The years 2011-2015 were marked by nearly constant bickering over the role and appropriateness of Islamic Banking in Nigeria. Defined along religious lines, some Nigerians argued that a faith-based system had no place in a constitutionally-secular country. Nigeria’s nearly equal religious divide further fueled speculations of attempts to “Islamize Nigeria”. Arguments from people on the opposite side cited the presence of Islamic Banks in secular and predominantly Christian-dominated countries like Germany and the United Kingdom. Regardless of each person’s stance on the argument, one undeniable fact is the very little sensitization on the Islamic and general non-interest financial system.
The conventional financial system is heavily debt-based. Banks and other financial institutions serve as intermediaries connecting those in need of capital with those possessing excess capital. By lending to those in need of capital, banks make enough to stay profitable and pay a little over the initial capital to the depositors. The same interest-based model holds in other major transactions including bond issuance and project financing. But this debt system came under increasing attack (especially when used as leverage) following the 2008 financial crisis when numerous loans went bad.
Added to this general aversion, a number of important studies by the World Bank show that about 70% of the global Islamic population remain unbanked due to the Islamic faith’s prohibition of interest (riba). These two factors (and a host of others) have led to greater calls for an alternative financial system to complement the current system.
The idea behind non-interest financing is the use of little or no debt (interest-based financing). In place of debt, non-interest finance encourages partnership and equity participation. The selling point of this system is the idea that risk is more equitably distributed among partners and interests are more aligned. This is because all parties contribute their capital (or other productive factors) to the business venture and are more likely to ensure its success.
Islamic Finance as Non-Interest Finance
In his meeting with lawmakers on the proposals for Islamic Banking in Nigeria, the then governor of the Central Bank of Nigeria (CBN), Sanusi Lamido Sanusi, acknowledged certain criticisms. Foremost, one of the critics claimed that the document mentioned Sharia “35 times”. This fueled the argument of Islamic Banking as an attempt to Islamize Nigeria. However, the CBN governor was quick to mention the apex bank’s definition of a non-interest financial institution as:
“A bank or other financial institution under the purview of the Central Bank of Nigeria which transacts business, engages in trading, investment and other commercial activities, as well as the provision of products and services, in accordance with any established non-interest banking principles.”
This settles (or should assuage) some of the uneasiness on the motives of Islamic Banking in Nigeria. Islamic Banking is a form of non-interest finance; not necessarily the only form. Islamic Finance is built on the principles of risk-sharing among partners, prohibition of interest, gambling, and other activities prohibited under the Shariah. The main thrust of Islamic finance is the emphasis laid on equity financing rather than debt.
Numerous Islamic financing solutions abound in different parts of the world. A number of sukuks (popularly dubbed “Islamic bonds”) have been issued by both Islamic and secular governments including the Hong Kong government. Revenues (rather than interest-based coupons) derive from returns on the investments at which the raised capital was directed. Other financing mechanisms include Ijara (leasehold) and salaam financing (deferred manufacturing) among others.
Possible Role of Non-Interest Finance in the Nigerian Economy
Regardless of the general attitude towards Islamic banking in Nigeria, what is undeniable is the role of capital in economic growth. And non-interest financing is no exception. At the micro-level, following successes recorded in microfinancing in countries like Bangladesh, this financing method was touted at the panacea for poverty alleviation in Nigeria. In a bid to promote it, the Central Bank of Nigeria dedicated about 200 billion naira to the scheme.
More than 6 years later, the problems associated with microfinancing, and the debt-system in general, persists. Fundamentally, the loan-based microfinancing system shifts most of the risk to the borrower. Regardless of the outcome of the borrower’s business, or the nature of cashflow in any particular year, he/she has to make fixed periodic payments as well as principal at the end of the contract period. Added to the numerous paper works and identification requirements to qualify for a small loan, it’s easy to see why this scheme has failed to live up to its ideals.
Having tried this system for close to a decade, it might be time to give equity-based financing a chance in Nigeria. A system could be set up where general partners (similar to alternative asset managers) pool capital from other limited partners to invest in a series of partnerships with farmers and other traders. This is especially applicable to agriculture where the general partners provide the capital alongside small capital contribution from farmers in addition to their labor. Proceeds from the farming operation would be sold and profits (sometimes loss) shared between both parties based on a pre-agreed ratio. This usually has the potential for more profit accruing to the capital provider above the typical interest rate while enabling the farmer to manage risk more efficiently.
Beyond micro-level financing, the virtues of non-interest finance remain high at the macro level. The world is awash with numerous protests against what is deemed the insensitivity and back-breaking interest-based loans from global lenders like the World Bank and the IMF. This alternative system creates opportunities for strategic project financing (such as electricity, roads, and mining projects) using non-interest financing. The Ijara system in Islamic Finance has been successfully utilized in building bridges, roads and solar plants in numerous countries including Mali. By promoting risk-sharing complemented by efficient resource allocation, both parties stand to gain a lot more. The major capital provider gains more from the successful business than would be the case from loan interests. The other party also makes significant profit, but one that takes into account the periodic fluctuations in cash flow from investments.
We believe that non-interest finance could increase Nigeria’s (and Africa’s) access to more capital for funding at the micro and macro level. We are also aware of the uneasiness certain terms might cause and encourage greater sensitization of the population on the merits of this relatively less-risky financing mechanism. Considering the huge potential Nigeria has in Agriculture, Mining, and infrastructural development, non-interest financing could play an important and complementary role in turning our vision into reality.
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