THE concept of Islamic banking might not really have anything to do with the religion. It only means an inclusive financing package that is aimed at lifting the burden of interest rate off the people, especially the poor, or the low income or better still, people that have no access to formal banking. In this report, BUKKY OLAJIDE examines how this non-interest banking that is about to be introduced in Nigeria will benefit the people.
WHEN the harsh economic realities hit Rakiya and other members of food sellers in the market, they decided to come together to do a contribution since they belong to the informal sector, who have no access to banking.
The day’s meeting ended with shouts and the subject was penalty for defaulters of the petty loans. They could not reach an agreement and this led some of them to leave food selling and take up other less humane jobs like house-keeping (househelps).
Financial non-inclusion of people in this sector in the first place was the reason why the co-operative was set up. These people with so many factors working against them do not have access to the formal banking sector and so, cannot access loan even for petty businesses.
The concept of economic and financial inclusion stems from the fact that a large segment of population in developing countries have little or no access to financial services.
In Nigeria, only less than two per cent of rural households have access to formal banking services while aggregate micro-credit facilities account for 0.2 per cent of GDP and less than one per cent of total credit to the economy.
The successive Nigerian governments made some attempts on economic inclusion but their interventions did not record any success hence the increase in poverty of the people consequence of economic breakdown.
These included, Rural Banking scheme, Agriculture Credit Guarantee Scheme, Peoples Bank, National Directorate of Employment, Family Economic Advancement Programme (FEAP) and National Poverty Eradication Programme (NAPEP).
These supply-led credit strategies of the successive government recorded little or no success at all. The objectives of the new Microfinance Policy Framework, which came about in 2005 included the provision of financial services to economically active poor, as well as, promoting synergy and mainstreaming of informal sub-sector into the national financial system.
There were also regulatory incentives for micro-finance programme. This included, tax exemptions in the form of VAT and non-taxable interest income and Central Bank’s support through a rediscounting and refinancing facility.
Others are, creation of a N50 billion Micro-credit Fund in February 2005, and state governments requirement to allocate not less than one per cent of their yearly budge for micro credit finance activities, as well as, deposit insurance coverage.
And because economic inclusion is critical to achieving a sustainable economic growth and development, Islamic finance is another alternative financial model that is attracting serious attention all over the world now.
This is because there is a need to promote an alternative to conventional finance whose interest-based factor has promoted capitalism rather than elevate poverty.
At the workshop organised last weekend by the Nigeria Deposit Insurance Corporation (NDIC) for business editors and finance correspondents, which took place in Bauchi, the participants discussed the preparation by the NDIC to extend Deposit Insurance Coverage to these non-interest financial institutions when it is eventually introduced through the development of a draft framework.
The participants also examined the complementary role of NDIC in promoting financial inclusion in Nigeria.
At the event, the Managing Director and Chief Executive Officer of NDIC, Alhaji Umaru Ibrahim stated the commitment of the CBN and NDIC to strengthen the MFBs in the country to facilitate the achievement of the objectives for which they were set up by strengthening regulation and supervision.
The two institutions will also provide necessary incentive to encourage self-regulation through the instrumentality of National Association of Micro Finance banks in Nigeria.
On a regional and sub-regional plane, several are struggling to become the hub of Islamic Finance in the African sub-region or at least to become pioneers in the field, noted Dr. Bashir Aliyu Umar, the special adviser to the Central Bank governor on non-interest banking.
According to Umar, Islamic finance is a financial system that is based on adherence to the Shariah or Islamic law, which offers services, products and instruments based on compliance to the Divine Law.
Central to the precepts of the Shariah regarding all commercial and financial transactions is the prohibition of actions like Riba, Gharar, maysir (gambling) and purchase of unlawful goods and services.
Riba is simply interest. The extent of evil of interest is manifested in the example of Nigeria’s debt.
A breakdown shows that in 1985 the country’s debt was $5 billion. Over the years $16 billion was paid and the country still owed $28 billion.
A breakdown shows that in 1985 the country’s debt was $5 billion. Over the years $16 billion was paid and the country still owed $28 billion.
This meant that $29 billion was interest rate calculated over $5 billion debt. This shows the extent to which interest rate may prove unprofitable to a debtor both at the short and the long run.
Umar explained Gharar, also a prohibition under Islamic finance as one which lacks certainty. It refers to any uncertainly created by the lack of information or control in a contract or its conditionalities.
This includes want of knowledge over the subject of the contract or the nature of the contract or the price to be paid which entails its naure, amount or period of payment.
The special adviser gave more modern examples, which included transactions where rthe subject is not in the possession of one of the parties and there is uncertainty even about its future possession, as is the case with splecialative contracts.
Concerning mayssir (gambling), it comes under prohibition under Islamic finance because it represents an unproductive exchange of property where one wins and one loses in every transaction involving gambling.
Umar stated that it is a clear case of squandering peoples’ wealth unjustly.
Therefore, as the alternative to interest-based lending, Islamic finance adopts asset backed financing. These involve the transfer of assets and are not based on making money from money alone as is the case with interest-based transactions.
Namely, these were Musharakah, Mudarabah, Salam, Istisna, Murabana and Ijarah.
Umar noted that the Islamic banking sector worldwide has grown at a strong rate of 15 to 20 per cent annually over the past decade, from about $150 billion in the mid 1990s to an estimated $780 billion in 2009.
In 2010, he said, the Islamic banking sector assets are expected to grow by more than 20 per cent to $950 billion while the Islamic Financial Services Board (IFSB) expects the global Islamic finance assets to reach $1.6 trillion by 2012 with Islamic banking expected to remain the major at more than 80 per cent share.
Analysts have always believed that non interest banking would have significant impact on the Nigerian banking system and the economy as a whole.
Umar said that the introduction of non interest banking will herald the entry of new market and institutional players such as the Islamic Money Market, Islamic Asset Management companies, Takaful (Islamic insurance) companies and so on, thus deepening the financial market.
It will also enable a larger proportion of the Nigerian population to participate actively and effectively in economic development, while Islamic banks offer an array of products and services that cater to the financing needs of the banking public.
Umar also mentioned new competition as one of the expected benefit of Islamic banking saying that it will engender a wave of healthy competition in the banking industry with a possible concomitant reduction of interest rates, which would have a salutary impact on the economy.
His words, non-Moslems are expected to patronise the system, as they have done in other economies, either based on the ethical and social responsiveness of its investment strategy, or based on their desire to explore an alternative to conventional finance.
“Islamic finance though based on a religious law, is not just a religious activity that adherents are the only expected people, who engage in it. It is a business activity open to all segments of the society.
Umar stated further that through financing instruments such as Sukuk, non interest bank can provide much needed finance for the developments or critical infrastructure, thus supporting the developmental agenda of government.
The development of the real sector of the economy is not left behind.
The development of the real sector of the economy is not left behind.
The special adviser explained that because of its asset-backed financing nature, non-interest financial services will have the effect of availing funds only to the production and real investment activities, and based on its practical record of success in Micro Finance Banking in countries like Indonesia, Bangladesh and Pakistan, it is expected to contribute positively to the development of the real sector of the economy.
Speaking on the role of Microfinance banks in financial inclusion, the Director of Research, Policy and International Relations Departments, NDIC, Dr. Ade Afolabi called for a policy design that will identify the target population, their needs and obstacles to accessing financial services.
In the resolution of failed microfinance banks, the director said one of the lessons learned is the need for stricter licencing regime.
According to Afolabi, lessons also showed that lack of exit mechanism for ujnlicenced and illegal financial intermediaries fosters unhealthy competition, erodes public confidence and inhibits economic inclusion.
While stressing a need for greater discipline from both borrowers and lenders, Afolabi said that the business model of micro finance banks requires a radical review, that is, rather than rely heavily on the money and capital market for funding, they should develop innovative products for deposit mobilisation.
“With a large unbanked populace, there is a huge potential for deposit mobilisation for economic growth and development. Economic inclusion remains a veritable strategy for Nigeria’s development. The lessons learned from the past and present initiatives should guide future direction.
Speaking on the “role of the press in promoting financial inclusion,” the Editor-in-Chief, Peoples Daily Newspapers, Mallam Rufail Ibrahim stated that the formal financial system serves only about 40 per cent of the economically active population. And the services of the formal Micro Finance Institutions (MFIs) are available to only about 1 million of the over 40 million Nigerians in need of their services.
Ibrahim observed that government in Nigeria, especially at the federal level, have over the decades intervened to redress these imbalances, but with little effect, largely because the approach has been faulty and the objective of the intermediation efforts has been ill-defined.
“Government’s approach has often been to create financing institutions and instruments, which end up not being able to squarely address and solve the problems largely because of poor funding and lack of effective supervision.
But the government intervention also fails largely because it defines the objective it sets out to achieve as alleviating poverty and not eradicating it, which will require a different and more effective approach.
“Yet, the problem of poverty is one that must be solved if we are to build a virile economy and a democracy in which the Nigerian people will realise their full potentials in a free and conducive environment.
“The government must, as a way of addressing the problem put in place the right policies, framework, instruments and institutions for the enhancement of the flow of financial services to the rural areas and promoting financial inclusion as a way to empower the poor and the small entrepreneur.The press has an important role to play in ensuring this.”
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