Jaiz Bank : Can Islamic Banking Compete?

By Okey Onyeweaku

Jaiz Bank’s impressive unaudited first quarter results for 2017 has proved that non-interest banking financial institution’s can survive in a capitalist market- driven environment . Initially considered to be an oddity with several market analysts doubtful of its long term viability Jaiz seems to have lunged ahead of earlier skepticism as investors pick renewed interest in the bank.
Nigeria’s premier non-interest banking institution, reported a thundering earnings growth of 176 percent after tax in Q1 2017.
Out pacing industry expectations, the bank’s unaudited financials show that profit after tax (PAT) rose from N73.8 million in Q1 2016 to N203.7 million in Q1 2017. However, this juxtaposes the the 66 per cent plunge in earnings it took at the end of 2016. Year end 2016 profit after tax plummetted from N910 million in 2015 to N311.3 million in 2016.
But in a remarkable twist and pushing against adverse market expectations the banks results for the first three months of 2017 suggest that the banks management has gotten a firmer grip of operations and has been less lax with investment decisions and lending portfolios.
Q1 2017 financials show that Gross Income from Islamic Financing transactions surged 24 percent to N1.6 billion while Total income also added some notches which took it to N1.4 billion against N1.1 billion recorded in the corresponding period of the previous year.
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 installments. It is similar in structure to a rent-to-own arrangement.)
Murabaha transactions, in fact, recorded an increase of 76.3 percent to N794.4 million for the review period.
Jaiz Bank’s total investment income also grew 59 percent to N79.7 million from N50.1 million while Total assets went up 34 percent to N78.7 billion from N58.7 billion in the same period of 2016 given mainly to an increase in Murabaha receivables and investments in Ijara assets.
Over the last fifteen months jaiz banks performance, however, has been mixed. For instance, the bank reported a total income of N9.9billion against N4.3 billion in 2015. Its expenses increased to N4.6 billion from N3.5 billion while operating profit for the 2016 financial year was reported at N343million.
The bank ramped up its total assets as at December by 28 per cent to N67.6 billion from N52.6 billion in 2015 as shareholder’s funds appreciated to N14.7billion from N11.4billion recorded in 2015.
From a loss position in 2012 and 2013, Jaiz Bank has grown its profit after tax to N311.2 million in 2016.
There is a consensus that there is 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 practiced 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 equally explored Islamic Banking opportunities including banks like 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 that is harmful to society like alcohol, tobacco, gambling etc. They also seek to avoid gharar – excessive speculation, uncertainty in 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.
In fact, even practitioners of the Islamic faith have confessed ignorance and lack of understanding of the nitty gritty of the banks 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 in economics and 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 .
‘’So, 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 profit, sustain itself and support such profit for stakeholders, to enable them have value for their investments,’’ Managing Director, Jaiz Bank in Nigeria, Hassan Usman said.
Unlike the conventional banks, experts have said, non-interest bank lacks the enabling environment, especially in the areas of infrastructure that suits Islamic banking operations. They believe that the bank lacks depth of instruments to put its excess liquidity.
Whereas conventional banks can invest its liquidity in treasury bills, bonds, or overnight to other counter -parties in the financial system, non-interest bank have very limited options and products.
One major challenge facing non-interest banking is lack trained man power.
Practitioners are very few, in terms, of quantity and quality of persons who can manage Islamic bank operations. In addition, deposits in Islamic banks are usually based on 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 clients.
BH research revealed that while many Southerners seem ignorant of Islamic Banking in Nigeria, the Northern region see it as their own and it is growing in popularity by the day. One attempt that made it a bit known in the South was in 2012 when it listed its shares on the floors of the Nigerian Stock Exchange (NSE).
Interestingly, the bank also offers a range of domesticated tailored to serve its customers. Some 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 on a phone interview that investing on the shares of Jaiz Bank which depends on profit sharing has paid off.
‘’It is a good investment. The bank has a 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.
In fact, 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.
‘’ But, 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.’’
‘’The worst case scenario is, like Nigeria has a deficit of about 17 million houses, most Nigerians are in need of a house. In the short to medium term, I don’t see that as a major issue for our bank, looking at the size.
In 2016, which was a really bad year, if you were doing business with counter-parties, you would have some delays in debt-servicing. But, we are not doing that in Nigeria. We are not financing businesses. I am sure customers were having issues in debt servicing. But we are within tolerable limits’’ he also explained.
With its recent national operating licence, Jaiz Bank craves expand and compete with conventional banks in other regions of the country. But market observers believe the bank should trade cautiously and take its expansion strategy gradually in a weak economy. Whereas there may be huge market for the Islamic Banking in Nigeria, penetration to regions that are not Sharia compliant will be a herculean task. However, research reveals that the UK which 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 bugged down with multi-layer interest structure. “This banking option is a product with a difference. We hope our brothers from 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.” Said its Chairman, Umaru Abdul Mutallab, 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 ineterst banking appears to be a concept whose time has come.