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Globally, in the last decade, there has been unprecedented
growth in the non-interest banking and finance, which is generally
known as Islamic Banking. The existence of Islamic finance has
become imperative in many jurisdictions of the world and it is
expected to continue to spread in view of the economic growth in
countries with huge Muslim population.

Nigeria is home to the largest population of Muslims in
sub-Saharan Africa. It accounts for over 80 Million Muslims. In
recent times, Nigeria is opening itself to Islamic financing with
hope of establishing a hub for non-interest banking.

Nature of Islamic Banking

Islamic finance is a financial system that is based on adherence
to the Sharia or Islamic law. It offers services, products and
instruments based on compliance to this Divine Law.

Sharia prohibits the payment or acceptance of interest charges
(riba) for the lending and accepting of money, as well as carrying
out trade and other activities that provide goods or services
considered contrary to its principles. Money in Islam is not
regarded as an asset from which it is ethically permissible to earn
a direct return. Money tends to be viewed purely as a medium of
exchange. Interest can lead to injustice and exploitation in

There is no real ‘lending’ in Islam since all
‘lenders’ obtain ownership interests in the assets that
they finance, or earn a profit-share or purely fee-based
remuneration. In order for an Islamic bank to earn a return on
money lent, it is necessary to obtain an equity, or ownership,
interest in a non-monetary asset. This requires the lender to also
participate in the sharing of risk.

Modes of Islamic Finance

There are basically two folds of Islamic financing. They

  1. Profit-and-loss-sharing (PLS), also
    called participatory modes, i.e., musharakah and mudarabah;

  2. Purchase and hire of goods or assets
    and services on a fixed-return basis, i.e., murabaha, istisna,
    salam and leasing (ijarah).

Some of these Islamic finance terms are discussed hereunder:

Musharakah is a profit-and-loss
sharing partnership and the most authentic form of Islamic
Financing. It is a contract of joint partnership where two or more
partners provide capital to finance a project or own real estate or
movable assets, either on a permanent or diminishing basis.
Partners in musharakah have a right to take part in
management; they seem to bear the greatest risk among all Islamic
financing modes with the potential for earning the highest reward.
However, whereas profits are distributed according to pre-agreed
ratios, losses are shared in proportion to capital

is a popular Sharia compliant sale
transaction mostly used in trade and asset financing. The bank
purchases the goods and delivers them to the customer, deferring
payment to a date agreed by the two parties. The expected return on
murabaah is usually aligned with
interest payments on conventional loans, creating a similarity
between murabaah sales and
asset-backed loans

Mudarabah is a profit-sharing and
loss-bearing contract where one party supplies funding (capital
owner) and the other provides effort and management expertise
(manager) with a view to generating a profit. The ratio in which
the total profits of the enterprise are distributed between the
capital-owner and the manager of the enterprise is determined and
mutually agreed at the time of entering the contract, before the
beginning of the project. In the event of loss, the capital owner
bears all the loss and the principal is reduced by the amount of
the loss. It is the risk of loss that entitles the capital-owner to
a share in the profits. The manager bears no financial loss,
because he has lost his time and his work has been wasted. This is,
in essence, the principle of mudarabah

Ijarah is a contract of sale of the
right to use an asset for a period of time. It is essentially a
lease contract, whereby the lessor must own the leased asset for
the entire lease period. Since ownership remains with the lessor,
the asset can be repossessed in case of nonpayment by the lessee.
However, the lessor is also responsible for asset maintenance,
unless damage to the leased asset results from lessee negligence.
This element of risk is required for making ijarah
payments permissible.

Salam is another mode of financing in
Islamic Finance. It is a sale where the seller undertakes to supply
some specific goods to the buyer at a future date is specified in
exchange of an advanced price fully paid at spot. This mode of
financing is used to finance the agricultural sector.

Istisna is another mode of financing
where the commodity involved is manufactured to the specifications
of the purchaser. This is widely used in the housing finance
sector, where the client seeks finance for the construction of a
house. The financier may undertake to construct the house on a
specified land either belonging to the client or purchased by the
financier, on the basis of Istisna with payment fixed in
whatever manner the parties may wish.

Sukuk is the Islamic equivalent of
bonds and they are similar to asset-backed securities. Whereas a
conventional bond is a promise to repay a loan, Sukuk
constitutes partial ownership in receivables In practice, Islamic
finance often involves structuring transactions in a manner that
closely mimics conventional finance insofar as a periodic rate of
return is provided. In certain types of
Sukuk instruments, a predetermined rate of return is often
paid to the investor; this rate is based on the expected return of
the underlying assets that collateralize the Sukuk. In the
case of debt-like financing by Islamic banks, interest is not
charged; instead, debtors will provide predetermined and periodic
payments to the bank, based on the expected profit that would
accrue to the underlying asset (in the case of a capital
investment), or on the rent that might be charged for the use of
the underlying asset (in the case of a home or car loan)

Musharakah and mudarabah can be used for
short, medium and long-term project-financing, import-financing,
export financing, working capital financing and financing of single
transactions. Diminishing musharakah can be used for large
fixed assets such as houses, transport, machinery, etc.
Murabaha can be used for purchases of goods needed by the
bank’s clients. Salam is useful for financing farmers,
trading commodities for the public and private sectors and other
purchases of measurable and countable things. But it must be kept
in mind that buyback and rollover modes may not be used, because
they are seen as a back door to interest.

The Laws Regulating Islamic Banking in Nigeria

The Banking system in Nigeria is generally regulated by Banks
and Other Financial Institution Act (BOFIA), Cap B3 Laws of the
Federation 2004; Central Bank of Nigeria Act (CBN Act) 2007; and
Companies and Allied Matters Act (CAMA) Cap C20 Laws of the
Federation 2004. Over the past years, Nigerian authorities have
announced a number of regulatory initiatives that will prepare the
landscape for the development of a strong Islamic finance hub. They

  1. Guidelines for the Regulation
    and Supervision of Institutions Offering Non-Interest Financial
    Services in Nigeria.

    The Guideline is issued pursuant to the non-Interest banking
    regime under Section 33 (1) (b) of the CBN Act 2007; Sections 23(1)
    52; 55(2); 59(1)(a); 61 of Banks and Other Financial Institutions
    Act (BOFIA) and Section 4(1) (c) of the Regulation on the Scope of
    Banking Activities and Ancillary Matters, No. 3, 2010. It shall be
    read together with the provisions of other relevant sections of
    BOFIA, the CBN Act, CAMA and circulars/guidelines issued by the CBN
    from time to time.

    Under the Guidelines, the non-interest banking and finance
    models are broadly categorized into Non-interest banking and
    finance based on Islamic commercial jurisprudence, and Non-interest
    banking and finance based on any other established non-interest

    The non-interest banks are to be categorised into two, namely:

    • National non-interest bank, which
      shall have a capital based of N10 billion and will operate in every
      state of the Federation including the Federal Capital Territory

    • Regional non-interest bank, which
      shall have a capital base of N5 billion, and will operate in a
      minimum of six states and a maximum of 12 contiguous states of the
      federation, lying within not more than two geo-political zones as
      well as the within the Federal Capital Territory.

    A non-interest financial institution under this model will
    ensure that its Memorandum and Articles of Association (MEMART)
    state that its business operations will be conducted in accordance
    with the principles and practices of Islamic commercial
    jurisprudence. The institution offering Islamic financial services
    will transact business using only financing modes or instruments
    that are compliant with the principles under this model and
    approved by the CBN.

    The Islamic bank may charge such commissions or fees as may be
    necessary in accordance with the principles under the Guideline and
    the Guide to Bank Charges. The funds received as commissions and
    fees shall constitute the bank’s income and shall not be shared
    with depositors.

    In view of the provisions of Section 39 (1) of BOFIA, the
    registered or licensed name of an Islamic Bank shall not include
    the word “Islamic”, except with the consent of the
    Governor of the CBN. The financial institution shall, however, be
    recognized by a uniform symbol designed by the CBN. All the
    signages and promotional materials of Islamic financial institution
    shall bear this symbol to facilitate recognition by customers and
    the general public.

    An Islamic financial institution shall ensure that relevant
    disclosures are made to Profit Sharing Investment Accounts (PSIA)
    holders in a timely and effective manner and also ensure the proper
    implementation of investment contracts. Also, they are expected to
    inform its prospective PSIA client(s) operating under
    profit-sharing, loss-bearing contracts, in writing that the risk of
    loss rests with the client(s) and that the institution will not
    share in the loss unless there is proven negligence or misconduct
    for which the institution is responsible.

    Pursuant to this Guideline, there are only two institutions that
    currently provide Islamic finance services in Nigeria –
    Stanbic IBTC, a unit of South Africa’s Standard Bank, and Jaiz
    Bank, a full-fledged Islamic lender which has operated in Nigeria
    since 2012. Sterling Bank has been granted approval in principal to
    launch an Islamic finance arm.

  2. Guidelines on the Regulation
    and Supervision of Non-Interest (Islamic) Microfinance Banks in

    In April 2017, the CBN issued the Guidelines on the Regulation
    and Supervision of Non-Interest (Islamic) Microfinance Banks in
    Nigeria. This Guideline is to provide a level playing field for the
    conventional microfinance bank and the non-interest (Islamic)
    microfinance bank. It provides the standard operating procedures
    and other operating requirement that operator of Islamic
    microfinance bank ought to comply with.


Despite the innate restrictions in Islamic banking, there is a
room for the market to grow. Islamic financial institutions present
various products and services that can cater for the needs of the
banking public Nigerians as captured herein.

As expected, the introduction of the Non-Interest (Islamic)
Microfinance Banks in Nigeria is expected to engender a wave of
healthy competition in the microfinance industry which will bring
about a possible reduction of interest rates. This will help drive
the Nigerian economy and ensure its steady growth considering the
fact that Nigeria not too long ago was in recession.

As an alternation to the established conventional banking
system, the Non-Interest (Islamic) Banks in Nigeria will give
opportunities to non-Muslims. Though Islamic finance is based on a
religious law, the opportunities therein are not just for religious
faithful. It is a business activity open to all segments of the

As captured earlier, charging and paying interest is banned
under Sharia law, Islamic finance institutions instead invest in
infrastructure or other types of projects and share risk and
earning with the clients.

March 1, 2018

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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