The Proposed Islamic Banking By Central Bank of Nigeria - The Way Forward

The Banking institution is a place where individuals or corporate organizations alike deposit their money for personal or business transactions for the purpose of savings, current or fixed transactions that would yield profit over a particular period of time. Nigeria as one of the growing economies of the world has taken the right step to restructure the banking system in the country. Dating back to the year 2005 where all the existing banks were mandated to re-capitalize to a minimum balance of Twenty five billion Naira or risk losing its operating licenses during the leadership of Prof. Charles Chukwuemeka Soludo, the then Governor of Nigeria's apex bank, Central Bank of Nigeria.

Interestingly, this paved way for an organized and thriving banking sector where some of the banks met the expected benchmark while others merged and few dropped by the wayside. Nonetheless, this reform created free flow of capital funds for the banks to play around with - ushering of universal banking. One would not forget the role the banks played in the Capital market during the boom era where investors' borrowed loans or applied for a margin loan facility from these banks ranging from 7% to 20% interest rates in order to reap bountiful profits on their appreciated stocks invested. Unfortunately, the proliferation of all manner of deals in our capital market over time accounted for the down turn of the economy. It must also be mentioned that Africa was not alone in this economic impasse as most countries of the world suffered the same fate including the United States of America.

Risk Analysis for Islamic Banks

For a long time now, the idea of operating Islamic banking has generated a lot of debate or argument, especially in Nigeria which has different religions. I was therefore excited when I was handed this book by a former boss of mine on his return from a World Bank conference in the United States of America recently. At least, reviewing it will shed more light on the supposed grey areas of Islamic banking.

This text entitled "Risk Analysis for Islamic Banks", published by the World Bank, is co-authored by Hennie van Greuning and Zamir Iqbal. Iqbal is a principal financial officer with the Quantitative Strategies, Risk and Analytics (QRA) Department of the World Bank Treasury. He earned his Ph.D. in International Finance from the George Washington University, where he also serves as the adjunct faculty of international finance. Iqbal has written extensively in the area of Islamic finance in leading academic journals.

As for Greuning, he is a senior advisor in the World Bank Treasury and has worked as a sector manager for financial sector operations in the Bank. He has had a career as a partner in a major international accounting firm and as chief financial officer in a central bank. Greuning holds doctoral degrees in both Accounting and Economics.

Greuning and Iqbal say over the years, the Islamic Financial Services Board and related organisations have invited them to workshops and conferences, allowing them to learn from the many scholars presenting at those gatherings.

Banking on Sharia Principles - Islamic Banking and the Financial Industry

There are an estimated 1.61 billion Muslims worldwide, making Islamic banking one of the fastest growing segments of the financial industry. Banks serving the Islamic population must comply with several very specific principles of Islamic law if they hope to retain existing customers and attract new ones. Banks must be ready with specialized products and services and they must put programs in place to train their personnel to support these products and services in order to exist in this competitive marketplace.

The basic principle of Islamic banking follows the laws of Sharia, known as Fiqh al-Muamalat (Islamic rules on transaction). The term "Islamic banking" is synonymous with "full-reserve banking" and "Sharia-compliant banking." The most prominent feature of these laws is usury - the prohibition of paying or collecting interest on funds. The Islamic terminology for this is riba or ribaa. The Sharia also forbids engagement in investments that include financial unknowns such as buying and selling futures, as well as businesses that are haraam - dealing in products that are contrary to Islamic law and values such as alcohol, pork, gossip or pornography. These principles apply to all individuals, companies and governments.

Banks that comply with Islamic law are forbidden to charge interest or late payment fees, which is also considered a type of riba. To minimize risk, banks will often require a large down payment on goods and property, or insist upon large collateral. It is lawful for the Bank to charge a higher price for a good if payments are deferred or collected at a later date since it is considered a trade for goods rather than collecting interest. Sharia-complaint banking products include Mudharabah (profit sharing), Wadiah (safekeeping), Musharakah (joint venture), Murabahah (cost plus) and Ijarah (leasing). Another way that banks work within Islamic laws while trying to turn a profit is by buying an item that the customer wants, and then selling the item to the customer at a higher price.