress if not checked.

As a new brand of banking which is alien to the majority of Nigerians,’ the bank must do a lot more, in terms, of awareness to not only the public but also among other stakeholders including the regulators, the investing public and customers. The perception is still that the organisation serves the interest of Muslims alone.

Even practitioners of the Islamic faith have confessed ignorance and lack of understanding of the nitty-gritty of the bank’s products.

”We thought it was going to be like a quasi – charity organisation that will not demand payment for its services”, said Abdullahi Kangiwa, a civil servant in Abuja.

Similarly, a PhD holder in economics and the retired senior banker was quick to say that he does not understand the operations of Islamic Banking.

”I will not be able to invest in what I do not understand. I don’t understand Islamic Banking at all”, said the academic who pleaded anonymity.

And there is an admission from the inside that of a truth there is indeed a challenge:

”We have a responsibility to always explain to these people that our model of banking is only another vehicle channel or purpose of the organisation remains the same. The truth is that Islamic bank is an organisation set up to make a profit, sustain itself and support such profit for stakeholders, to enable them to have value for their investments,” former Managing Director, Jaiz Bank in Nigeria, Hassan Usman had said.

Unlike the conventional banks, experts have said, non-interest banks lack the enabling environment, especially in the areas of infrastructure that suit Islamic banking operations. They believe that the bank lacks the depth of instruments to put its excess liquidity.

Whereas conventional banks can invest their liquidity in treasury bills, bonds, or overnight to other counters -parties in the financial system, non-interest bank have very limited options and products. One other major challenge facing non-interest banking is the lack of trained manpower.

Practitioners are very few, in terms, of quantity and quality of persons who can manage Islamic banking operations. Also, deposits in Islamic banks are usually based on the principle of profit and loss (Musharaka or Murabaha). If something happens and the bank suffers loss it has to be transferred to the depositor directly.

This fear of loss is the biggest barrier to deposit mobilisation in Islamic banks. In some cases, it leads to withdrawal of funds. Market analysts argue that the depositors should be provided with some kind of protection to encourage them.

BH research revealed that while many Southerners seem ignorant of Islamic Banking in Nigeria, the Northern region sees it as their own and it is growing in popularity by the day in that stretch of Nigeria. One move that helped increase awareness about it in the South was in 2012 when it listed its shares on the trading floor of the Nigerian Stock Exchange (NSE).

Interestingly, the bank also offers a range of domesticated products that are tailored to serve its customers. Some of these products include JAIZ Kids Savings Account, Jaiz Auto Ijara, JAIZ Premium Savings Account, JAIZ Salary Current Account, JAIZ Domiciliary Account and JAIZ Investment Account.

Other common Shariah banking concepts include: Safety Deposits, Profit sharing, Mortgage

Higher Purchase, Joint venture, Agency and Interest-free loan

Dr Farouk Umar, the President, Association for the Advancement of the Rights of Nigerian Shareholders who owns huge shares in the bank told Business Hallmark in a telephone interview that investing in the shares of Jaiz Bank which depends on profit sharing has paid off. ”It is a good investment. The bank has good management and it is doing well. I encourage people to invest in the bank because it is profitable”, he said.

Chairman, Progressive Shareholders Association of Nigeria, Mr Boniface Okezie, shares the views of Faruk Umar on the viability of investing in Jaiz Bank. ”I have shares in Jaiz Bank. I have not received any dividend yet but there is hope that it will do well in due course,” said Okezie.

Jaiz Bank’s age could be seen as an advantage given that it has not yet been exposed to those difficult and crisis-ridden areas like the oil & gas and energy sectors. These sectors have tied down huge funds of banks as non-performing loans.

It is a view that is supported by an insider: ”because we are not heavily exposed to oil business financing (offshore and downstream). We don’t have significant exposure to those very difficult areas. Our balance sheet is heavy with the assets we created in the real estate area.”

And talking about housing and the relative volatility in the sector at the moment, he observes: ”The worst-case scenario is like Nigeria has a deficit of about 17 million houses, most Nigerians need a house. In the short to medium term, I don’t see that as a major issue for our bank, looking at the size.

Again, with its recent acquisition of a national operating licence, Jaiz Bank craves to expand and compete with conventional banks in other regions of the country. But market observers believe the bank should tread cautiously and take its expansion strategy gradually, given that we currently reside in a weak economy. Whereas there may be a huge potential market for Islamic Banking in Nigeria, penetration to regions that are not Sharia-compliant will be a herculean task. However, research reveals that the UK is said to be the hub of Islamic Banking in the world, yet only 5% of its population are Muslims.

“Whether it is Christianity or Judaism, every community wants to borrow money without being bogged down with a multi-layer interest structure. “This banking option is a product with a difference. We hope our brothers from across the divide will see it as an ethical bank which is not meant to promote a particular religion. It is for all Nigerians and not Muslims alone. Once you have a viable project proposal which is ethical, which doesn’t cater for such things as liquor, gambling etc, it becomes a halal (lawful) project and would be looked into by the bank,” says its Chairman, Umaru Abdul Mutallab, himself a former Chairman, First Bank of Nigeria.

Founded in 2003, Jaiz Bank is the only full-fledged non-interest bank in Nigeria with 26 branches in 14 states in the country. The bank was recently awarded a national licence by the Central Bank of Nigeria to operate across all 36 states, including the Federal Capital Territory, Abuja. As conventional banks struggle to come to terms with a slower-paced growth in national output, GDP, investors and traders alike are increasingly investigating the potential of non-interest banking to provide investment and financing alternatives, apart from the difficulties with unfamiliar names, non-interest banking appears to be a concept whose time has come.