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Examine The Impact Of Islamic Banking On Economic Prosperity
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CHAPTER ONE
1.1 Background to the Study
Non- interest banking otherwise or also known as Islamic banking is one which raised a lot of fumes in Nigeria and the world over. It usefulness as well as its religiosity raised a lot of controversy. Some have seen it as a good way of banking while others have given it a dismissal attitude. If this is so, we would like to know what this system of banking entails and weather it is useful to the society and the world at large. In doing so, it raises a question in our mind. That is, ‘what is non- interest banking?’
Non-interest banking or Islamic banking is a banking activity that is consistent with principles of sharia and its practical application through the development of Islamic economics. Also according to Charles M. Hudwick, in his book Banking evolution, 2008, pg.205, Islamic banking refers to a banking activity or a system of banking that is in consonance with basic principles of Islamic sharia (rules and values set by Islam).
Furthermore, as defined by Abdul Gafoor in his book titled ‘interest-free commercial banking’, 1995, Islamic banking is a banking system which is based and propelled by the sharia. Nothing is done by a non-interest bank without reference to the sharia and the Quran.
Banks play a crucial role in the modern economy essentially. They perform some important functions in society and significantly influence the distribution of income, the level of economic activity and even the level of cost in a country positively. The function of financial institutions in economic development cannot be overemphasized considering the evidence from the current empirical studies, which suggest that broader, deeper, and better-functioning financial system can enhance higher economic development which is highly necessary and desirable for Muslim country’ economics (International Center for Education in Islamic Finance, INCEIF, 2006).
In 2008, the central bank of Nigeria (CBN) asserted that the poverty has been a recurring problem in Nigeria since the 1980s.it declared that 70% of Nigeria’s population of well over 150million is not only unbanked, but also lives below the poverty line. In view of this, successive Nigerian governments over the years have introduced different policies that will facilitate access to finance for all in order to reduce between the have and have not.
Unfortunately, the government’s efforts in that respect have failed due mainly to low income level or lack of awareness about/ or distance from where the services are available. For instance, the CBN long ago have presented micro finance banking in rural and urban settings to cater the needs of non-bankable Nigerians and promote financial inclusion, but still the system ended up being relentless with the problem of low patronage or participation particularly in the northern part of the country. The rejection may be owing to conventional interest based microfinance; its non-compliance with Islamic principles, especially the paying and receipt of interest(riba), which is strongly prohibited under Islamic sharia law (Aliyu,2013). The rise of Islamic banking in Nigeria rooted in 1991 with the promulgation of banks and other financial institutions Acts (BOFIA), which replaced banking Acts of 1969. In 1992, the central bank granted license for Habib Nigeria Bank limited (former bank phb and now keystone bank plc), to offer non-interest banking services on a’ window basis’. In addition, under the governorship of Charles Chukuwuma Soludo, the CBN joined the Islamic development bank (IDB) as a full member and the basic business model of this bank was to provide financial assistance and support on profit sharing, and also the international financial services board (IFSB) as full member.
The origin of Islamic banking system can be traced back to the advent of Islam when prophet himself carried out trading operations for his wife. The ‘mudarabah’ or Islamic partnerships has been widely appreciated by the Muslim business community for centuries but the concept ‘riba’ or interest has gained very little diligence in regular or day-to-day transactions.
The first model of Islamic banking system came into picture in 1963 in Egypt. Ahmad Al Najjar was the chief founder of this bank and the key features are profit sharing on the non interest based philosophy of the Islamic sharia. These banks were actually more than financial institutions rather than commercial banks as they pay or charge interest on transactions. By the end of 1970, several Islamic banking systems have been established throughout the Muslim world, including the first private commercial bank in Dubai (1975), the Bahrain Islamic bank (1979) and the faisal Islamic bank of Sudan (1977).
The history of Islamic banking in Nigeria is very short and not most individuals regard Islamic banking in Nigeria as having a history due to its young age. However, for the purpose understanding this research, we would give a brief history on Islamic banking in Nigeria. Islamic banking was first introduced in Nigeria by the CBN governor, Sanusi Lamido Sanusi as an alternative to the other forms of banking in Nigeria in the year 2010. He introduced this banking system so as to ensure that the excesses of the commercial banks where checkmated. In 2005, the Nigeria’s central Bank (CBN) approved jaiz Bank’s request to establish non-interest banking.
Also in 2008, some conventional banks sought CBN license to run non-interest banking window. It is significant to note that by the time of this research the only full-fledged non-interest bank in Nigeria is jaiz bank plc., which on 11th November, 2011, was granted a license from the Nigeria’s central bank, the national banking regulator, to operate as a regional bank. On 6th January, 2012, the institution commences business with offices and branches in Kano, Kaduna, Kwara and Abuja (Jaizbank.com) The banks ultimate objective is to expand beyond the shore of Nigeria in line with its vision. The bank intends to increase its current share capital base from ₦15 billion (USD $75 million) to ₦25 billion (USD $125 million). This upgrade will enable the bank position itself towards the actualization of its vision of serving the sub Saharan African markets effectively in one of the most thriving sectors of African economy.
The bank sees absence of sharia compliant liquidity management instruments in the Nigerian money market as a major hurdle to growing earning assets, as only Osun state has been able to issue sharia compliant sukuk bonds as of today.
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