We faced opposition to establishing non-interest bank –Professor Bashir Aliyu

Sheikh Bashir Aliyu Umar is an associate professor of Islamic Studies at Bayero University Kano and the Imam of Al-Furqan Mosque in Kano. He is also the Deputy Chairman of the Financial Regulation Advisory Council of Experts of the Central Bank of Nigeria, and a former Special Adviser to the former Central Bank Governor, Sanusi Lamido […]

Sheikh Bashir Aliyu Umar is an associate professor of Islamic Studies at Bayero University Kano and the Imam of Al-Furqan Mosque in Kano. He is also the Deputy Chairman of the Financial Regulation Advisory Council of Experts of the Central Bank of Nigeria, and a former Special Adviser to the former Central Bank Governor, Sanusi Lamido Sanusi, on non-interest banking, in this interview the Islamic scholar talks about non-interest banking, challenges and other issues

At what time did Nigeria contemplate having 

non-interest banking?

Well, I think the primary conceptualization of non-interest banking came with the enactment of the Bank and Other Financial Services Act of 1993, during the time of President Ibrahim Babangida, then, there was a clear reference to profit and loss sharing banking issues and that paved the way for promoters to establish Islamic banking, which had started appearing in the world for about two decades at that time.

And there were also efforts to establish Al-Barka Bank, as well as Al-Aqida Bank, and the then Habib Bank also worked and opened a window, but there were no regulations and because there were no regulations, the effort of the promoters did not see the light of the day. But I learnt that it was due to a misunderstanding between the promoters about the location of the head office.

Can you share your experience on 

non-interest banking?

You see my experience regarding this started when there was an international conference on Islamic banking, sometime in 2003. And this was after the beginning of the move for the implementation of the Sharia in some states. As a result of that, there were a number of things that gave the whole idea of establishing the bank.

One of which was the membership of Nigeria in the Islamic Development Bank during the time of President Obasanjo, precisely in June 2005. President Obasanjo took Nigeria into the Islamic Development Bank and raised its share capital from 0.3% to 7.69%, bringing Nigeria to be one of the seven major shareholders of the bank. Obasanjo is a Christian, so the whole question of Islamization did not arise.

Thus there was not so much hue and cry as there was when President Babangida took Nigeria into the OIC in 1986. Then, because of the influence of that conference, the management of the Central Bank of Nigeria (CBN) at that time under Governor Charles Soludo, the current governor of Anambra State, took Nigeria into the Islamic Financial Services Board, which is an organisation established by central banks and multilateral organisations like the Islamic Development Bank, the International Monetary Fund and the World Bank which are associate members.

And because of the membership of Nigeria into the Islamic Development Bank, they opened a technical aid to the CBN for it to develop a framework or a guideline for the establishment of Islamic banks in Nigeria. That technical aid was accessed by the CBN because a group was sent to Malaysia to understudy the Malaysian experience. Malaysia operates a dual banking system, a conventional banking system and an Islamic banking system, and Nigeria felt that the nearest example or the best jurisdiction for it to understudy would be Malaysia.

So they went under the leadership of a deputy governor, Mr. Tunde Lemo, who is a pastor, as a result of that visit, a draft guideline was issued. Therefore, when Lamido Sanusi became the CBN governor, we opened a discussion which we had started while we were students with him.

When Sanusi Lamido was in the United Bank of Africa (UBA), the chairman at that time, had committed a fund to him to open a window of Islamic banking in the bank. But it did not come through, though he had that commitment.

Therefore, on becoming the governor of the Central Bank, he felt that if this has to be done, then it has to be done the proper way, which means, there has to be people who know the Sharia and who will be committed to knowing modern finance and modern banking because you need the marriage of the two to have Islamic banking. Islamic bank is a banking system that does the same intermediation that conventional banks do, but it has to be in compliance with Sharia.

I felt I had the tools to equip me to do that because I had the interest, I had the passion and I was reading a lot since I was in school. I have been very fascinated with what our modern scholars all over the world are doing of making pronouncements regarding new occurrences, especially in the field of finance and in the field of medicine.

So we spoke with the governor and he said why not I come and advise them at the CBN on this. So I started as a consultant because at that time I was with the Kano State Government in the Sharia Commission as a permanent commissioner. So I started as a consultant to the financial system strategy.

However, one of the initiatives of the financial system strategy is to pursue non-interest banking as an avenue for financial inclusion, to bring into the organized financial sector the unbanked and the under-banked segments of the society. So I was a consultant for some time. When things began to materialise the CBN governor said my appointment has to be permanent. So he appointed me as his special adviser on non-interest banking.

We started with developing the guidelines and one of the principal things that Governor Sunusi did at that time was to dismantle the universal banking system. And he introduced a capital requirement that is not universal, that will be commensurate with the type of banking institution that will be established.

In dismantling the universal banking model, they came up with a model that has a differential capital requirement. Specialized banks were created and also the normal deposit money banks were categorised into two, those with regional authorisation, those with national authorisation and those with international authorisation.

And then the specialised banking model came, which included the non-interest banks in which the non-interest banks did not have the differential capital requirement. So one of the things we did was we discussed with some of the promoters and I suggested to them that they should speak to the governor as there is a differential capital requirement for the normal deposit money banks, let there be a differential capital requirement for the non-interest banks.

So with that, it brought the minimum capital requirement for a regional bank to N5 billion. At that time, the promoters of Jaiz had about N3.5 billion leaving a  balance of N1.5 billion. The CBN governor, because of his passion for it, spoke to some committed individuals so they were able to meet the capital requirement and he ensured that he himself signed the licence for Jaiz Bank, but as you know, so much had happened.

Can you share with us some of the challenges and difficulties you faced?

Sure, unfortunately even the Institute of Nigerian Legal Studies, whom you would think that they are independent bodies, organised a seminar and they brought people to discredit the whole thing as an Islamization problem. And even though there was a deputy governor Moghalu at that time, who tried to explain, the opposition was so severe. It was when the House of Representatives organised an appearance for the CBN governor that the public began to understand what it is all about.

The CBN governor went with all the deputy governors and the special advisers as well as the directors, especially the director of the Financial Policy and Regulation Department, which is the licensing department. And he delivered a speech where he explained the whole thing. He also showed how the guidelines were made in such a way as to accommodate the sensitivities of Nigerians.

He made it clear that one thing was that the banks will not be called Islamic banks, even though the law says that a bank will not be called Islamic except with the approval of the governor. Despite that provision, he did not go for it. So, he said, just to misunderstanding, they will not be called Islamic banks, they will be called non-interest banks.

And in doing so, it’s not only Nigeria that has done this. In Saudi Arabia and Turkey they don’t allow banks to be called Islamic banks. They are called participation banks. In the guidelines, they made provisions for a council of Sharia scholars and in other jurisdictions like Malaysia and Sudan, it is called Sharia Advisory Council because of the sensitivity of Sharia.

The opposition also claimed that in the document, when it first came, there were 63 mentions of Sharia. Therefore, they believed one could claim it’s not Islamization. However, this was watered down and this council was called Financial Regulation Advisory Council of Experts and the word Sharia was removed just to accommodate the sensitivities.

Another issue was with the Christian Association of Nigeria (CAN), indirectly, through government. They queried why would the CBN governor fix the regulatory capital for Islamic banks with regional authorisation at N5 billion, less than the regulatory capital for commercial banks which is N10 billion. The CBN Governor explained that the non-interest banks have a special type of deposit and that type of deposit is treated like equity. It’s not guaranteed by the bank. Therefore it does not need high capitalization.

Another challenge was that we expected support from the Supreme Council for Islamic Affairs. The Sultan was misled into thinking that there was no need for it. Because some minority opinion felt that there is nothing ‘haram’ in what the commercial banks are doing hence there is no need for it and we can continue using the commercial banks.

He regarded the issue as highly controversial. So, he didn’t come out in full support of Islamic banking. And that definitely, did have its impact.

But, Alhamdulillah, you know, when the license was issued and Stambic IBTC also opened a window and the bank has so many Christian organisations as its customers and shareholders it indeed reduced the apprehension.

And then, when the operations of the bank started, it showed that there was no discrimination, both Muslims and Christians could access credit, they could open accounts, they could also buy shares into the bank. So, the whole thing about Islamization started dying down. And now, Alhamdulillah, you see how much it has achieved.

Are there differences between non-interest banking and the other banking system?

There is a fundamental difference. You know, the intermediation of commercial banks, they do it by taking deposits as loans with interest. They will take deposits and they will tell the depositors, you are going to be given 26% in your fixed deposit account, for instance. This money that is mobilised together with their own funds, are advanced as loans to deficit units – those who are in need of loans. And they will charge them 30-31% as interest. The difference between what they take from the debtor and what they give to the depositors is what they make as their own profit.

So, the intermediation is based on borrowing and lending. They borrow from depositors, they lend to financees. But in Islamic banks, when they borrow, when they take deposits, they take them on a non-interest basis and they don’t give any return for that.

But then they use that money when they gather it and they enter into projects and business ventures that are based on trading and leasing. And through trading and leasing, they buy and they sell and they buy equipment and business units and real estate and sell, then they make profit. The profit is their income and that is how they hold their customers. They also take deposits on what they call profit-sharing basis.

So you see the fundamental difference is that the Islamic banks are not engaged in borrowing and lending. They are engaged in trading and leasing and activities that are asset-based where there is risk-sharing, profit and loss.

Some believed that what you have just mentioned here is only achievable when the monetary policy is favourable. Is that so?

No, it is a misconception. Monetary policy is a policy that is tied to interest lending.

The only thing is that Islamic banks have more challenges than conventional banks. One challenge is that they have excess liquidity but they do not have short-term avenues in which they can invest their excess liquidity. And when they are in need of funds like overnight funds or intraday facilities from the Central Bank or from the other banks, they can’t get it because they will only get it based on interest.

And by regulation, the Central Bank does not allow them to deal in interest. So up till now, the Islamic banks, have this challenge. So they have so much money and it’s not bringing any kind of return for them. It’s just now that the Sukuk the federal government has issued that the banks are investing in. But how much is the Sukuk? The whole Sukuk, are just a little over N1 trillion. One bank has got several trillions in excess liquidity.

So this is one of the serious challenges that they are facing.

How do you see states and local governments keying into non-interest banking and maybe benefiting from it?

Yes, the states definitely have an opportunity and a number of states are exploring non-interest instruments, the Sukuk.

The first state that did this was Osun State. In 2013, they issued a Sukuk and this Sukuk is a way of raising funds from the capital market and from high net worth individuals then using those funds in projects, they raised about N11 billion and they built secondary schools with that money. The amount was amortized within a period of seven years and by the end of that period, the investors had received back their capital as well as their profits. And Osun State now owns the school. It is also on records that Lagos State recently did the same. Gombe State, they have done the same but it was through a private offering.

So state governments could raise funds for their projects because the beautiful thing about the funds that are raised under Islamic finance is that they are tied to a project. You just can’t just gather money and give it to government to finance its budget deficit and you don’t see it anywhere. It has to be tied to a project.

Similarly, some state have leverage the membership of Nigeria in the Islamic Development Bank and they got that kind of financing. Like Kaduna State government, the Zaria water supply, water treatment plant was financed with a Murabaha, a kind of instrument of Islamic banking from the Islamic Development Bank.

Imo State as well. Even Kano State, they benefited from an agricultural programme. Local governments can also issue Sukuk to get money, build roads and then from what they are getting from their subvention, they pay off. The issue here is that sometimes the amount that comes to the local government, is not enough to finance infrastructure projects, because such projects are highly capitalised and the initial take off capital is much and the subvention they are getting may not be enough for them.

How would you rate non-Muslim participation in the non-interest banking system?

I think the non-Muslim participation is very encouraging. We have a shareholder in Jaiz who is a bishop and right now there is a promoter who is a Christian from the South East who is in the process of establishing a non-interest bank, an independent non interest bank.

Now we have five full-fledged and one as a window non-interest banks in Nigeria. And we have so many microfinance banks. Right now there are applications in the CBN for new and one of the promoters is a Christian. He wants to establish a non-interest bank with headquarters in the South East. So, actually it has found reception by the Christian community. It is well received just like it was done in Malaysia.