FACULTY: MANAGEMENT SCIENCES
COURSE TITLE: INTRODUCTION BUSINESS FINANCE
COURSE CODE: BAF 101
TABLE OF CONTENTS
Definition of Islamic Banking 1
Sharia Supervisory Board 5
RISK AND CHALLENGES OF ISLAMIC BANKING
1. Religious Crisis 8
* Mohammed Dauda 11
* Paul Aggrey 11
* Felicia Amuzie 12
2. The Social Variant of Islamic Banking 13
DEFINITION OF ISLAMIC BANKING
Is a Banking system that is based on the principles of Islamic law (also known as Shariah) and guided by Islamic Economics?
Two basic principles behind Islamic banking are the sharing of profit and loss and significantly, the prohibition of the Collection and payment of interest. Collecting interest is not permitted under Islamic law.
Investopedia Explains Islamic Banking here an example of how the Islamic banking system uses methods of profit and loss sharing to facilitate financial transaction:
For some types of loans, the borrower only needs to pay back the amount owed to the lender, but the borrower can choose to pay the lender a small amount of money to serve as a gratuity.
Since this system of banking is grounded in Islamic principles, all the undertakings of the banks follow Islamic morals.
Therefore, it could be said that financial transactions within Islamic banking are a culturally distinct form of ethical investing (for example investments involving alcohol, gambling, pork, etc are prohibited). The Dubai Islamic Bank has the distinction of being the world’s first full-fledged Islamic bank formed in 1975.
Islamic banking has the same purpose as conventional banking except that it is operating in accordance with the rules of Sharia, known as “Figh al-Muamalat” (Islamic rule son transactions)
The basic principles of Islamic banking is the sharing of profit and loss and the prohibition of riba (interest)
Amongst this common Islamic concepts used in Islamic banking are profit sharing (Mudharabah), safe keeping (wadiah) joint venture (Musharakah) cost plus (Murabahah) and leasing (Ijarah).
In an Islamic mortgage transaction, instead of loaning the buyer money to purchase the item, a bank might buy the item itself from the seller, and re-sell it to the buyer to pay the bank in installments. However, the fact that It is profit cannot be made explicit and therefore there are no additional penalties for late payment. In order to protect itself against default, the banks asks for strict collateral. The goods or land is registered to the name f the buyer from the start of the transaction. This arrangement is called Murabaha.
Another approach is ijara wa Iqtina, which is similar to real-estate leasing. Islamic banks handle loans for vehicles in a similar way (Selling the Vehicle at a-than-market price to the debtor and then retaining ownership of the vehicle until the loan is paid. There are several other approaches used in business deals. Islamic banks lend their money to companies by issuing floating rate interest lions. The floating rate of interest is pegyed to the company’s individual rate of return.
Thus the banks profit on the loan is equal to a certain percentage of the company’s profits. Once the principal amount of the loan is repaid, the profit-sharing arrangement is concluded. This practice is called Musharaka.
Further, Mudaraba is venture capital funding of an entrepreneur who provides labor while financing is provided by the bank so that both profit and risk are shared.
Such participatory arrangements between capital and labor reflect the Islamic view that the borrower must not bear all the risk/cost of a failure, resulting in a balanced distribution of income and not allowing lender to monopolize the economy. And finally, Islamic banking is restricted to Islamically acceptable deals, which exclude those involving alcohol, pork, gambling, etc.
Thus ethical investing is the only acceptable form of investment and moral purchasing is encourage.
JAIZ international is trying to Su that it has establish an Islamic Bank in this country, however with the review of capital adequacy delayed. Although the N2513 capital base is one condition for the establishment of an Islamic bank in Nigeria, but we see that there is more to meeting. This CBN conditions are:
Managerial commitment, Sharia supervisory board, safeguarding Muslim investors fund and compliance. The management must be fully convinced of the concept and fully committed and dedicated to it, unless the entire management is committed and convinced. The business activities and the enterprise will not be foul free or will no escape irregularities and stringent fatwa and contracts are, this will not ensure sound practices if there is no insufficient sincere and committed to implement the principles.
SHARIA SUPERVISORY BOARD:
There should be a Sharia supervisory board for any Islamic Bank and that board should consist of trustworthy scholars who are highly qualified to issue fatawa on financial transactions.
Giving our present situation within the muslins today how do we constitute the members of the board? Another issue is Trust form the customers who may use the bans fund when it comes to profit sharing. Last but not least is ENLIGHTEMENT. Many people even within the Muslim are not aware of how Islamic bank operates.
Therefore there is urgent need for a serious enlightenment to the public on operational modalities and requirement of an Islamic bank.
Other options that may be considered by JAIZ or even states like SOKOTO, KANUO BORMO, KASTIMA ETC is to establish an Islamic micro finance at local government level. The recently approved MICRO FINANCE BANKS can be converted to an Islamic one. In a symposium held at Harvard University on FINANCING THE POOR. Towards Islamic Micro finance sometime last year, Mazim Ali has pointed out that micro finance is not reaching the poorest of the poor, even though this is its purpose and loans are going to activities unrelated to entrepreneurship. Islamic fiancé could, in principle and in practice, correct these defects.
Robort Annibale, global director of micro-finance for ciligroup, shared his insights into both Islamic finance and Microfinance institutions as micro finance Institutes as self-styled “bankers of the poor originally rooted in domestic local markets but increasing expanding into larger markets and offering a boarder range of services.
He noted that the high operating costs, posed on to the customer in the form of high interest rates are a hurdle for the poor. He felt that this was where there is potential for Islamic finance to make a difference. Under conventional microfinance risk is borne by borrowers and rarely held by the institutions. Islamic fiancée focuses on interest-free method f providing capital because the Shariah held lending to be a purely charitable exercise, rather than a means of making a profit.
Islamic finance is also accustomed to method of risk-reward sharing between the institution and the borrower. Islamic microfinance banks have grown sufficiently in countries like Pakistan, Indonesia, Malaysia, and Bangladesh. In fact, Islamic microfinance institutions enjoy greater penetration than traditional commercial banks in Bangladesh, it is high time for us here in Nigeria (particularly in the North because the south have stated) to start introducing Islamic micro finance banks which will graduate to a full bank in future.
RISK AND CHALLENGES OF ISLAMIC BANKING
1. RELIGIOUS CRISIS:
Since the Governor of Central Bank of Nigeria (CBN, Mallam Sanusi Lamido Sanusi, began moves to introduce the Islamic banking system the product has attracted so much anger in the Christian fold to the extent that the little achievements Sanusi made in the industry almost fizzled out.
Some of his crities reasoned that Nigeria is a secular state and so the introduction of Islamic baking Smacks of Islamizing the State. They believe that the introduction of the Sharia banking system now is not appropriates in view of the destructive activities of book Haram. To his effect, Nigeria’s, who lost relations or were injured, mined or frustrated by the unscrupulous behaviour of Boko Haram from the bulk of crities of Islamic banking. Some prominent Christian leaders say it will further inflame religious violence.
According to Father Paul Anyansi:
“We have too much religious tension and so, it could stirrup some more. This is not the time for it. The policies for Islamic banking are good in the sense that there is no interest. It doesn’t go against the beliefs of the Islam. But what we are trying to day is that this country’s is not mature for it now”.
Anyansi argues that although Islamic banking is community banking, it portends more dangers that it’s benefits. Said he. “It could be as effective as it is in England, America, Malaysia or countries where it is operated but for now, we are still growing. A lot of people are not accepting their brothers as their brothers. They are not accepting the differences between religions. It will create more problems, than gains”.
The president of Christian Association of Nigeria (CAN), pastor Ayo Oritsejeafor, also condemned the introduction of the banking system because it is a ploy to introduce Islamism into the country. Many are of the view that CBN. Which is the regulatory authority did not do much sensitization before it was thrown at Nigerians with the result that some of the crities of the system do it form a position of ignorance. However, Sanusi maintained that the product was an initiative of his predecessor professor Chukwuma Soludo, who is a Christian and his deputy governor, Mr. Tunde lemu, who is a pastor. According to him, he only implemented a project left behind by his predecessor.
He also posited that Nigeria is introducing Islamic banking to bring more of the nation’s estimated 70 million Muslims, who had remained unbaked, into the economy. Islamic law prohibits paying or receiving interest or investing in business that provides goods or service that are contrary to Islamic principles.
This belief has led to the creation of interest-free, Islamic banking in more than 50 nations where customers share in profits and losses. In an Islamic mortagage, for example, the bank buys the house,
Then results it at a higher price, allowing the new homeowner to pay in installment.
In a recent Islamic banking summit, organized by the CBN, in Abuja, Ziyad Muhammad of the Islamic finance institute of south Africa told his audience that Islamic banking was about creating wealth for the community. “the ultimate objective is to ensure that anything that is introduced by the entrepreneur is done for the benefit of the community at large” he said.
The CBN governor asserted that the project has reached a level where, it was irreversible and that any aggrieved person could go to court since it is only the Court that can remorse it. Other Nigerians spoke to Daily sun.
“WHAT IS WRONG WITH Islamic Banking? I don’t know why whenever people hear about Islam, they are jittery. Is Islamic banking not a system of banking just as first Bank and oceanic Bank”.
“Nigerians are not mature to host such banks in view of the Boko Haram activities in the country now. It is not advisable to introduce such a thing in Nigeria now?
“don’t we have enough banks in Nigeria. It is a Muslim Bank? Well, let the Moslem patronize it. As for me I have my own Bank? Jaiz international Bank an Islamic Bank was licensed to operate since 2009, but yet to take off.
2. THE SOCIAL VARIANT OF ISLAMIC BANKING
The debate on introducing Islamic Banking (IB) outcome will effect people, its social implications therefore are Central this piece isn’t about the good/evil, beauty awkwardness of the scheme but its meaning to the people and the nation they belong to.
Majority of the supporters of 1B come from the North which is pronominally Muslim, it’s opponents come mainly from the South which is predominantly Christian. So already there’s a divide along religious lines in a secular state. The question now is, what does the state say? The south says, it’s dangerous to make prominent a particular religion in financial operators designed to serve all faith and more still, an affront to inscribe its impressions on the currency bill in other words, keep religion where it belongs and money were it belong.
It’s permanents argue that what’s important is what IB brings to the common man not it’s name. It we go the way we presently are, the economy will till towards polarization along religious lines and perhaps spread to other sectors. In the end, serve find themselves many from beneficiaries to gladiators.
The founders of this country understood the hidden five in our distinct diversities and proffered a secular state as the preferred extinguisher. An indicator of such social five is polarization which is already in place. Our best response therefore, is to get the extinguisher ready. Secularity is it, we should need it in accordance with the vision of the founders and the constitutional provision of the land. Right form the beginning, it was possible for the founders to slot in IB but they opted for caution. Then as now, the sensitive remain the answer. If we focus mainly on the benefit of the scheming may err because it is people at peace that talk about economic benefits. What if after defeating the opponents through organs of governance like recently in the House of Reps but they continue to see this as a belief not economy challenge and resort to other means to assert their position, where will the country be reap benefits? I say so because violence is already in our midst and we can’s pretend otherwise. What rulers them is perception that is what they think, the picture in their head.
That’s what determines their response /action not necessarily the rightness wrongness of the scheme. If that’s the case, how intensive has it’s education /enlighten warrant been to improve the thriving mind-picture? What time has been to make sure the message has been understood? Rather, what we’ve been hearing form CBN-chief is comments in finality-some thing like on Islamic banking, no going back, no court can stop me”.
Such comments, rather than thorn light, point to the battle lines with an air of arrogance. The response of the opposite party turns nothing short of resistance. By then, we won’t Ni talking economy but security. The other question is, why push Islamic banking with such Zest at a time the nation is under threat of its corporate existence?
The opponents have found it easy to relate Islamic Banking to the Islamisation drive book Haram
Invariable Sanusi is perceived as its arrow head from the monetary end. That may not be the ease but it’s the picture and it determines the response.
The backside of all these is the paradoxical practice of our banking institutions. In a country where people are squeezed for borrowing to do business and banks come declaring obscene profits is to say the least obtuse. This perhaps is the driving force behind the IB option.
But we won’t in causes of fleeing from our predatory banks Jump into fire. What the Central Bank. Should do for us is to see how to peg bank profits to reduce the cost of borrowing without necessarily Islamizing the system. There must be some monetary policies that address this.
What’s Scaring is the threat of religion in our national life and Sanusi Can’t explain it enough that Islamic banking isn’t about Islamizing Nigeria.
Already, he is a suspend and the more he explains it, the loss it’s understood and if he forces it through, at some point it will be resisted. So why do we harm to go that path?
What’s presently prevailing is positional reasoning- a kind of, my way of the highway which ends in ego-defense without an acceptable solution. Once were here, issue shifts form problem-solving to defending held positions with less regard for it’s consequences-what’s needed how is a middly-ground that satisfies all parties, not perfectly but acceptability.
“Islamic Banking in Nigeria” By Sani Adamu Danbatta.
Daily Champion, 23rd August 20211
Sun, 29th August 2011
Business Day. 29th July 2011.