The Central Bank of Nigeria (CBN) wants banks to key into the Islamic finance market for cheap funds following oil prices slump. It has also rolled out new governance guidelines in line with the centralised model of supervision, which is preferred globally, writes COLLINS NWEZE.
When a Muslim cleric told Ahmad Abubakar, a bank customer, that Sharia law forbids paying interest, he returned his N1 million loan from a new generation bank to the lender and turned to the fast-growing industry of Islamic finance.
It is a market that has doubled in size over the past four years and is now worth more than $2 trillion, with demand forecast to soar to new heights.
Abubakar returned the loan just one week after he got the money from his bank. “A cleric told me it is not permissible under Islam to take loans from a non-Islamic bank because they charge interest,” the white-collar worker said.
A few days later, he arranged for a loan from an Islamic bank after paying a $100 service charge. As well as the religious aspect, customers are attracted to Islamic finance by its flexibility, link to real economic activity and its ban on transactions involving speculation or uncertainty, experts say.
Growth of the Islamic finance market globally has continued unabated since last year despite poor recovery in other segments within the world’s financial markets. The International Monetary Fund (IMF) links the rapid growth of Islamic banking in developing countries to its relative resilience to financial crises as compared to conventional banking. Therefore, Sharia-compliant assets are expected to sustain double-digit growth in the coming two to three years.
With Nigerian banks facing cash crunch over oil price fall and increasing need to shore up their capital bases, the time to promote Islamic finance is now. Hence, many people saw it coming when the Central Bank of Nigeria (CBN) last week, issued guidelines for an advisory body that will oversee Islamic banking in the country.
Impact of the guidelines
Islamic finance refers to the means by which corporations in the Muslim world, including banks and other lending institutions, raise capital in accordance with Sharia, or Islamic law. With the policy guidelines, the CBN has become the latest regulator to opt for a centralised approach to the Islamic banking industry. It also indicates that Nigeria, home to the largest Muslim population in sub-Saharan Africa with over 80 million Muslims, and authorities are trying to establish the country as the African hub for Islamic finance.
Traditionally, Islamic banks have practiced self-regulation when ensuring that their products follow religious principles. But a centralised model of supervision is increasingly being favoured across much of the world.
Countries including Bahrain and Morocco have opted for such a format, which can help to limit differences between products, speed the design of new products and boost investor confidence.
For Nigeria, the advisory body, known as the Financial Regulation Advisory Council of Experts, will be tasked with ensuring all banking products that are designated as Islamic conform to sharia principles.
The guidelines set out minimum requirements for the advisory body, which will comprise a minimum of five members including a CBN official. Members, who will serve renewable two-year terms, must be qualified in Islamic jurisprudence, and are restricted from working for any other financial institution supervised by the apex bank.
Financial institutions that offer Islamic banking products are already required to have their own boards of Sharia finance experts, who are limited to serving in one institution at a time.
The advisory body will be guided by the principles of Sharia governance issued by the Malaysia-based Islamic Financial Services Board.
Besides Nigeria, global acceptance for Islamic finance is increasing by the day despite initial hitches to its survival. According to Standard & Poor’s (S&P), Islamic finance remained a demand-driven market, with scarce supply, still hampered by a limited range of Islamic financial centers and their various regulatory frameworks.
The rating agency said it believed that regulatory efforts to accommodate Islamic finance and the establishment of additional industry bodies at national levels will take center-stage starting, in 2014. Interestingly, newcomers in the industry – such as Oman, Turkey, and Nigeria, for instance, have started to trace the footsteps of fast-growing pioneers, such as Malaysia.
What experts think
An international expert in Islamic finance, Sheik Abdulkader Thomas said deposits from non-interest banking could be deployed into infrastructure funding and other developmental projects.
Thomas, who is an American living in Kuwait, described Nigeria as a huge market for non-interest banking, given its large population base. He said the banking concept is a viable means of gathering huge deposits, adding that although Nigeria’s infrastructure is seen as weakness, deposits from non-interest banking can be used to fix it.
He said: “We have to look at a country like Nigeria from a different perspective. Kuwait has small population, with very high wealth. But Nigeria has very large population. We believe that non-interest banking will be very important to gather savings from the grassroots population,” he said.
He said the billions of dollars in the non-interest banking accounts globally, cannot find its way into Nigeria, rather, the country should generate its own funds to finance key projects and create wealth for its citizens.
President, Chartered Institute of Stockbrokers (CIS), Ariyo Olushekun, said prospects for Islamic finance are very bright. He said the finance system has become necessary since a very significant proportion of Nigerian population strongly believe that based on the nature of the capital market and the dictates of their religion, they cannot invest in the market. He said there is therefore, need to develop products that are attractive to these set of investors to allow easy flow of their funds into the market.
“The one that is popular is Islamic finance. Some Christians also do not like certain things, some do not like alcohol, some cannot put their money in companies producing arms and ammunitions some cannot put their money into companies that are gambling and all that. So, all these funds are outside the market, we need to bring them in, call them any name. If traditional or Idol worshippers need certain product, develop it and use it to bring their money into the market. The same thing applies to everybody,” he said.
Olushekun explained that these products are limited to any religion, adding that what is important is to improve the depth of the market by introducing products and instruments that will channel funds and savings into the market. This, he said, would allow those who have projects to raise limitless amount of money from the market to execute those projects.
Capital base
The CBN guidelines on non-interest banking put the minimum capital base of N10 billion for National Islamic Banks and N5 billion for regional Islamic banks. However, the regulator allows deposit money banks to offer non-interest banking products, using existing structure such as the branches, even manpower.
According to the CBN, Nigeria should not ignore Islamic Finance, which has become household name in Europe and America. For instance, the United Kingdom’s Prime Minister, Mr. David Cameron recently resolved to make London the global hub of Islamic finance, hence the need for Nigeria to wake up to opportunities the finance system presents.
Speaking at the World Islamic Economic Forum, Cameron expressed his desire for London to be one of the greatest capital of Islamic finance. According to him, steps had already been taken to open up London for more Islamic financing activities.
“Already London is the biggest centre for Islamic finance outside the Islamic world. But today our ambition is to go further still. I want London to stand alongside Dubai and Kuala Lumpur as one of the great capitals of Islamic finance anywhere in the world,” he said.
Nigeria’s perspective
Nigeria’s profile as Africa’s most liquid debt market after South Africa has been rising since JP Morgan and Barclays last year, included its bonds in their sovereign bond indices, encouraging greater foreign participation in its debt market. The use of Islamic finance in Africa could grow further as several north and sub-Saharan African countries including Morocco, Tunisia, South Africa and Kenya are laying the legal groundwork to issue sukuk, an Islamic finance bond.
Osun State, Nigeria recently floated the country’s first Islamic bond, taking a major step towards developing an Islamic finance industry in the country. Analysts said the Nigerian Sharia-compliant bond issued by the state while relatively small at $62 million, signaled the start of a trend.
The sukuk is based on an ijara structure, a common leasing arrangement in Islamic finance, which bans payment of interest. Sukuk have become an increasingly popular investment globally, particularly among cash-rich funds in the Gulf and Southeast Asia.
The CBN has so far registered Jaiz Bank, and has given a licence to Stanbic IBTC Bank to operate some window. Sterling Bank also has approval to operate an Islamic window. This is in addition to the work being done by the National Insurance Commission to promote Takaful, an Islamic insurance product.
Russia example
Russian banks are developing their expertise in Islamic finance to help broaden funding sources for local firms hurt by Western sanctions. Though Russia’s Islamic banking sector is still in its infancy, an estimated 20 million Muslims living in the country are seen as a potential source of money, as are cash-rich Islamic funds abroad.
However, the EU and the US are seeking to cut overseas funding to Russian firms over Moscow’s support for the rebels in eastern Ukraine. Banks in the Middle East and Southeast Asia, the major markets for Sharia-compliant debt, are wary of becoming tangled in the sanctions. So, some Russian lenders are trying to build their own in-house knowledge of Islamic finance.
State development bank Vnesheconombank (VEB), which has been targeted by the sanctions, is seeking help from Middle East firms to develop its Islamic finance expertise, a spokesperson said, without naming those institutions. “VEB sets as it goal diversification of project financing instruments, and among those considers Islamic finance tools.”
VTB Bank, Russia’s second-largest lender and another sanctions target, is exploring sukuk deals for several of its clients, although some questions remain over the accounting treatment of such transactions, the bank said. “Nonetheless, this remains a current issue, especially given growing interest in Asian markets.”
In December last year, officials from institutions including Moscow Industrial Bank, VEB and SME Bank took part in a trade mission to the Gulf region, with Islamic finance featuring in the discussions.
