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Thursday, July 7, 2011

A debate on Islamic banking

Islamic banking became prominent in the early 1970s after the launch of the first International Conference on Islamic Economics organized by King Abdul Aziz University in Makkah, Saudi Arabia. It was immediately followed by the establishment of the first commercial Islamic Bank, Dubai Islamic Bank (DIB) in the United Arab Emirates.
No sooner than later, the International Islamic Development Bank (IDB) in Jeddah, Saudi Arabia paved the way for many private commercial Islamic banks. Egypt, Sudan, Kuwait, Pakistan and others followed suit.
The emergence of this Islamic banking was not only seen as a feasible and viable alternative financial institution but also as an efficient and productive way of undertaking financial intermediation between surplus and deficit economic units. Giving free-interest on loans from the surplus and at the same time operating on PLS (profit and Loss Sharing).
Since then, Islamic banking has gained momentum and has been growing very fast so much that the practice of Islamic banking is now not limited to only Arab and Muslim countries but has spread from East to West, all the way from Indonesia and Malaysia towards Europe and the Americas.  Today, there are several hundreds of interest free banks in about fifty countries of the world in addition to other conventional banks which provide Islamic financial products. So, if Nigeria is joining the league of countries that are operating the non-interest banking, does that make Nigeria an Islamic country?
In Nigeria, attempts have been made hitherto, to established Islamic banking system. What is now raising dust in some quarters predated the present CBN governor. The first move was made by Jaiz International Plc during the tenure of Chief Joseph Sanusi but was later approved under Prof Chukuma Soludo.
In 2007,  Bank PHB launched the system paving the way for an integration of Islamic banking principles into the structures of the conventional banking system with its interest-free (Riba) financial products. You can also talk about the TAKAFUL which literally means “mutual guarantee.” It has different financial products designed to ensure that Muslim faithfuls still stay in tune to their faith.
At this junction, Nigerians should look at the product and see what it has to offer the economy.
Ibanking as I would love to call it is based on free interest.   It is  based on Profit and Loss Sharing (PLS) system where profit and loss will be shared by investors.  The investors are not only limited to Muslims alone. Non-muslims whose principle and ideas are in concert with the dictates of free-interest which Islam propagates can invest in it.  The very essence of it is to provide alternative to the almighty-interest based principle of the conventional banks and to build capacity in micro and macro-economic management.
The underlying principle of Islamic banks is the principle of justice which is an essential requirement for all kinds of Islamic financing. In profit sharing of a financed project, the financier and the beneficiary share the actual or net profit/loss rather than throwing the risk burden only to the entrepreneur. The principle of fairness and justice requires that the actual output of such a project should be fairly distributed among the two parties. If a financier is expecting a claim on profits of a project, he should also carry a proportional share of the loss of that project.
One of the unique and salient characteristics of Islamic bank is that the integration of ethical and moral values is the hallmark of the banking operation. The ethical and moral consideration of Islamic bank cannot be detached and their behaviour should be consistent with the moral and ethical standards laid down by Islamic law.
Islamic banks are restricted to useful goods and services and refrain from financing alcoholic beverages and tobacco or morally unacceptable services such as casinos and pornography, irrespective of whether or not such goods and services are legal or profitable in a given country.
Another important characteristic which forms the basis for the development of Islamic banks is the relationship with depositors. They deal with their customers on investment grounds rather than a pre-determined fixed interest rate. They invest the money of their depositors on high profitable projects after going through a strategic analysis in order to give a substantial return to their depositors.
Furthermore, Islamic banks eliminate the barrier between those who save and those who invest, and bring them closer to the real market. The nature of the financial intermediation of Islamic banks significantly defers from conventional banks and it is in harmony with real market and in tune with the dynamics of the economy.
I think the CBN should introduce the theoretical foundations and principles on which this new alternative is going to work.  It is then people who are suspecting another ‘Islamic agenda’ can have a rethink on the need for it rather than crying over what they have little or no knowledge about. You also cannot rule out the possibility of islamophobia, but like I used to say Islam tolerates only non-Muslims dont.

1 comment:

  1. With the passage of time, however, and other socio-economic forces demanding more involvement in national economic and financial activities, avoiding the interaction with the banks became impossible. Local banks were established on the same lines as the interest-based foreign banks for want of another system and they began to expand within the country bringing the banking system to more local people.