There has been heated debate in the media over the introduction of Shariah Banking by the Central Bank of Nigeria through its Framework on Non-Interest Financial Institutions (NIFI) which it issued on 13th January, 2011. Most people have taken positions on the subject essentially based on their religion even without reading the CBN Framework which is downloadable from its website: www.cenbank.org.
I have been very vocal on the subject given my knowledge of the issues having been a Bank Examiner and since my business is consulting, particularly for the Nigerian banking industry. Last week, I was at the Colloquium organised by the Nigerian Institute of Advanced Legal Studies in the University of Lagos on Islamic Banking: Challenges and Prospects. I was invited as the Lead Presenter on the topic "Challenges of Islamic Banking in Nigeria". The Colloquium had as Chairman Alhaji Dr. Lateef Adegbite, CON, SAN, the Secretary General of the Nigerian Supreme Council for Islamic Affairs and a member of the Nigerian Inter-Religious Council (NIREC). The Central Bank Governor was the Key-note Speaker at the forum but was represented by staff of the CBN.
I have written this paper to throw light on the issues in contention to help the public understand the subject better in the Nigerian context.
Non-Interest Banking has its origin in the Jewish practice of lending money by an Israelite to a fellow Israelite without charging usury or interest as commanded in Exodus 22:25 and Deuteronomy 23: 19- 20.
Exodus 22:25.... “If thou lend money to any of my people that is poor by thee, thou shalt not be to him as an usurer, neither shalt thou lay upon him usury”.
Deuteronomy 23:19-20.... “Thou shalt not lend upon interest to thy brother: interest of money, interest of victuals, interest of any thing that is lent upon interest. Unto a foreigner thou mayest lend upon interest; but unto thy brother thou shalt not lend upon interest; that the LORD thy God may bless thee in all that thou puttest thy hand unto, in the land whither thou goest in to possess it”.
So clearly, Non-Interest Banking pre-dated Islam. In modern times, the principle of Non-Interest Banking is evident in Venture Capital and Private Equity firms where projects and businesses are financed through equity funds after the financier has assessed the risk as acceptable. Non-interest banking works essentially on the principle of RISK SHARING between the capital provider and the user. The profit or loss arising from the transaction is shared on an agreed basis. Non-Interest Banking enables persons (and projects) whose credit risk is high and unattractive to conventional lenders and who have no adequate collateral for loans to access capital.
Islamic banking as we know it today is an innovation which began in Egypt just about 50 years ago. The first formal Islamic Bank, the Dubai Islamic Bank, only commenced business in 1975. So Islamic Banking is not synonymous with Non-Interest Banking. It is merely a sub-set of Non-Interest Banking. There are successful models of Non-Interest Banking in the world that are not “Shariah-compliant” or in line with “Islamic jurisprudence.” The JAK Members Bank of Sweden (please visit http://jak.aventus.nu/22.php) is one. It has been operating as an interest-free savings and loans system in Sweden since 1970.
The CBN Framework is not only illegal but also unconstitutional. It is very insensitive to the religious sensibilities of non-Muslim Nigerians and even provocative. Below are some highlights of the repugnant guideline.
1. DEFINITION OF NIFI: “A Non-Interest Financial Institution (NIFI) means a bank or Other Financial Institution (OFI) under the purview of the Central Bank of Nigeria (CBN), which transacts banking business, engages in trading, investment and commercial activities as well as the provision of financial products and services in accordance with Shariah principles and rules of Islamic commercial jurisprudence.”
The Glossary of Terms of the CBN’s NIFI Framework states that Shariah Principles refers to “the divine guidance as given by the Holy Qur’an and the Sunnah of the Holy Prophet and embodies all aspects of the Islamic faith, including beliefs and practices”.
2. NON-PERMISSIBLE TRANSACTIONS:
· Interest;
· Uncertainty or ambiguity relating to the subject matter, terms or conditions;
· Gambling;
· Speculation;
· Unjust enrichment;
· Exploitation/unfair trade practices;
· Dealings in pork, alcohol, arms & ammunition, pornography and;
· Other transactions, products, goods or services which are not compliant with Shariah rules and principles.
3. LICENSING PRE-CONDITIONS:
· Evidence of a technical agreement executed by the promoters of the NIFI with an “established and reputable non-interest bank or financial institution”. This, in practical terms, implies compulsory partnership with an existing Islamic bank.
· NIFI’s Memorandum and Articles of Association (MEMART) to state that its business operations will be conducted in accordance with Shariah principles and practices.
4. ELIGIBLE TRANSACTIONS:
· Murabahah: Sale of an asset by the financial institution to a customer at cost plus a profit margin.
· Mudarabah: A profit sharing contract where one party contributes his entrepreneurial efforts while the other provides capital.
· Musharakah: A partnership contract between two or more parties, each contributing capital.
· Ijarah: Lease transaction.
· Salam: Forward sale contract.
· Istisna: Manufacture/construction order contract for manufacture of goods and commodities allowing cash payment in advance and future delivery according to specifications given in the contract agreement.
· Wadia: An amount deposited whereby the depositor is guaranteed his/her fund in full.
· Wakalah: Agency agreement assigning management of funds to a manager for fees.
· Sukuk: Certificates of equal value representing undivided share in ownership of tangible assets.
· Any other financing mode or structure that is Shariah-compliant and approved by the CBN.
5. CORPORATE GOVERNANCE: All licensed NIFIs are to have an internal Shariah compliance review mechanism and a Shariah Advisory Committee (SAC) as part of their governance structure.
6. ESTABLISHMENT OF CBN SHARIAH COUNCIL: An advisory body on non-interest banking and financial services to be established at the CBN to be called the CBN Shariah Council (CSC) which is to advise the CBN on Shariah matters for the effective regulation and supervision of NIFIs in Nigeria.
7. BRANDING: NIFIs shall not include the word “Islamic” as part of their registered or licensed names. They shall, however, be recognized by a uniform symbol designed by the CBN.
8. AUDIT, ACCOUNTING AND DISCLOSURE REQUIREMENTS: NIFIs are required to comply with the relevant standards
on disclosure issued by standards setting organisations including the following:
· Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI);
· Islamic Financial Services Board (IFSB); and
· Nigerian Accounting Standards Board (NASB).
All NIFIs are required to carry out an internal Shariah audit on a periodic basis to examine and evaluate the extent of compliance with Shariah rules.
9. LIQUIDITY MANAGEMENT:
· Liquid assets shall be held in line with the provision of section 15 of BOFIA 1991 provided they are Shariah-compliant.
· NIFIs shall not invest their funds in interest-bearing securities or activities. They are required to invest their funds in eligible Shariah-compliant instruments for the purpose of meeting the CBN prescribed minimum liquidity ratio.
10. RISK MANAGEMENT: NIFIs are to comply with the Islamic Financial Services Board’s Guiding Principles of Risk Management for Institutions Offering Only Islamic Financial Services.
The implications of the CBN Guidelines, allowed to be implemented, are as follows:
1. ILLEGAL REDIFINTION OF NON-INTEREST BANKING
Section 61 of the Banks and Other Financial Institutions Act of 1991 (BOFIA) has already defined a Non-Interest Bank in Nigeria as a “Profit and Loss Sharing Bank”. That is, “a bank which transacts investment or commercial banking business and maintains profits and loss sharing accounts”.
The CBN has, through the Framework, illegally re-defined a Non-Interest Financial Institution as a bank or Other Financial Institution which transacts banking business “in accordance with Shariah principles and rules of Islamic commercial jurisprudence".
2. INTRODUCTION OF RELIGION INTO NIGERIAN BANKING CONTRARY TO THE SPIRIT AND LETTER OF THE BANKS AND OTHER FINANCIAL INSTITUTIONS ACT 1991 (as amended):
Section 39 (1) of the BOFIA stipulates that “Except with the written consent of the Governor (a) no bank shall, as from the commencement of this Decree, be registered or incorporated with a name which includes the words “Central” “Federal,” “Federation,” “National”, “Nigeria”, “Reserve”, “State”,Christian”, “Islamic”, “Moslem”, “Quaranic”, “Biblical”.
3. UNCONSTITUTIONAL EXCLUSION OF NON-MUSLIMS FROM NON-INTEREST BANKING
By insisting that Non-Interest Banking products must be “Shariah compliant”, the CBN has unjustly excluded non-Muslim Nigerians from the emerging Non-Interest Banking business sub-sector contrary to Section 16 1(d) of the 1999 Constitution of the Federal Republic of Nigeria (as amended) which states that “without prejudice to the right of any person to participate in areas of the economy within the major sector of the economy, protect the right of every citizen to engage in any economic activities outside the major sectors of the economy”.
4. MAJOR CONTRAVENTIONS OF THE NIGERIAN CONSTITUTION
a) By the proposed plan to establish the CBN Shariah Council, which would obviously comprise only Muslims, the CBN would be:
i. Contravening the Federal Character Principle entrenched in Section 14(3) which states that “The composition of the Government of the Federation or any of its agencies and the conduct of its affairs shall be carried out in such a manner as to reflect the federal character of Nigeria and the need to promote national unity, and also to command national loyalty, thereby ensuring that there shall be no predominance of persons from a few State or from a few ethnic or other sectional groups in that Government or in any of its agencies”.
ii. Contravening the secularity of Nigeria enshrined in Section 10 of the Constitution of the Federal Republic of Nigeria which states that “The Government of the Federation or of a State shall not adopt any religion as State Religion”;
iii. Contravening the constitutionally guaranteed freedom of religion as stated in Section 38 (1) that “every person shall be entitled to freedom of thought, conscience and religion”.
The Central Bank of Nigeria should amend its NIFI Framework to allow non-Muslims who wish to carry on the business of Non-Interest Banking to do so without being required to comply with the principles of Shariah and Islamic jurisprudence.
This is without prejudice to the legitimate desire of Muslims who wish to practice non-interest banking as required by their religion.
Consequently, the CBN NIFI Framework should focus on the following issues:
1. Minimum Paid-up Capital and Licensing Requirements;
2. Corporate Governance;
3. Enterprise-wide Risk Management;
4. Accounting, Audit and Disclosure Requirements;
5. Rendition of Periodic Regulatory Returns; and
6. Prudential Guidelines with regard to:
i. Capital Adequacy Ratio;
ii. Cash Reserve and Liquidity Ratio; and
iii. Provisioning for Asset Losses.
The CBN should withdraw its offensive Guideline which is illegal, unconstitutional, unjust, discriminatory and inequitable. This is not about religion.
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