Evolution and trends in Islamic banking
By Omoh Gabriel
Non interest banking, Islamic banking or participant banking is banking activity that is consistent with the principles of Islamic law (Sharia) and its practical application through the development of Islamic economics . Sharia prohibits the payment or acceptance of specific interest or fees known as Riba or usury for loans of money. Investing in businesses that provide goods or services considered contrary to Islamic principles is also Haraam (forbidden).
Interest-free banking seems to be of very recent origin. The earliest references to the reorganisation of banking on the basis of profit sharing rather than interest are found in Anwar Qureshi (1946), Naiem Siddiqi (1948) and Mahmud Ahmad (1952) in the late forties, followed by a more elaborate exposition by Mawdudi in 1950.
The writings of Muhammad Hamidullah 1944, 1955, 1957 and 1962 should be included in this category. They have all recognised the need for commercial banks and their perceived “necessary evil,” have proposed a banking system based on the concept of Mudarabha – profit and loss sharing.
The first modern experiment with Islamic banking was undertaken in Egypt under cover without projecting an Islamic image for fear of being seen as a manifestation of Islamic fundamentalism that was anathema to the political regime. The pioneering effort, led by Ahmad Elnaggar, took the form of a savings bank based on profit-sharing in the Egyptian town of Mit Ghamr in 1963. This experiment lasted until 1967 (Really 1981).
In the last two decades, interest-free banking attracted more attention, partly because of the political interest it created in Pakistan and partly because of the emergence of young Muslim economists. Works specifically devoted to this subject began to appear in this period. The first such work is that of Muhammad Uzair (1955). Another set of works emerged in the late sixties and early seventies. Abdullah al-Araby (1967), Nejatullah Siddiqi (1961, 1969), al-Najjar (1971) and Baqir al-Sadr (1961, 1974) were the main contributors.
The early 1970s saw institutional involvement. The Conference of the Finance Ministers of the Islamic Countries held in Karachi in 1970, the Egyptian study in 1972, the First International Conference on Islamic Economics in Mecca in 1976, and the International Economic Conference in London in 1977 were the result of such involvement.
The involvement of institutions and governments led to the application of theory to practice and resulted in the establishment of the first interest-free banks. The Islamic Development Bank, an inter-governmental bank established in 1975, was born of this process.
While these principles were used as the basis for a flourishing economy in earlier times, it is only in the late 20th century that a number of Islamic banks were formed to apply these principles to private or semi-private commercial institutions within the Muslim community. The concept of Islamic banking is not new in Nigeria, however, this is the first time a governor of Central Bank of Nigeria (CBN) is vigorously pursuing its implementation. Before Sanusi Lamido Sanusi became the governor of CBN in 2009, Islamic banking/non interest banking was approved by the CBN during the tenure of Professor Chukwuma C. Soludo.
There is a provision for non-interest banking in the BOFIA Act 1991 as amended. Sections 9, 23 and 52 provided for the establishment of Islamic banking in Nigeria. As a result of this provision, the former Habib Bank was given an approval in 1992 to operate a window of Islamic banking, which is still operational with Bank PHB. The approval by the CBN under Professor Soludo saw the emergence of the proposed JA’IZ Bank, which has been working to raise the N25 billion capital base required.
Worldwide, Islamic banking is gaining ground. Many other countries including predominantly Christian ones have established and many are considering establishing Islamic banking. It is more than a quarter of a century now since the practice of Islamic banking and finance began in earnest.
The Dubai Islamic Bank, a private company, as well as the Islamic Development Bank, a symbol of the Muslim peoples’ endorsement of the idea launched by the Organization of the Islamic Conference (OIC), were both established in 1975.
The UK for example, has a minority Muslim population of about 4 percent, and has amended regulation to cater for Islamic banking. South Africa also has a minority Muslim population of about 2 percent but has had Islamic banking since 1989. Japan has begun the introduction of Islamic banking and China is also introducing Islamic banking. Countries across Europe, Africa and Asia, notwithstanding the significant presence of Islamic banking in the Middle East, have begun embracing the Islamic finance and investment philosophy.
Other Christian-owned institutions are also seeking to introduce interest-free financial products to serve clients regardless of their religion because they can now see that it is part of the international financial system, which is an alternative system of financial management as opposed to the market-based conventional system whose excesses nearly collapsed the world banking system through junk derivatives as collaterised debt obligations backed by mortgages in the United States.
The worry in Nigeria however is, will the bank offer its services to a non Muslim? Will non Muslims allow Islamic bank manager to be part of his business? Will the bank be set up for Muslims only? Will it operate only within the Muslim community? These are questions the promoters of non interest banking in Nigeria have to explain and well too.