1.1 BACKGROUND TO THE STUDY
The most recent and significant
development in the banking industry is the emergence of Islamic Banking System
and Interest-Free Banks (IFBs) in Nigeria through the CBN guideline on non
interest banking. This is in response to the failure of the conventional
interest based banking system to cater for the developmental needs of the
country which also apply to other developing economies (Ahmed, 2000).
According to Adebayo (2010), many
Muslims are not satisfied with the operation of the conventional interest-based
banking system which is against the spirit of their religion and would have
prefer a banking system within the Sharia governance framework. They are
however incapacitated by the fear of exposing their money to risk of theft
should they decide to keep their money at home, or the fact that their wages
will be paid to them through the banks, or rather, some other unavoidable
transactions with these conventional banks which do not operate in line with
the dictate of Allah. Those who opted for current accounts with these banks
still stand the risk of moving in the periphery of usurious transaction, as this
product has percolated element of interest to customers as well.
The Central Bank of Nigeria recently
joined other countries like Turkey, Jordan and Malaysia to come up with
specific guidelines and regulations for the establishment of Islamic banks,
with the difference that she (Nigeria) opted for non-interest banking just like
Turkey which refers to it as "Special Finance House" and it’s within
the framework of Sharia governance. This gives a sign of relief to the Muslims
who were not satisfied with the transaction of the conventional banks,
following the replacement of the Banking Law in Nigeria (Banking Act of 1962)
with the 1991 Banks and other Financial Institutions Decree (BOFID), which came
with the necessary framework for the establishment of Profit and Loss Bank in
Nigeria. On March 4, 2009, another Draft Framework for the Regulation and
Supervision of Non-Interest Banks (NIBs) in Nigeria was publicised. The
objective of the Sharia governance framework is to provide minimum standards
for the operation of non-interest banking in Nigeria. Among the issues
discussed inguideline include:-
- Meaning of non-interest bank
- Licensing requirements
- Models of non-interest banking
- Non-interest financial instruments
- Corporate Governance
- CBN Shariah Council
- Conduct of Business Standards
- Profit Sharing Investment Accounts,
The independence of the supervisory board
in the mission of supervision and the consistency of Shariah ruling can
contribute to an efficient Shariah governance framework. The confidence on part
of the stakeholders in the product of the Islamic financial institutions
generally and the Islamic bank in particular will be enhanced with the
existence of an efficient Shariah governance framework. (Hamza, 2013).
The concept of Islamic Banking and
Interest-Free Banking are synonymously used in Islamic Economics literature as
an alternative banking framework to the interest-based conventional banking
practice. Although in technical terms, there is a difference between an
interest-free bank and an Islamic bank but they are sometimes used
interchangeably. Ahsan (1988) defined an Islamic bank as “a financial and
social institution whose objectives and operations as well as principles and
practices must conform to the principles of Shariah and which avoid the
use of interest in any of its operations. It stands for an alternative
financial system based on Islamic ideals. It is not only a financier but also a
partner in productive economic development”.
While stating the difference between
Islamic Banking and Interest-Free Banking, Gusau (2000) argues that “Islamic
banking system is supposed to operate completely within the Shariah in
all its activities both in sourcing of funds and disbursement of the funds. It
not only avoids interest in all its ramifications but also it avoids all other
Islamically prohibited activities. Interest-free banking system on the other
hand, does not engage in interest but there is no reason to suppose that all
its other activities will be done strictly according to Shariah”.
the above, three things have become clear, namely: Islamic Bank must;
Charge no interest
Conform to Shariah principles in all its operation
Promote Islamic ideals
Thus, it can be seen
that interest-free operation is a necessary but not a sufficient condition for
a bank to qualify as an Islamic Bank. In addition to non-interest charges, the
bank must promote Islamic ideals. Therefore, Interest-Free Banking Window can
be described as the provision of Interest-Free Banking services by conventional
banks on the basis of profit and loss sharing (PLS) principles .It is an
operational strategy adopted by conventional banks in which interest-based
banking services are operated alongside Islamic banking services within the
same banking hall, for the purpose of meeting increasing demand from customers,
improve mobilizations of savings as well as benefit from the new vista of
opportunity offered by Islamic banking system. It should be seen as an integral
aspect of financial globalization which entails the integration of Islamic
financial system with the Western Financial System to produce global financial
Jaiz Bank PLC was
created out of the ashes of the former Jaiz International Plc which was set up
in 2003/2004 as a special purpose vehicle (SPV) to establish Nigeria’s first full-Pledged
Non-Interest Bank. It is an unquoted public company owned by over 3000
shareholders spread over the six geographical zones of Nigeria.
1.2 STATEMENT OF THE PROBLEM
According to Mannan (1976) who states
that Islamic banking is an interest-free financing system essentially based on
profit and loss sharing. And its operations are in conformity with Shariah governance. It is therefore,
the cornerstone of the Islamic Economic System which is by definition
Interest-Free. Siddiqi (1983) conceived an Islamic bank as a financial
intermediary mobilizing savings from the public on the basis of Mudaraba (profit
and loss sharing contract) and advancing capital to entrepreneurs on the same
basis. The bank shares the profits of the enterprise according to a mutually
agreed percentage and shares these profits with depositors according to a
percentage announced by the bank in advance. However, The researcher is out to assess the CBN
guideline on non interest banking with a view to seeing its level of conformity
with Islamic financial institutions. A juxtaposition of the guideline with the
Islamic teachings will reveal some problems in the operation of the interest-free
banking system shall also be considered
1.3 OBJECTIVES OF THE STUDY
following are the objectives of this study:
examine the impact of Sharia governance on CBN guidelines on non interest
analyze the benefits of non interest banking system in Nigeria.
identify the challenges of Islamic banking under the Sharia governance framework
1.4 RESEARCH QUESTIONS
is the impact of Sharia governance on CBN guidelines on non interest banking
are the benefits of non interest banking system in Nigeria?
are the challenges of Islamic banking under the Sharia governance framework?
Sharia governance does not have any impact on CBN guideline on non interest
Sharia governance does have any impact on CBN guideline on non interest banking
1.6 SIGNIFICANCE OF THE STUDY
study has the following significance:
study will educate the general public on the CBN guideline for non interest
banking system which is within the Sharia governance framework. Also, it will
enlighten stakeholders and the general public on the benefits of non interest
research will also serve as a resource base to other scholars and researchers
interested in carrying out further research in this field subsequently, if
applied, it will go to an extent to provide new explanation to the topic.
1.7 SCOPE/LIMITATIONS OF THE STUDY
study on the impact of Sharia governance on CBN guideline on non interest
banking system will cover the overview of the CBN guideline for non interest
banking, Sharia governance and the highlights of Islamic banking.
LIMITATION OF STUDY
Financial constraint- Insufficient fund tends to impede the efficiency of the
researcher in sourcing for the relevant materials, literature or information
and in the process of data collection (internet, questionnaire and interview).
Time constraint- The researcher will
simultaneously engage in this study with other academic work. This consequently
will cut down on the time devoted for the research work.
Adebayo, R.I (2010), "The Enabling
Environment for the Viability of Islamic Banking in Nigeria." A paper
presented at the International Conference on Islamic Banking and Finance held
at Crescent University Abeokuta between 19"1 and 22"' March, 2010.
Ahmed, A.Y. (2000). “Islamic Banks:
Bases, Mechanism and Proposals for Better Performance”. A Journal of
International Institute of Islamic Economics, Vol.3. No.4 International
Islamic University, Islamabad, Pakistan.
Ahsan, A.S.M. (1988). “Islamic Banking
in Perspective” in Molla, R.I. et al., (eds.) Frontiers and Mechanics of
Islamic Economics. Sokoto, University of Sokoto Press.
Draft Framework for the Regulation and
Supervision of Non-Interest Banks in Nigeria (BSD/DIR/GEN/NIB/01/008, March 4,
Gusau, S.A. (2000). “Interest-Free
Banking System: Theory and Practice”. A Paper Presented in a Seminar on the
Prospects and Problems of Interest-Free Banking System in Nigeria, Organized
by the SIA Management Consultants, at the Royal Tropicana Hotel, Kano. 1st –
Hamza, H. (2013). Sharia governance in
Islamic banks: Effectiveness and supervision model, International Journal of
Islamic and Middle Eastern Finance and Management, Vol 6 No 3, 226-237.
Banking: A Viable Alternative to Conventional Banking. Kaduna: Joyce Publishers.
Siddiqi, M.N. (1983). Issues in
Islamic Banking. Lencester: The Islamic Foundation.