The Nation Newspaper

Tag: Non-Interest Banking

  • Sterling Bank: Touching lives through non-interest banking

    Sterling Bank Plc is empowering people at the lower cadre of the economy by offering non-interest banking services to them. Group Head, Non-Interest Banking, Sterling Bank Plc, Basheer Oshodi, speaks with COLLINS NWEZE on how non-interest banking is changing the lives of people positively and why more awareness is needed to get more people into the financial services net.

    Once again congratulations on Sterling Bank’s successful hosting of the Non-Interest banking programme in Kano State. What is really driving the bank’s interest in this segment of banking?

    What we observed in this part of the world is economic growth without development. We found out that there is Gross Domestic Product (GDP) growth with increased poverty and unemployment thus there is no relationship between these indicators and better lives for Nigerians. So, poverty is still increasing, it has increased much more from the 1980s to this time. It has even increased much more from 1999 since the advent of stable democracy with unemployment also increasing. Depending on where you are getting your figures from, there are almost 50 million adults without jobs or defined source of income.

    Since unemployment is extremely high, we thought that apart from making profit as a business, which could somewhat be achieved easily, it is important to touch the lives of those at the bottom of the pyramid. Yes, we need to give those facilities; such facilities need to be cheap meaning the cost of fund needs to be low. We must also be able to guide them towards accessing market while the conditions of the debt are friendly.

    What are the important gains people can take away from non-interest banking?

    Access to fund is one thing, reduction in the cost of fund is another and then access to market also becomes very important. Now we thought why can’t we encourage entrepreneurs and High Net-worth Individuals (HNIs) and institutions to give us termed deposits?

    Most depositors like to have profit on their deposits. There are, however, others that are willing to leave their funds in current account for a defined term of one year, two years or three years provided such funds are given to those doing micro and small businesses. These businesses constitute 98 per cent of all businesses in Nigeria. In Non-Interest banking, we typically do not give out loans except under a qard-hassan (interest-free loan) for social solidarity or very micro businesses. We are basically engaged in partnership transactions, buying and selling at a markup price, and buying and leasing. That then means that markup price at every point in time is lower than 10 per cent. So, if somebody wants a generator to run her pure water business for example, we will simply buy her a generator and sell-back at a mark-up price of 9.75% per annum, she will only bring 10 per cent security deposit and two personal guarantors.

    Are there collaterals for such facilities?

    We only accept guarantors for our micro mark-up facilities, which is a maximum of N2 million. Those that want such facilities may even use their personal names rather than a business name and so the cost of doing business is reduced drastically and the cost of fund also is reduced, the deposit that he/she puts on the table is reduced, and the issue of collateral does not arise except the two personal guarantors. When we get funds cheap or at zero cost for a rather long term, and we give it out through ‘partnership’, ‘buying and selling’ or ‘buying and leasing’ mode of finance’, then, we can begin to see social impact or lives being positively touched in good time.

    We want to deal with cooperatives in large numbers since we already have funds from some foundations and high net worth individuals. We have since started to disburse while encouraging middle income earners to also contribute as little as N50,000 for one year or two years and add to the pool to funds we extend to the bottom segment.

    Of course, this means that unemployment will start to reduce with this approach that promotes self-employment. The truth in today’s Nigeria is that a lot of people cannot be employed, but can start to do their own thing. Only 0.5 per cent of Nigerian companies are large and with our massive population growth, it is unrealistic to employ the over 50 million adult population looking for jobs. With our micro mark-up facility, household incomes can start to increase, and multi-dimensional poverty can reduce. Parents can send their children to better schools, they can have access to better health facilities in the absence of national health insurance schemes and can afford to pay their rent.

    So, the idea of the programme is to be able to achieve what we call the primary purpose of non-interest finance which is to impact lives positively, make sure communities are happy and ensure that individuals are pleased. We call this communal well-being and having a good-life. As a bank, compliance with non-interest principles is most essential, followed by achieving profitability. The next most important thing being impacting lives.

    You talked about funds coming in from where you can now give out to beneficiaries that will contribute 10 per cent. You mentioned that the funds come from HNIs. But at what cost to you?

    It is basically at zero cost.  It is just like having current account, a regular current account means that the owner of the money can go to the bank anytime and collect it so I can put in N1 million in the bank today and pick it up tomorrow or next week. So, the idea now is for a lot of people to put that money in current account, but the money will have to stay for one or two or three years. Thus, the cost is almost zero.

    It is only where you have money at zero cost that you can give out money far below industry price. Don’t forget that inflation rate is 14.3 per cent, don’t forget that Monetary Policy Rate (MPR) is 14 per cent so banks will ordinarily trade at a price much higher than that.

    Are those people putting funds there aware that they are supporting non-interest banking?

    In Non-Interest Banking, the underlying contracts are defined. I am putting down this money into a qard (interest-free loan) deposit and it is for one, two or three years, that is the definition of the contract. The other part of it is that the bank should use it for micro facilities. So, the contract is clearly stated out. However, it doesn’t mean that if you want to take your  money at any time we wouldn’t give you.  When you want to redeem it, all you must do is to tell the bank I want my money back.

    I want to know if the people putting down such funds are supposed to share from whatever the business does, or they are just doing it for humanitarian sake?

    The first N100 million into this fund came in through a foundation while many of our corporate customers have also started to deposit into the fund. Now we have started to fragment it further such that individuals can also take part. The benefit is somewhat spiritual. From theoretical integral finance model, we refer to this as ‘sanctuary’ with unseen and immeasurable benefit.

    How much is in this pool of funds as we speak now?

    Beyond the exact figures, it can never be sufficient. In Nigeria we have 70 per cent of our population living below the poverty level whichever way you measure poverty. There are about five major ways of measuring poverty and it shows that Nigerians are very poor. So, even if you have a trillion dollars the problem is yet to be fully solved. What is important is to sustain that model and ensure that it consistently grows.

    Also, we want to see how we can get additional funds through retail banking. We need groups, associations and cooperative to believe in this and support such initiative.

    Can you name some of the foundations where the funds come from or international bodies that are involved?

    Basically, the funds we have now are from local foundations, corporates and individuals. They may not be popular names that you see everywhere. They only seek for the spiritual benefits.

    How do you feel, when you see the businesses that are supported with the funds thriving. What joy does it give you and how much of that have you achieved?

    From my experience, most people that take micro facilities do not default. Even where for some reasons, a business is not doing very well, and they are unable to pay in a particular month, they are usually able and willing to pay in the following month or immediately funds are received from their business. Occasionally, we give them extension which does not change the profit we charged at inception. The benefit is that we are not putting them under pressure, and they are able to expand their businesses. In Nigeria, and the bulk of Sub-Saharan Africa, assuming you have up to 100 businesses, about 90 of them are macro, another eight are small. So, 98 per cent of what we have in African countries including Nigeria are very small and micro businesses. It may be challenging to take them away from that segment, but helping them sustain their life-style would be fair.

    What do you think the regulators in this segment of the market should do to attract more interest in this type of banking because of the benefits that you have listed?

    The countries that were listed as third world countries 40-50 years have suddenly emerged as industrialised nations. What really helped them was some sort of equity injections into industries. What we have in this part of the world is debt-based intervention funds, thus the borrower will have to pay back usually within a year. But you know, debt and equity are not the same thing. Debt is usually short-term and can hardly serve certain part of industry. That means that certain industries will not grow. For countries that started doing very well in the last 40 years, like South Korea, Taiwan, Malaysia, and recently, Rwanda, you find out that there are special funds that were injected into industries because they are long term, they are patient and they allow gestation to take place. They acknowledge and accept incubation period. In the first one or two years, you may not make profits, but because the fund is equity there is no pressure to pay before breakeven.

    Don’t forget that Nigeria has the most Non-Interest finance regulation in Africa and the Middle-East. So, regulation wise, the regulators have done perfectly well. The infrastructural regulatory platform is already there. I am in support of long-term debts or equity and I am also in support of tying such debts or equity to specific projects so that funds are not unnecessarily mismatched.

    Now, we saw the oversubscription witnessed in the N100 billion Sukuk raised by the Federal Government. Does it in any way show the level of confidence people have in this type of banking?

    More than 90 per cent of institutions that bought into the Sukuk are conventional financial institutions. That is because it is guaranteed and the return/coupon is fixed. It adds to financial institutions liquidity ratio. If another Sukuk comes out now it would still be absorbed quickly. It shows that the market has matured much earlier than envisaged. People are just waiting for the opportunity to come in.

    What are the challenges you think should be tackled to take Non-Interest banking to where it should be?

    Like any other sector, it is affected by the overall economic performance of the country. So, the first challenge is that if an Islamic Bank has N1 trillion in its books as deposit, it cannot buy T-Bills or bonds because they are interest-based. The bank would also not be able to invest in other interest-bearing securities and deposits except in compliant instruments like Sukuk. It then means we need to have a lot of such that would create that opportunity on one hand. On the other hand, financial institutions can also be innovative enough and be able to come up with products that will absorb the excess funds so that such funds are not left idle. The only challenge left is in awareness. In fact, those that are banked are more aware than those that are unbanked. Those that are largely unbanked are less aware. In Nigeria, the Northwest and Northeast and more financially excluded than the remaining regions. This means the people need a lot more awareness and the expectation will be Non-Interest banking will attract them to banking.

    What is Sterling Bank taking away from this type of banking?

    We simply want to bring innovation and flavour to the banking system while impacting communities.

  • Sterling Bank to host non-interest banking forum

    Sterling Bank will be organising a one-day public lecture on non-interest banking with theme: “Reducing Poverty and unemployment through Non-Interest Banking”. The event, which holds on January 15th, in Kano is in line with the lender’s  continuous bid to sensitize the public about non-interest banking, The event which is slated for the.

    It is also part of the bank’s commitment to deepen the awareness and public enlightenment of alternative finance or non-interest banking in Nigeria.

    Speaking on the programme, the Chief Host of the Lecture and Executive Director, Finance and Strategy, Sterling Bank, Abubakar Suleiman, said the lender will continue to intensify efforts to sell the Sterling Alternative Finance offerings to customers and prospects while remaining a reference institution in the area of Non-Interest banking not only in Africa but globally.

    The Emir of Kano, Sanusi Lamido Sanusi is expected to headline the public lecture as the Royal Father of the day while the Executive Governor of Kano State,  Abdulahi Ganduje is the Special Guest of Honor.

  • ‘Non-interest banking open to all’

    ‘Non-interest banking open to all’

    Hassan Usman is Managing Director/Chief Executive, Jaiz Bank Plc, the first and only non-interest financial institution listed on the Nigerian Stock Exchange. He spoke with a cross-section of journalists on the prospects and opportunities available in the different financial windows the institution has on offer among other issues. Ibrahim Apekhade Yusuf was there. Excerpts:

    Getting listed on the Nigerian Stock Exchange (NSE)

    If you recall when we did the listing, I said we made a promise. We have to look at the history. Jaiz Bank has been a project prior to starting the business of banking in 2012. The first Initial Public Offering (IPO) we did was in 2003. That is almost 15 years.  This was before the banking consolidation. It was a time when we had more shareholders than many banks because we had more than 20,000 shareholders then. You also have to know that many of those shareholders were people who were just yearning for investments. Some of them were investing in shares for the very first time in their lives and we said look, once we start the bank and the platform gets stablised, we will list so that we can create avenue for them to buy or sell as the case may be. That is one of the strong reasons for us to list because we have to keep our promise. Secondly, we believe that listing has a number of advantages. It creates not just liquidity for the shares but also a platform to discover the price based on the interaction of demand and supply. It also enables Jaiz Bank to reach out to as many investing public as possible in and outside because the Nigerian Stock Exchange (NSE) is internationalised. The shares that are traded are also going international. In fact, what I hear is that those who own shares from outside, that is foreign portfolio investors, in terms of volume and value, they have much more stake than local. So that creates an opportunity for anybody who would like to buy the shares and also an opportunity for us to be more transparent. And because of listing requirements, it will ensure that we are more discipline in-house. The pressure to meet those requirements will make us to raise the bar of our efficiency level, governance and general compliance more so creating visibility. These were the reasons, even though the market was tough. We are looking at the long run not the short run.  We also know that there were pent up demand for people to get cash, there is the likelihood that they will come to the market and because they have been  holding this shares for many years,  they will look for the opportunity to sell.

    Prospects of Islamic banking

    Yes, non-interest or Islamic banking is open to all irrespective of their religious persuasions. The concept is informed by religion but the operation is not religious. It is not only Islam that propagates non-interest banking; it is equally informed by Christianity and Judaism. All the three religions talk about impermissibility of charging interest on loan from their roots. The operations and activities of Islamic Banking do not discriminate against any religion. The criteria are those for banking. The contract on Islamic banking is tilted towards trading and partnership, while the concept in conventional banking is on loans (Giving out money and creating debt which can be traded in). In Islamic financing, you have to deal with real commodities for you to make a return.  You can’t just give money to someone and earn a profit on it. You must partake in a commercial and entrepreneur risk to be able to earn income. This is the major significant difference. Of course Islamic finance tends to be more ethical in terms of choice of the type of business to finance. If you take these two differences that is all you have. That is for non-interest banking, we trade with our partners, we lease asset to them. We can also jointly finance and share profit or loss as the case may be. In conventional banking, you just give the loan and then you charge a pre-defined rate of interest. In Islamic banking we take initially business risk and not financial risk.  The financial risk follows subsequently but firstly, you have to take a business risk of buying the commodity and selling it on credit or buying a commodity, or an asset and leasing it. Or if you are very comfortable with a customer, you can invest in his business as a partner and then you share whatever profit or loss.

    Unique selling points of Islamic banking

    Individuals, have their lifestyles to finance. So we finance their lifestyle and this can be household equipment or motor vehicle among others. There is also the need for medical services, education services etc. All of these range of things that an individual needs, we can finance them. But we come in not by giving you the money but by providing the service or providing the commodity on a trade basis with deferred payment.  That is the kind of financing that we do – we provide the services. If it is medical for instance, we hire the service of the specialist to provide the surgery and pay for it. We get the service from the specialist and make it available to the patient who is the customer and then he pays us later. Instead of him going to the hospital and there is no money and the doctor will turn him down, we come in between, buy the service from doctor, add our mark-up, which is what we get for coming in between our customer and the doctor so that he can get his surgery or whatever treatment now, rather than later when he gets the money. So after the treatment, which was facilitated by our coming in, he pays us the money later on agreed term. And similarly, if it is education for the child, we buy the credit hours and he goes through the education now, and then pays us later. And because we are selling a service to him, we earn a profit on it.

    Awareness creation

    Part of the awareness creation is what we are doing now through this interview. You are the channel through which information is disseminated. We engage as much as possible with the media both print and electronic. We are also, now looking at our strategy for the social media as well. Also, anywhere we go, we engage the locals and tell them how this differs and how advantageous this way of banking is to them and the benefits they stand to gain and the fact that anybody, anywhere is welcome. As you can see, in our bank, we have staff members of different religions. In our customer base also, we have Muslims and Christians. So we do not discriminate. What we look at is what you can bring on the table and we deal with that.

    What Sukuk is all about

    Yes, we have been in the forefront. We have been trying to make the government to understand that this form of financing is attractive to the public sector. It provides us an avenue to diversify the way the public infrastructure is developed. And the specific instrument, which is the Sukuk is used world over. In West Africa before now, Senegal had issued it, Gambia has done that, Togo and Ivory Coast have all issued sovereign Sukuk. The beauty of a Sukuk is that unlike a conventional bond that you takeout byways and means, spend it anyhow, the proceeds of Sukuk has to be dedicated to specific projects. For instance, the just concluded N100billion Federal Government Sukuk was to construct and build roads across the country. If those projects are not identified, you cannot raise money for Sukuk because Sukuk investors cannot realize any benefit without an underlying asset. They are investing to earn and for them to earn, those projects have to be identified and financed. If it is construction of railway or airport, they have to be established. It is the services that those infrastructure will provide that is being sold by the Sukuk holders. So they now get in return the profit that is distributed or the rental that the government has to pay or whoever is using those services or infrastructure. So the return to Sukuk holder is not interest but it is the rent or profit that is generated from those projects or from leasing of those assets. So Sukuk gives an excellent way to ensure that projects are managed properly and there is no diversion, which is very rampant in this part of the world leading to so many abandoned projects.  So, we are part of this from the inception.

    Expansionist drive

    We started in 2012 with only three branches including: one each in Abuja, Kaduna and Kano. Today, we have about 30 branches and these branches cut across at least five out of the six geo-political zones of the country. We have almost covered every zone of the country with our branch expansion and we are continuing to do so because we believe that we should be in all major commercial centres to start with across the country.

    Our communication strategy is to make use of all model of communication to reach out to a community of people who are interested in this mode of banking. They still need to understand what this product is all about. At the beginning we concentrated using radio programmes that are aired regularly around the areas we are operating as a regional bank, which is the North west and North east. As we are now a national bank, we have to spread our activities and communication as well. What we are trying to do is to use a mix of radio, television viewing commercial (TVC), social media, and of cause print media.  Anywhere we go, we make sure that we meet with the media community to have interaction with them and they help us to convey the message.

    Growth trajectory over the years

    The year 2016 was a very difficult year for everybody. But let me say that in the Islamic banking world, Jaiz Bank has done excellently well. We set a record time for break-even. We broke even in 2014 and since then, we have been making profit. We made profit in 2015 and even in 2016 in spite of the difficulty witnessed in the economy. This year, 2017, looks better because fundamentals have started to improve and so our performance will follow the trend of improved fundamentals. We hope and believe that based on 2017 financials, we will be able to pay some dividend.

    Final word

    I believe that non-interest financing is the fastest growing sub-sector of the financial system globally. It is growing at an average of 15 to 20 per cent per annum. It is a strong growth area and it is being adopted in major financial centres around the world. It is a more disciplined way of financing and more conservative. It is more realistic. It is a system that tries to avoid the creation of paper assets rather it create assets that are supported by reality. It is profitable and it is growing fast. The evidence can be seen from Jaiz Bank. We have been growing at about 30 per cent per annum over the last five years. So to all our stakeholders, we assure them of the fact that Jaiz Bank is here to stay and also going to be adding greater value to the economy and to all our counter parties. The system is quite sustainable. It is supported by the reality of the economy and the specific situation of our commercial transactions. I believe we will achieve our plans and vision, which is to be a clear leader in this sector and to be a very serious contender in the rank and file of financial institutions especially banks in Nigeria and sub-Sahara Africa. To those who want to be associated with growth in profitability and sustainability, Jaiz Bank is the way to go.

     

  • ‘Non interest banking open to all Nigerians’

    ‘Non interest banking open to all Nigerians’

    Mahe Abubakar is the Deputy Managing Director of Jaiz Bank Plc, which has the pioneer status of being the first nationalised non-interest banking financial institution in the country. In this interview with Assistant Editor Nduka Chiejina, he comments on the long-held stereotypes and misconceptions about Islamic banking vis-à-vis the benefits and investment opportunities inherent in non-interest banking for prospective local and international investors. Excerpts:

    The Central Bank of Nigeria recently issued a national license to Jaiz Bank Plc. What does this mean to you and the bank in particular?

    The national license means a lot to us. We have worked tirelessly for it and thanks to the support of the apex bank through their advice and direction, we now have it. We are grateful to Almighty Allah. It is indeed a milestone achievement. It is also an opportunity for us to extend our unique brand of banking to all Nigerians. We have commenced the first phase of our roll-out with branches in Lagos, Port-Harcourt, Ibadan and Ilorin and very shortly, we will be in all the states of the federation.

    A national license requires additional and huge investment and capital, have you made adequate provisions in this direction?

    As a specialised non-interest bank, you only need a capital of N10 billion to be a national bank and Jaiz Bank has had this as far back as 2012 when we commenced operations. However, there were certain requirements that we were not able to meet at that time. We are grateful that this is now behind us. Recently, we had course to do a rights issue, which is raising our capital to N15billion. I’m happy to say that the exercise was concluded successfully as we were oversubscribed by about 3%.

    Our target is to raise the capital base to N25billion before the year runs out. This will be unveiled as soon as we have the nod of the regulatory authorities. I believe this will position us to compete efficiently in this highly competitive sub-sector of the economy.

    As a new platform offering Islamic non-interest bank, do you foresee challenges in terms of penetrating some Southern states in the country where there is limited enlightenment on how you operate?

    Well, there could be challenges due to lack of enlightenment as you mentioned. But Jaiz Bank is already a national bank in character because most of our customers are from all over the country. Our staff cuts across all the geo-political zones of the country and from all tribes and religions. So also are our shareholders. It is really not very difficult, only that there are some people that misunderstand the concept of non-interest banking. It is an alternative form of banking based on a principle of non-interest, sharing of risk and rewards, equity, fairness and justice. Some people believe because it is called Islamic banking, we are into Islamic propagation. No. It is a business that is mainly guided by Islamic jurisprudence. Of course, it is open to all Nigerians irrespective of their religion affiliations and leanings.

    We acknowledge the fact these challenges exist due to lack of knowledge, but we have equally mapped out a detailed communication strategy to address it. We only recently launched an advertising campaign consisting of print, electronic and outdoor. We intend to maintain the momentum.

    Do you think the products you offer are enough to convince the new entrants that they would get value for their investment?

    I’m sure you know that we are only four years in operation. In our third year we broke-even and made a modest profit of about N126million. In the following year, we made profit of over N800million. That tells you that we are a very profitable venture and I know Nigerians are people that are highly analytical. They would analyse and see our value proposition.

    The challenges we have mainly is that of liquidity management. If you have some deposit and you don’t invest you don’t earn income naturally. This is different from the conventional mode where the reverse is the case. Be that as it may, we have arrays of products that cater for different segments of the society.

    Now that you have a national license, how soon do we expect branches across the country?

    Like I mentioned earlier, we have already rolled out four branches in Lagos, Port Harcourt, Ibadan and Ilorin which will be opened soon. We will after this move very quickly move to other states of the federation. So, we are on course.

    Some conventional banks also operate some form of non-interest services, what exactly differentiates your bank from the others?

    Actually, what some of the conventional banks have is just Islamic banking window. They got license from the CBN to open Islamic non-interest banking window which is at par with their conventional banking activities. At Jaiz Bank, the difference is that we are a full-fledged non-interest bank. We don’t co-mingle. We are strictly Sharia compliant unlike others.

    As the bank is expanding are you also considering expanding your staff strength and other logistics as well?

    Yes. The national license would open more employment opportunities for young Nigerians and also give us or open up more alternative source of funds for businesses. As a matter of fact, we are better placed to promote the CBN policy on financial inclusion.

    You are about six months in office now. What improvements have you brought into the system in terms of your leadership style?

    My predecessor had over three decades experience in Islamic banking. I have gotten over two decades experience in conventional bank, but what I have learned in terms of Islamic banking in the last two years that I joined Jaiz Bank I can say are very valuable. For the past six months, we have been able to raise the deposit of the bank by about 30%. Besides, we have been able to raise the investment level by about 16% and equally been able to grow the balance-sheet by more than 25%.

    Apart from that, we have been able to bring down the cost of running the bank by about 20%. To me that is a modest achievement. We have also opened our training centre in Zaria, which has been in the pipeline for a long time. We are now building the much needed capacity that is lacking in the area of Islamic banking and finance.

    Many banks are having difficulties in managing forex, how do you manage your forex?

    Actually managing forex in Nigeria is all about prioritisation. It is about knowing what is important and doing them and discarding those that you don’t need. That is what we do at Jaiz Bank and I believe that is what other banks are also doing. Nigerians are used to spending, especially abroad without control. The crash in the price of oil should be an eye opener to all Nigerians that life is not as easy as we think it is and we really need to look inwards. A situation where you depend completely on import is not good for the country and our future.

    Does Jaiz Bank have SMEs products for customers?

    The bank has robust SMEs products. In fact, in our third year of operations, the bank decided to do a pilot SMEs project and N500million was earmarked for that. Apart from that, we also made attempt to partner with SMEDAN so that we could bring in more people to access SMEs products in the bank. A lot of people have done so and we still have a lot of opportunities for other people in that direction. We are stepping up our enlightenment so that people can take advantage of this opportunity.

    There are some intervention funds like SMEs and Agricultural Funds from CBN, can people access these funds through Jaiz Bank?

    Not at the moment because these fund are interest based. However, we are discussing with the CBN Advisory Committee on Non-Interest Banking, on how we can participate. We are hoping that this will be resolved soon.

    Looking at the current economic situation in the country that is characterised by hardship, how would you describe patronage, especially in the area of mobilising deposit?

    Well I would say we have managed very well. If you could recall, I mentioned that in the last six months, we were able to raise deposit by over 30%, which means that we could double our deposit in one year which shows there are a lot of potentials for mobilising liquidity. We have a lot of Nigerians that are financially excluded and our bank again is better placed to encourage them to bank.

    Besides, the Federal Government is also moving in right direction in terms of its economic policies. I believe that very shortly we will begin to reap the benefits of democracy and good governance.

  • Why non interest banking should be encouraged’

    Industries  such as agriculture, manufacturing, SME have experienced set back due to lack of access to finance. Most complain that interest rates charged by banks make it difficult for them to access fund. Head, Personal and Business Banking, West Africa, Standard Bank, Mr Lincoln Mali, in this interview with Bukola Afolabi, gives reasons why  non-interest banking should be encouraged and how it  will enhance the economy.

    You recently delivered a lecture on non-interest banking and Islamic Finance at the  Bayero University, Kano. What was the thrust of your presentation?

    The actual presentation was on leadership in business and academia. This was a precursor to the Islamic Banking conference that we sponsor, which is being held in Bayero University in partnership with Standard Bank. One of the things I talked about was the importance of us as a business to be involved in financial inclusion; to be sure that as many Nigerians as possible are banked. The second was to make sure that we offer the broadest range of financial services to all Nigerians, and that is the commitment that was given. In Standard Bank, are committed to making sure that Islamic Banking actually succeeds in Nigeria and grows from strength to strength.

    Nigeria’s Muslim population is estimated at half of the country’s 160 million people, bringing it to over 200 million Muslims when the West African sub-region is included. One would have expected that non-interest banking, which was introduced in the region, moreso in Nigeria, a couple of years ago, would have gained a significant attraction. But that does not appear to be the case. What could be responsible for the slow uptake of non-interest banking?

    I think what is important is that we make sure that we do things right. The Central Bank did the right thing by laying down very clear ground rules, very clear regulatory standards and very clear criteria for approving any bank to do Islamic banking or non-interest banking. When the regulator did that, it allowed banks to then apply for getting the licence. And with God’s help, we are one of the banks, the first bank to get the licence. Getting the license was the first step; then you have to make sure that internally we have all the right processes in place. We have to setup the right structure to supervise in line with Islamic banking; you have to make sure that the products are approved by your board and then approved by the Central Bank. After that, we have then to consult religious leaders and other stakeholders in the Muslim community to give them a sense of what it is that we do. Only then do you start to get to market or promote the product. Yes, it has taken time but I think it’s the right thing because, now, more and more people know about it. As more and more people know about it, it then has a pull effect because people are saying this is something I want to do, it is in accord with my values, in accord with my faith and I trust that it is the right thing. It will grow and I think the setup process is the right ones.

    Do you think enough has been done to generate awareness about the non-interest banking in Nigeria? Specifically, what is Stanbic IBTC doing in creating awareness?

    We are spending a lot of time with important scholars; we are spending a lot of time with universities; for example, the University in Katsina (the Katsina Muslim University) and the university named after the former President, Yar Adua University in Katsina, Bayero University, and Crescent University. These are universities that we are starting to work with. We are also spending time with some of the religious institutions and other foundations to give them a sense about non-interest banking and then obviously in our branches already, we are starting to promote the product. In my travels in Bauchi, in Jos, in Kano, Katsina, Zaria, Abuja and so on, we are promoting non-interest banking and in other parts of the bank, even here in Lagos. We are starting to create that awareness so that people understand what it is all about. What people miss a lot about Islamic Banking is that there are fundamental principles and values associated with Islamic Banking. If those principles and values are not there and if those structures are not there, you can’t call it Islamic Banking. We want to do it right and we will promote it based on Standard Bank’s own integrity ethics, because in Standard Bank we wouldn’t do something that is not ethically right or values-based. We have to get the promotion right. I am happy with the progress we have made so far.

    Standard Bank, the parent company of Stanbic IBTC, launched Sharia-compliant banking in other African markets a long time ago. What has been the experience in markets like Tanzania and Ghana, and how have you applied such experience to drive uptake in Nigeria?

    Our view is that each market is unique. We are trying to make sure that we use the uniqueness of Nigeria, because even within Nigeria, each region is unique; we are trying to make sure we use that. Some of the experience we gained from Tanzania and from other markets is relevant, but we try and always bring it back to what works in Nigeria, what works in this region and use it in line with what the Central Bank has approved and what is in line with our board’s decision.

    It is generally accepted that non-interest banking policies as well as legal and operational frameworks are well thought out and structured. Do you share this view? Are the policies adequate to spur growth of non-interest banking in Nigeria?

    Absolutely. This is the actual key essence of Islamic Banking. You have to make sure that the structures are in place. You must make sure that the training is being done that each product has been approved by the board and has been approved by the Central Bank, only then can you market it. Those structures are in place, the products are now in place and again, we started with day-to-day products – which are Transactional Products. We are now getting into the learning products and as time goes on, we’ll move to more high-end products. I am happy with the progress in the way we have gone up till now.

    The development and issuance of Sharia-compliant products and services appear not to have kept pace with market expectations. The issuance of Islamic bonds has not attracted any traction.

    I think it’s making sure we take steps all the time. The Transactional Products are the first we have got right. We have got that right, they are working and we are growing that base, we are now moving into the learning products. The other investment type products like Bonds and things like that will come as time goes on.

    Can you give us an insight into the kind of projects or the sectors of the economy that Islamic finance can help develop in Nigeria?

    I think trade is fundamental. We have to use the trade environment as key. Agriculture is very important. For me, those two stand out. The more people get to know about Islamic Banking, it can affect any industry, it can apply to any of the industries but the two main ones for me that are important are trade and agriculture. The third one, in a strange, way is tourism, but not tourism-in, tourism-out. It’s not tourism in the sense of tourism, but it’s in relation to the faith. For instance, people who go out to do the Hajj carry a lot of cash and that is not good for them. But we are now developing the right products, debit cards that somebody can have when they are going out to Hajj. Now, these products and their potential are some of the things that for us are exciting.

    Apart from inadequate awareness campaigns to market non-interest banking in Nigeria, we understand that banks offering the service are also contending with management and manpower challenges. To what extent is this true?

    I can’t comment about other banks. At Stanbic IBTC, we have been fortunate to have a very good team of people in the NIB(non-interest banking) team; very good support from the Centre where we have a dedicated specialist who the bank hired as part of our regulatory approval, who sits in our head office, who is dedicated to Islamic Banking. On the board we have got eminent scholars, and business people. We haven’t had that problem. I can’t comment about other banks, but what I know is that internally, we don’t have that difficulty at all.

    One of the key objectives in launching non-interest banking in Nigeria is to enhance financial inclusion in a country where about 70 percent of the population lack access to regular banking services and also to diversify the economy by developing alternative financial services. Has non-interest banking helped in any way to bridge the gap?

    It has in the sense that there are people who hitherto were unbanked because they didn’t feel that conventional banking was there for them. Those people are now seeing an alternative in non-interest banking. But as you can well imagine, the gap is too huge, it’s still going to take time and the more awareness, the more people that take it and the more people that get involved, then financial inclusion will improve. I have known how it can move people into the financial environment and allow them to be part of a broader economy. That’s something that I am quite passionate about.

    Is non-interest banking also for non-Muslims?

    Yes, although there are term differences. If you call something Islamic Banking, then yes-indeed, it’s focused on people of the Islamic faith. But non-interest banking is a general term where Muslims will find it appealing because of the fact that it deals with the issue of interest, which in Islam is forbidden; because it’s not allowed to charge interest .But there are other faiths or religions who also want non-interest banking. We are working now with Catholic churches who want to work with us on non-interest banking. In that sense, it will incorporate people from other faiths. That is why we talk more of non-interest banking, because when we say non-interest banking, then it is somebody who then says that this suits my faith, my values or my religion. If it does, then somebody will do it. When sometimes you say Islamic Banking, it then becomes a challenge. If somebody doesn’t think that he fully subscribes to Islam, then such a person will say – well, I opt out. But when you say non-interest banking, then such a person will say – I think it’s all the things that I want. Catholics are starting to also want to use our non-interest banking solutions.

    Back in June 2011 the Central Bank of Nigeria expressed the desire to make Nigeria a hub for Sharia-compliant finance in Africa, competing with Senegal, Egypt and South Africa to gain a huge chunk of the $1 trillion Islamic finance industry. More than three years after, are there signs the country is close to this goal?

    No, we are not close. There is still a lot of work to be done. And I think the most important thing for us is, let’s get Nigeria right in terms of non-interest banking and the rest will follow. Nigeria is such a significant country that it is inevitable what it will become but we have got to make sure that we’ve done everything right in order for that to happen.

    Stanbic IBTC Bank is generally perceived as a conventional commercial bank. What expertise or experience does it have to offer non-interest banking which is based on principles of Islamic commercial jurisprudence?

    The leadership team that looks after our non-interest banking are all highly qualified, well experienced bankers who subscribe to the values and principles that are needed in Non-Interest Banking. The Board that we have is also made up of eminent members. What we follow is also regulated by the Reserve Bank and the products we serve are also the products that are approved by the Central Bank. That is what is important. It is not necessary to setup a separate bank, it is not necessary to setup a separate business for this, as long as that part of the bank that deals with this is well regulated, well managed and approved by the Central Bank and supported by communities, then we are succeeding. The conference we are having in Kano with other eminent scholars and other banks from all over the world is starting to get access to that community; more and more people will know Standard Bank as a bank that is there for all Nigerians.

    Islamic Finance is the fastest growing market in ethical finance with an annual average growth of between 10 and 20 percent. According to one account, current global Islamic finance assets stand at $800 billion and are expected to hit $1.4 trillion by 2015.  How would this projection shape the global financial industry as a whole, and Nigeria in particular?

    In the next few years, you will see a huge growth in this environment. The scholars that are meeting in Kano come from different parts of the world – Turkey, Middle East, Malaysia, Indonesia, and so on. And some of them already have very well developed banks that are taking this to the next level, so that the more the growth, the more financial order it will change and I think for Nigeria as well; the fact that it is only three banks that have been approved by the Central Bank indicate that this is going to grow.

    Despite being rated the fastest growing market in ethical finance and with the potential to transform economies, Nigerian banks have largely shunned the non-interest banking platform. Does that suggest that it is not profitable?

    Not at all, four banks including one MFB are having the licence within the first two years of the new guidelines. Other financial institutions are showing interest. Every business has its own gestation period for profitability, ways of assessing the future potentials and opportunities.  For us, we believe that NIB has a very bright future and Profitability potentials in Nigeria. We are providing end-to-end financial products and services and are complementing our offerings with NIB products and services not only for the potential profitability but also to increase the options and financial inclusion.

  • Non-Interest Banking in Nigeria -Tax Issues (I)

    Non-Interest Banking in Nigeria -Tax Issues (I)

    The storm surrounding the introduction of Non-Interest Banking (NIB) commonly called Islamic banking is gradually settling down and it is important to begin to exhume the challenges that might crop up in its operations with particular reference to the taxation of the sub-sector by the relevant tax authorities, especially the setting of standards for the type of taxes that apply and that are to be collected from the transactions.

    As the name implies, Non-Interest Banking (NIB) is a system of financial services that provide unique services in accordance with Islamic religious jurisprudence and Sharia principle and fully regulated by the relevant regulatory authorities as provided for in sections 9, 23 and 52 of the Banks and other Financial Institution Act (BOFIA) 1991 as amended. The CBN is empowered by law, to issue licenses to appropriate entities for the establishment of Non-Interest Banks provided they meet the regulatory requirements.

    The establishment of an enabling ûscal and regulatory framework in the UK for Islamic Finance becomes more imperative today than ever. Though the Federal Inland Revenue Service (FIRS) technical Working Group on NIB is working assiduously to enunciate policies that will guide the tax regulation governance of this sub-sector it is also crucial for sector stakeholders to step in and make valuable contribution to engender a mutually acceptable tax system on the operations of Islamic Banking in the Country.

    Islamic financial instruments continue to attract consumer attention, with the central element of being interest-free products in compliance with Islamic Sharia law. According to financial sources, the value of funds involved in Islamic banking worldwide grew by an average of 15% annually over the past three years. Some analysts estimate Islamic banking to be worth some $500 billion, with the Middle East controlling a quarter of those assets. Kuwait is reportedly the biggest contributor, accounting for almost 29% of the sector’s value in the Gulf region. It is followed by Saudi Arabia with about 27%, and the UAE with 15.2%. Nigeria with its 160 million people should definitely not be left out of emerging business frontier. The unbanked population can be a key target.

    There are a number of challenges that have to be addressed for the successful

    Introduction and operation of Islamic banking in Nigeria. Indeed the challenges are numerous, the absence of skilled workforce and the technical capacity to even regulate Islamic financial institutions are lacking and must be resolved before we can witness a boom in this banking sub-sector.

    Much has been said of the Lack of Sharia-compliant liquidity management instruments. Islamic banks cannot invest their excess liquidity in interest based instruments, which are the liquidity management instruments in the money market.

    This puts them at a disadvantage side by side with conventional banks. The current interbank market and the instruments used by the Central Bank for monetary policy operations are all interest-based with no equivalent government securities or other money market instruments that are Shariah compliant, all of which are essential to avoid a liquidity bottleneck for Islamic banks when they come into operation.

    Another key deficiency that has been hotly discussed is the lack of knowledge of accounting and auditing standards pertinent to Islamic financial institutions. The balance sheet structure of Islamic banks is unique, and even though the work of the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) on accounting and auditing standards for Islamic banking products is available, there is the need to train conventional accountants and auditors in the application of the standards and how it can be used with the recent benchmark of the International Financial Reporting Standards (IFRS).

    Should NIB products be taxed as conventional banking products? One of the best ways to understand Islamic banking is to gain an understanding of the products that are considered acceptable. The important thing to remember is, as it is with the Christian Bible, there are several differing interpretations of what the Holy Quran and the Hadith actually intend. As a result, not all of these products are universally acceptable (particularly those where the return is determinable in advance), but they are a useful guide. Several of these are covered below:

    Wadiah (Safekeeping)-In Wadiah, a bank is deemed as a keeper and trustee of funds. A person deposits funds in the bank and the bank guarantees refund of the entire amount of the deposit, or any part of the outstanding amount, when the depositor demands it. Mudarabah (Profit Loss Sharing) Mudarabah is an arrangement or agreement between a capital provider and an entrepreneur, whereby the entrepreneur can mobilise funds for its business activity. Musharakah (Joint Venture), this concept is normally applied for business partnerships or joint ventures. The profits made are shared on an agreed ratio, while losses incurred will be divided based on the equity participation ratio. This concept is distinct from fixed-income investing (i.e. issuance of loans).Murabahah (Cost Plus), this concept refers to the sale of goods at a price, which includes a profit margin agreed to by both parties. The purchase and selling price, other costs and the profit margin must be clearly stated at the time of the sale agreement. The bank is compensated for the time value of its money in the form of the profit margin. Bai’ Bithaman Ajil (Deferred Payment Sale), this concept refers to the sale of goods on a deferred payment basis at a price, which includes a profit margin agreed to by both parties. This is similar to Murabahah, except that the debtor makes only a single instalment, on the maturity date of the loan. By the application of a discount rate, an Islamic bank can collect the market rate of interest. Qardul Hassan (Benevolent Loan),t his is a loan extended on a goodwill basis, and the debtor is only required to repay the amount borrowed. However, the debtor may, at his or her discretion, pay an extra amount beyond the principal amount of the loan (without promising it) as a token of appreciation to the creditor. Ijarah Thumma Al Bai’ (Hire Purchase), these are variations on a theme of purchase and lease back transactions. There are two contracts involved in this concept. The first contract, Ijarah contract (leasing/renting) and the second contract, Bai’ contract (purchase) are undertaken one after the other.

    Bai’ al-Inah (Sell and Buy Back Agreement)-The financier sells an asset to the customer on a deferred payment basis and then the asset is immediately repurchased by the financier for cash at a discount. The buying back agreement allows the bank to assume ownership over the asset in order to protect against default without explicitly charging interest in the event of late payments or insolvency. Sukuk (Islamic Bonds), in keeping with the prohibition of riba, a conventional bond is not permitted. A Sukuk bond, however, is asset-backed and the returns on it are not fixed, but are linked to the return on the assets purchased with the proceeds of the issue.

    Interestingly there is no tax law specifically to regulate the NIB in Nigeria. The current tax legislation therefore has to be strengthened urgently to accommodate the operations of the NIB institutions. Aside the Jaiz Bank Plc and Lotus Capital currently operating non-interesting banking institutions in Nigeria non other exists. Clear tax legislation is the required to back the guidelines created by the Central Bank to spur up growth in this sector.

    The key issues are; how would Company Income Tax be charged on Musharaka, Mudarabah and Sukuk (is it be charged like conventional bonds)? Or VAT on Ijara? The collection of taxes such as Company Income Tax, Value Added Tax, Capital Gains Tax, Withholding Tax and Stamp Duty need to be properly highlighted and guided by appropriate legislation to avoid multiple taxation of the sub-sector.

    Does the purchase and then onward sale of assets by the Islamic financier result in any capital gains or other profit-based tax? What will be an equitable VAT framework on Islamic banking products? Issues remain unclear. Is VAT, which tends to be a key tax type with greater focus on delivery procedure in commodity murabaha/tawaruq transactions, be an issue? Islamic Finance requires proper documentary evidence of the transfer of title from the original supplier to the financier.

    From a UK perspective, in light of the changes made by the government overtime, changes have been progressively incorporated into UK tax legislation since 2003 with particular changes relating to Sukuk in the 2007 Finance Act with more changes done in the 2009 tax legislation. These changes will bring Sukuk legislation in line with conventional corporate bonds and securitisations and address capital gains and capital allowances issues.

    With the take-off of Islamic Banking there is a need to work with tax jurisdictions with established NIB tax legislation as a learning curve to guide the FIRS on the high-level tax implications of Shariah compliance, as well as on the day-to-day practical issues of complying with the intricacies of the existing Nigeria direct tax legislation.