A banking system is a crucial component for any developing financial system and economy, an appropriate system of Banking is important in creating a proficient society. Banks help apportion saver’s funds to borrowers effectively and give out concentrated financial services. A major source of income for the conventional banking system is the difference in the rate of interest rates paid to depositors and the rate lent to individuals and businesses.
Islamic/unconventional banking is a banking system that is steered by the principles of Shariah (Islamic law) and guided by Islamic economics. Financial transactions based on Islamic principles are different from conventional and or commercial transactions. For example, investments based on interest, alcohol, pork, gambling and speculation are prohibited in Islamic finance. Under Islamic finance, the returns from deposits are managed by the size of the bank’s return on investment and not by a fixed rate of interest. When giving out loans for investments, the banks do not charge interest but practice a profit and loss sharing system whereby the bank has a share in both the loss and profit of the investment. With conventional banking, the interest on the loan is simply received whether or not the investment yields a loss or profit.
The introduction of Islamic Banking by the Central Bank of Nigeria (CBN) in 2011 was part of its initiative to boost the economy and promote financial enclosure/create diversity through the insertion of substitute products. Unlike what is assumed by many, its operation in the country is not restricted to Islamic banking alone but incorporates other forms of non interest banking that are not based on the principles of Islamic finance. The CBN is to issue a license (according to the Banks & other financial institutions act, 1991) for any group or individual that intends to operate unconventional banking with rules asides that of Islamic finance.
In the long run, Unconventional banking will improve the growth of the Nigerian economy. One of the features of the system is that it is based on a profit and loss sharing principle, whereby the customer and the bank share risk from an investment. In other words, its ideologies are geared towards investments that will benefit Nigerians at all stages of wealth. The mode of banking also incites long-term investment. A principle of the structure is to avoid investing in groups or persons that can cause harm to the society or people. Every unconventional fund puts in extra effort in its screening process whereby organisations with risky financial practices are weeded out; this goes a long way in creating Investment stability. Additionally, an interest free structure will instinctively appeal to investors, investment flourishes effectively in a climate where there is no stern circumstance attached to deriving the funds to finance investment. This means that Islamic finance has the ability to enable the advancement of infrastructure that Nigeria has been longing for. Finally, the system is less disposed to to inflation and not as susceptible to speculation as other banking systems, which are presently being fueled by the existence of large debt instruments in the market.
Despite the benefits that could sprout from continuous growth and implementation of Islamic finance in the country, the banking system is still plagued by low awareness. There is a need to elaborate on the principles of the system to all participants, Nigeria is a secular state and many are still of the notion that Islamic finance is an agenda to ‘Islamize’ the country. The government alongside Non-interest banks need to sensitize individuals and groups on the ideology to prevent non-Muslims from misunderstanding the concept. The CBN also needs to modify regulations governing the operations of Islamic banking in the country. In other words, the policy context needs to be such that Islamic banks can properly compete with their conventional colleagues.
The author is an economist & accountant with a passion for journalism and writing. She is an advocate of good governance, gender equity and youth inclusion in politics and has written for various media.