1
THE ROLE OF ISLAMIC BANKING AND CHALLENGES IN GLOBAL FINANCIAL CRISIS: IN NIGERIA
BY
MUSTAPHA TAJUDEEN ADM. NO: 1122903477
PROJECT SUBMITTED TO THE DEPARTMENT OPF BUSINESS ADMINISTRATION, USMANU DANFODIYO
UNIVERSITY, SOKOTO
AS PART OF PARTIAL FULFILLMENT OF THE AWARD OF MASTERS DEGREE IN BUSINESS ADMINISTRATION
OCTOBER, 2014
2
APPROVAL PAGE
I hereby certify that this project (research project) is the original product of my research findings. This project has been carefully supervised, read and approved having satisfied the necessary conditions for the award of Masters Degree in the Faculty of Management Sciences, Department of Business Administration, Usmanu Danfodiyo University Sokoto and is approved for its contribution to knowledge.
__________________________ __________________
Dr. A.S Yabo Date
Project Supervisor
__________________________ __________________
Project Coordinator Date
__________________________ __________________
Head of Department Date
__________________________ __________________
External Examiner Date
3
DEDICATION
I dedicate this project to my beloved parents for bringing me up, my family for the support and assistance they gave me, and my supervisor for the assistance, guidance and understanding given to me in the course of my research work.
Above all, glory and thanks to Almighty Allah and his noble Messenger for making me what I am today.
4
ACKNOWLEDGEMENT
To God Almighty Allah be the glory for the great things he has done for me throughout my life upto this moment of accomplishing this study, He kept me healthy, gave me the required skills, knowledge and wisdom and make me financially capable in His ultimate mercy which make my academic journey a huge success, which is being celebrated by many beneficiaries of my success in life.
I am highly indebted to several persons, relations, lecturers, friends and classmates without whom this study wouldn't have been success.
I wish to express my sincere and tremendous gratitude to my beloved family, whose love, prayers, encouragement, support, patient and take good care of me despite the usual challenges of life they stood by me and my parents who are always there for me right from my childhood to date.
My appreciation also goes to my supervisor Dr. A.S. Yabo for her immeasurable timely amendment and suggestion which led to the successful completion and writing of this research work. May God Almighty reward her abundantly. Also profound gratitude goes to all my lecturers in the department whose advise and guidance has gone along way in bringing me up to the task.
5
Finally, much thanks goes to Almighty Allah who gave me the opportunity to complete this study lift my status in my office to the Director of my own company.
6
TABLE OF CONTENT
Title page i
Approval page ii
Dedication iii
Acknowledgement iv
Table of content vi
CHAPTER ONE
1.1 Introduction 1
1.2 Starting the intention of the research. 4
1.3 Statement of the problems 8
1.4 research Questions 9
1.5 Objective of the study 9
1.6 Significant of the study 10
1.7 Scope and Limitation of the study 11
CHAPTER TWO: Literature review and theoretical frame work
2.1 Introduction 13
2.2 The concept of Riba (interest) 13
2.3 Basic principle of Islamic Banking 16
2.3.1 concept of frame work 18
2.3.2 Definition of Islamic Banking 18
2.3.3 Empirical Review on Islamic banking 20
7
2.4 Problem of Non Interesting Banking 27 2.5 Problem and Challenges of Islamic Banking 31 2.6 Islamic Banking theories and Practices 40 CHAPTER THREE RESEARCH METHODOLOGY
3.1 Introduction 44
3.2 Population of the study sample size 44
3.3 Sample Techniques 45
3.4 Method of Data collection 45
CHAPTER FOUR: Data presentation, analysis and interpretation
4.1 Introduction 47
4.2 Presentation and Data Analysis 47
4.3 Prospects for Islamic Banks 54
4.4 Discussions and Implications 54
4.5 Summary of findings 57
CHAPTER FIVE: Summary, conclusion and recommendation
5.1 Summary 59
5.2 Conclusion 60
5.3 Recommendation 62
References 65
Appendix 72
8
CHAPTER ONE: INTRODUCTION
1.1 Introduction
Islamic banking or interest free banking as it is alternatively called is a banking system based on the principles of profit and loss sharing by all the stake holders. Islamic banking concept owes its origin to the Islamic concept of money. In Islam money does not in itself produce interest or profit, and is viewed as a medium of exchange and not as a commodity. Already Ribah (interest) is prohibited in Islam. The status of Islamic bank in relations to its clients is that of partner – investor and trader. Whereas, in conventional banks of the West the relationship is that of creditor or debtor.
Islamic banking will be based on the universally recognized principles of Shirakah (partnership). That is, the whole system of banking in which the holders, the depositors, the investors and the borrowers will participate on a partnership basis i.e through the application of the external principle of Mudarabah – labour and capital combine as partner for work.
In their actual operation, Islamic banks use various techniques and method of investment such as Mudarabah contracts, under which a financier provides capital and the Mudarib (labour partner) provides
9
his technical know – how and skill, and the profit is shared between the partners according to and agreed percentage. Islamic banks are also involved in Mudarabah (cost plus) contracts, under which banks purchase a certain commodity according to its client’s specifications and give delivery on the basis of sharing on an agreed ratio profit.
Islamic banks are also involved in dealing with foreign exchange markets and other banking services operations, such as letters of credit and letters of guarantee. Islamic banks may also provide various non – banking services such as, trust business, real estate and consultancy services. The concept of Islamic banks and their operational techniques will be discussed in detail in the preceding chapters. The first reason why we need Islamic banking is because;
Allah has prohibited any form of interest on loans and allowed lawful trade and profit from the business. In the other hand the conventional banks which was introduced to us by Europeans, their mode of operations is principally dependent on interest. They advance loan in which the recipient must refund with and increment. But Allah has prohibited such types of loan. He created us and brought us into this world while we were unconscious of anything. He provides to us the air we breathed, the water we drinks, the food we eat and the clothes we clad our nudity. Whenever we are in hardship or fall sick or are
10
experiencing a disaster we turn unto him, we seek refuge from Him.
At the end we will surely return unto Him. Did He then create us to turn deaf ears to what He has forbidden us? Allah has prohibited such transaction in one of the places where he says:
“O ye who believe fear Allah and give up what remains of your demand for Usury if ye are indeed believers, if ye do it not, take notice of a war from Allah and his messenger” Qur’an chapter 2:278-279.
Certainly, we are in problem if we are to continue transacting with interest without replacing it with Islamic banking. That is an act of disobedience to Allah. The prohibition is not only to those that advance loans with interests, but including those that borrow and refund with interests and all those that assist them. “The curse of Allah is upon who collects interest (Ribah), the person given it, and who write it and witness it. He says those are all the same” 850 (Bulugul – Maran).
Non – interest banking was introduced in the Nigerian financial sector by ex Habib Nigeria bank plc, now known as Keystone bank ltd. The system is alternatively called interest free banking or “Islamic banking” is the wider context comprising of the people of the book who belief in the followings:
I. Oneness of God
11
II. The Holy book revealed to mankind and
III. All the prophets (peace be upon them) sent by Allah (SWT).
But if the term Islamic is confined to the religion of the followers of prophet Muhammad (peace be upon him) only, then this name does not appear to be proper as it is not only the holy book of Qur’an which prohibits, but also the Christian holy books have also advised followers to shun away from interest.
1.2 Stating the Intention of the Research
The issue of establishing Islamic banking (bank based on Islamic law (Shari’ah)) in Nigeria is not a new issue in the Nigerian financial system. Various efforts have been made to see it come through by some concerned Nigerian Muslims and non - Muslims but faced all sorts of challenges and oppositions due to differences in culture and religion, and as a result of lack of awareness of the system. With all these challenges and oppositions, a careful consideration of the Nigeria banking law led to the promulgation of Decree No. 46 of 1992 which provides avenue for each community to establish community banking which can operate based on its own customs and tradition. This prompted the establishment of Haraka Islamic Community Bank (H. I. C. B) in Sokoto (Malami, 2009). This bank operated strictly on the basis of Islam but did not record any
12
successful achievements due to lack of adequate personnel, low capital base, nonchalant attitude of staff and inadequate awareness of the system e. t. c.
However, modern Islamic banking in Nigeria evolved as far back as 1991 with the enactment of the Banks and Other Financial Institution Decrees. Section 23 and 61 of this Decree recognize profit and loss sharing banks. However, there were no significant achievements due to lack of compliance with Central Bank of Nigeria requirements by potential investors. In 1996, Central Bank of Nigeria approved the defunct Habib Bank Plc to open an Islamic banking window which was not successful due to lack of full - fledged Islamic banking in the country. Furthermore, in 2004 Ja’iz International demanded approval for the establishment of full - fledged Islamic bank which was given Approval – in – Principle (AIP) upon meeting the mandatory capital requirement. In line with the struggle to have Islamic banking, in 2005 Financial System Strategy launched a blue print to engineer Nigeria’s transformation into the 20 largest economies in the world by the year 2020. Among its initiatives regarding Money Market is to create Islamic banking in Nigeria. More so, in 2008 the Islamic Finance Working Group was founded and was highly supported by Enhancing Financial Innovation and Access (EFInA), NDIC,
13
NAICOM, PENCOM, DMO, CBN observer e. t. c. In addition, the CBN joined the Islamic Financial Service Board (IFSB) as a full – council member in 2009, and issue the draft framework for the regulation and supervision of Islamic banking in Nigeria for stakeholders’ comments and suggestions in that same year. In line with the opinions of the stakeholders, the Central Bank of Nigeria released the new banking model which designated Islamic banks among the specialized banks in 2010. The NDIC also released a draft framework for Islamic Deposit Insurance Scheme for comments and suggestion from stakeholders. Despite all the hurdles of establishing Islamic banking in Nigeria, the CBN joined 11 other Central Banks and 2 multilateral organizations to form the International Islamic Liquidity Management Corporation (IILM) to be based in Malaysia.
And finally, in 2011 the Central Bank of Nigeria released the framework for the regulation and supervision of Islamic banking in Nigeria and gave Approval – in – Principle (AIP) to some potential investors upon meeting the mandatory requirement of the CBN (Sanusi, 2011).
It has however been discovered from various studies (see for instance Iqbal et al, 1998; Iqbal, 2001, Dusuki and Aboizaid, 2007; Ariss and Sarieddine, 2007; Njamike, 2010; Malik et al, 2011; Sanusi, 2011;
14
Abduh And Omar 2012; Farahani and Dastan 2013; Hassanudin et al 2013) that the establishment of Islamic banking in any country be it Muslim or Non – Muslim countries faces a number of challenges which Nigeria is not an exception. These challenges could be institutional or operational, but there are not without remedies. It is also accepted that a lot of studies have been conducted in this area of finance in most Muslim and few Non – Muslim countries. This became more pronounce after the recent Global Financial Crisis in which most Islamic banks were not affected (Nijzink, 2009). But to my greatest surprise there are still few studies in the case of Nigeria.
Even where they are, they failed to carry every Nigerian along irrespective of religious differences which prompted this study. Since Nigeria is on the line of establishing Islamic banking due to the benefits accruing to it which cut across all aspects of human undertakings, she should bear it in mind that these benefits are not without hurdles. In line with these, this study seeks to achieve the objective of assessing the challenges that the introduction of Islamic banking in Nigeria may face. To do this, this study will give a thoroughly explanation of Islamic banking and its modes of operation, and finally, it will provide solutions to possible challenges of Islamic banking in Nigeria. This study will be an eye opener to the central government of Nigeria, Central Bank of Nigeria, the judiciary,
15
existing financial institutions, and Nigerians irrespective of religious differences.
1.3 Statement of the Problem
The failure to provide a stable, monetary and banking framework has been one of the major factors that bring about economic ills all over the world. This led to the poverty of large proportion, economic and social injustices, as well gross income inequalities, instability in inflation rate, and erosion of the real value of monetary assets and other abnormalities.
Though the entry of Islamic banking into the field of local and international financial markets has been well recognized, it has yet to cross many hurdles before it can claim to be an institution capable of handling the needs of the world financial markets. Its initial success may be partly due to the fact that there is a niche market for Islamic funds, and partly to its ethical and intrinsic values. To sustain and develop the system, Islamic banks have to strive to solve all problems, which stand in the way of their growth and survival. Based on the above assertion, this study tends to assess the challenges that Islamic banking in Nigeria may face and provide solutions.
16
1.4 Research Questions
Research question are the question that are raised in order to find answers or solve the problem(s) under study for the purpose of this project. The following are the questions that need to be answered:
i. What are the potentials of Islamic banking system?
ii. How do Islamic banks operate?
iii. What are the positions of Islam on interests/Usury?
iv. What are the difference in products and services of the banks?
1.5 Objective of the Study
The main objective of this research is to determine the way Islamic banks operate and identify the problems facing their survival. Other objective includes:
To identify the potentials of Islamic banking system.
To examine the position of Islam on interest/Usury/Riba.
To differentiate between Islamic banking system and the conventional banking system.
To discuss some of the products/facilities provided by the banks.
17
1.6 Significant of the Study
So many writers have wrote about Islamic banking system and also have contributed immensely to the field of Islamic banking system, but not withstanding my own research work will try to build on that and provide solutions to the problems facing Islamic banking in a systematical way.
The significance of this study may be that, the findings will help in the following ways:
1. The study will provide an extensive explanation of Islamic bank which serve as an alternative to the widely practiced conventional banking system, which is usurious in nature and hamper human income growth in an exploitative nature to Nigerians.
2. This study will bring Muslims closer to what is seen as divine banking which is free of interest; clearing their doubt and exposing them to the practice that is accepted by their religion.
3. The study is particularly important to students of banking and finance, and anybody who reads through it as it adds more to the existing knowledge in the field of Islamic economics, Islamic banking and finance and Islamic business transaction.
18
4. The non-Muslim who may spare their time to go through this study would understand and gain knowledge on how these banks operate and know that, the bank are not specifically meant for Muslims alone but all benefit from the research work, because they will be exposed to the origin, evolution, survival as well as the problem faced, prospects anticipated and recommended solutions which will clear doubt on the successful operation and existence of the banks.
5. The existing Islamic banks would also benefit from this work because they would see how other Islamic banks at different countries operate and the problems facing them, how they became immune to the current global financial crisis which they can use as proactive means of handling these problems.
1.7 Scope and Limitation of the Study
However, in spite of the fact that there are different opinions regarding interest in banks, this work covers the opinion of most scholars that view banks interest as Riba (Usury). It also covers the practice of Non-interest banking or profit and loss sharing banking (PLS) as it is sometimes called in Muslims dominated countries such as Iran, Sudan, Pakistan etc, as well as the practice and operations in countries that are mixed where Muslims and Non-Muslims are fifty-
19
fifty or even those countries where Muslims are the minorities. These categories include; Germany, the United State, United Kingdom and even Nigeria.
The area of Islamic banking system is very wide. But, this research work is only restricted to issues like Riba, Mudarabah, Ijarah, etc, that forms the basic fundamental services and facilities provided by the Islamic banking system that is not applicable to the conventional banking system, and also emphases on the edge it has over the conventional banking system that gives rise to the present world economic crisis.
20
CHAPTER TWO: LITERATURE REVIEW AND THEORITICAL FRAMEWORK
2.1 Introduction
Conducting research work of this kind, a review of related literature is necessary. This is in support of the fact that there must have been other certain works done in the area under study which will serve as valuable braces of information to put the present work on curse, and to serve as arch light in further investigation. Concept of Islamic banking would be better understood if literature on the evolution, rational behind its existence, scholastic and Islamic view of the institution. The chapter discusses the conceptual framework of Islamic banking which covers definition of Islamic banking, the concept of Riba, Basic principles of Islamic banking, modes of operation in Islamic banking, justification of Islamic banking system in Nigeria, and Literature Review.
2.2 The Concept of Riba (interest)
Riba which is the same thing as interest or usury has been defined differently by different scholars. Some of these scholars see it to mean the same thing, while some try to differentiate it from interest charged in the conventional banking system without winning the
21
debate. Then what is Riba? Riba literally means the ‘increase’ or
‘excess’ above the principle on a loan (Abraham, 2008). He goes on to say that riba means usury since it is an inherently illegitimate practice which has been condemned in the Qur’an. More so, Seed (1996) in Lawal (2010) defines riba as an amount over the principal of a loan paid to the capital owner because of his extension of maturity for his debtor, and deferment of repayment of debt.
Furthermore, riba literally means excess or increase, and technically as an increase over principal in a loan transaction or in exchange for a commodity accrued to the owner (lender) without giving an equivalent recompense in return to the other party; even increase which is without an equal counter – value. Riba is however divided into two: Riba Al – Fadl and Riba Al –Nasiah. Riba Al – Fadl is the type of riba that is associated with quality in direct exchange of commodities. It means the quality premium in exchange of low quality with better quality commodities. The concept of Riba Al – Fadl refers to sale transactions. While Riba Al - Nasiah means an increment on principal of a loan or debt payable. It also refers to the practice of lending money for any length of time on the understanding that the borrower would return to the lender at the end of the period the amount originally lent together with an increase on it, in consideration of the lender having granted him time to pay
22
irrespective of loss or profit. Interest, in all modern banking transactions, falls under Riba Al – Nasiah. In the current banking system, as money is exchange for money with excess and delay, it falls under the definition of Riba which has been prohibited in Islam no matter the name you call it. More precisely, riba means any positive, fixed, predetermined rate tied to the maturity and the amount of the principal - that is, guaranteed regardless of the performance of the investment (Greuning and Iqbal, 2008). Conclusively, riba means an increase or excess of the principle of a loan.
However, Islam prohibits Muslims from taking or giving interest (riba) regardless of the purpose for which such loans are given as well as its rate. The prohibition of interest (riba) is mentioned in four different revelations in the holy Qur’an. The first revelation emphasizes that interest (riba) deprives wealth of God’s blessings.
The second revelation condemns interest (riba), placing interest (riba) in juxtaposition with wrongful appropriation of property belonging to others. The third revelation enjoins Muslims to stay clear of interest (riba) for the sake of their own welfare. And finally, the fourth revelation establishes a clear distinction between interest and trade, urging Muslims to take only the principal sum and to forgo even this sum if the borrower is unable to repay. It is further declared in the
23
Qur’an that those who disregard the prohibition of interest (riba) are at war with God and His Prophet. More so, the Prophet also condemned not only those who take interest (riba) but also those who give interest and those who record or witness the transaction, saying that they are all alike in guilt. Thus, by Islamic bank operating on free interest (riba) basis, it satisfies the interest (riba) – prohibition rule of Islam which cannot be achieved in the conventional banking system (Ariff, 1988)
2.3 Basic Principles of Islamic Banking
Islamic banking is a unique type of banking system that devoid all forms of transactions that are prohibited in Islam. So for any bank to be classified as Islamic bank, the following basic principles must be adopted for its operations (Greuning and Iqbal, 2008; Abraham, 2008;
Islamic Financial Stability Forum, 2010; and Sanusi, 2011):
1. Prohibition of Riba (interest). Interest which means a fixed predetermined amount in addition to the principal is prohibited in Islam. So for any bank to be called Islamic bank, it must not engage in any interest related transactions, rather, profit and loss sharing transactions.
2. Prohibition of Speculation (Gharar). The term gharar literally means hazard. More so, it means transactions that have
24
too much risk and are therefore linked to gambling. Since Islam prohibits speculation, a potential Islamic bank will avoid all transactions with excessive risk.
3. Profit, Loss, and Risk Sharing. Since interest is prohibited in Islam, the providers of funds and the entrepreneur in an Islamic banking settings share the business risk and profits based on mutual agreement. This act will equitably distribute income, enhance social justice, and alleviate poverty, e. t. c.
4. Shari’ah Approved Activities. Islamic banking is a banking system that is based on Shari’ah. So any transactions that are prohibited by Shari’ah in the likes of alcohol, gambling, e. t. c.
are avoided in Islamic banking. Islamic banks can only involve in any transactions or activities that are approved by the Shari’ah advisors.
5. Social Justice. Islam prohibits Muslims from any transactions leading to injustice and exploitation of any kind. So Islamic banks will not engage in any transactions that will lead to exploitation of any party to such transactions.
6. Compulsory Payment of Zakat. A potential Islamic bank is mandated for the payment of zakat. Zakat is alms of one – fourth of the total earnings annually for the relief of poverty.
This is considered as one of the pillars of Islam. In conclusion,
25
Islamic banks must contribute to the relief of poverty in the economy.
7. Overseen by Shari’ah (Islamic Law) advisors. Every Islamic bank will be regulated by experts in Islamic law who will have to audit the operations of Islamic banks and its products to make sure that they comply with Shari’ah guidelines.
2.3.1 Conceptual Framework
The conceptual framework section gives a detail explanation of Islamic banking by differentiating it from Islamic banking window;
explain the concept of Riba (interest), basic principles of Islamic banking, modes of operation, and justifies the establishment of Islamic banking system in Nigeria.
2.3.2 Definition of Islamic Banking
The definitions of Islamic banking revolved around one thing - Islamic law (Shari’ah). This can be understood in the following definitions from different scholars in Islamic finance. For instance, Sanusi (2011) views Islamic banking as an alternative form of financial intermediation that is based on the profit motive. That is, Islamic banking is market driven but with a moral dimension based on the Islamic value system. More so, Akram et al (2011) see Islamic
26
banking as that banking system which is run in accordance with the Islamic laws and the Shari’ah board; that guides the institutions.
Furthermore, Lawal (2010) defines Islamic banking as a system of banking that is consistent with the principles of Islamic law (Shari’ah) and its application through the development of Islamic economies. In addition, Marimuthu et al (2010) define it as the conduct of banking based on Shari’ah principles. In the same line, Ghayad (2008) sees Islamic banking as a banking system that operates in accordance with the rules of Shari’ah: Figh al – Muamalat (Islamic rules on transactions). In conclusion, Islamic banking is a kind of banking system that operates strictly on the basis of Shari’ah (Islamic law).
However, Sanusi (2011) defines Islamic banking window as a business model in which conventional banks offer Islamic banking products and services from their existing network. In short, Islamic banking window refers to a situation whereby a conventional banking system provides some of the Islamic banking products or services. In other words, it can be seen as a banking system that meets up only the profit, loss, and risk sharing principle of Islamic banking for some of its products. A typical example in the Nigeria context was the case of
27
the defunct Habib Bank Plc which was permitted to provide some Islamic banking products by the Central Bank of Nigeria.
2.3.3 Empirical Review on Islamic Banking
Studies on challenges of Islamic banking have been conducted all over the world in other to enhance the establishment of Islamic banking as well as its operation. However, some of these studies are based on a single country (Jabr, 2003; Saleh et al, 2007; Amin, 2008;
Sanusi, 2011; Akram et al, 2011; and Njanike, 2010) while others are based on the general system (Iqbal et al, 1998; Ariss et al, 2007;
Shaukat et al, 2011; Iqbal, 2001; Dusuki and Aboizaid, 2007; and Ahmad et al, 2011). Single country studies are studies based on a particular country experience, while general system studies are studies based on the general system of Islamic finance.
Ahmad et al. (2010) analyze the working of Takaful in the world and its popularity in the insurance sector in the world. They are of the view that inadequate qualified staff in both conventional insurance and Shari’ah finance, lack of awareness, application of International Financial Reporting Standard (IFRS) instead of AAOIFI standard in countries where Takaful is new, inadequate short – term financial instruments, lack of financial innovations, inadequate interpretation of what constitute Takaful, lack of organization to regulate Takaful,
28
inadequate human resources with the require knowledge, and the disparity in the approach of accounting practices and Shari’ah law are the challenges of Takaful.
Akram et al. (2011) employed descriptive analysis to examine the growth and development as well as prospects of Pakistani Islamic banking system. The study finds that there is tremendous increase in the sources and uses of Islamic banking funds, indicating growth and development of Islamic banking in Pakistan. In addition, they state that the prospects of Islamic banking in Pakistan depends on the fact that it is a Muslim country, Islamic banking branch network will improve in the future, the increasing interest of conventional banks in Islamic banking activities and functions in Pakistan, and the improvement in Islamic banking performance. However, Akram et al argue that the major challenges of Islamic banking in Pakistan are competition and cultural differences.
Amin (2008), studies e – business from Islamic perspective as well as its prospects and challenges in Malaysian finance. Based on these results, Amin argues that the prospects of e – business of Malaysia depend on government support, Islamic financial system liberalization, economies of scale, the improvement in manpower, and growing users of internet facilities. However, Islamic e – business
29
challenges are lack of consumer acceptance, pricing in Islamic e – business, the need for complex infrastructure, legal risks issues, and will “chicks” dominate “bricks”.
Ariss et al. (2007) investigate the recent guidelines for risk management and capital adequacy in Islamic banking. The study concludes that the proposed guidelines of Pillar 1 of the Basel II Accord disregard the sources of funds of a conventional bank and assess only the risk of its activities arising from the uses of such funds. This means that the proposed guidelines are bias to Islamic banking system. The study further states that the other challenges of Islamic banking are liquidity risk, lack of wide range of derivative instruments, and complications in measuring Shari’ah compliant risk.
Dusuki and Aboizaid (2007) assess the challenges in realizing the maqaeid al – Shari’ah in contemporary economics transactions. They conclude that the major challenges are inadequate understanding of maqaeid al – Shari’ah and various tools in Islamic law, inability to understand the very aims of Shari’ah and its application to modern transactions, and finally circumventing the prohibition of riba.
30
Iqbal (2001) opines that the challenges facing Islamic financial industry are limited set of short terms financial instrument and inadequate medium – to long – term financial instruments, limited coverage of Islamic finance, concentration of Islamic banking, poor risk management and governance framework, and difference between Islamic finance in theory and in practice. The author recommends adequate risk management and diversification of the institution, provision of non – banking financial services, and development of capital markets that are Islamically inclined to improve its activities and functions, and be able to compete favourably.
Iqbal et al. (1998) opine that the challenges hindering Islamic banking are institutional as well as operational challenges. The institutional challenges are poor institutional framework, inadequate legal framework and supervisory policies, poor supervisory framework, disparity in accounting standard, lack of equity institutions, absent of organized secondary financial market, and lack of short term market placement of funds. While the operational challenges are improper financial engineering, lack of teaching, training, research and development in this institution, lack of profit sharing finance, inability to adequately mobilize deposits, competition, and finally globalization.
31
Jabr (2003), concludes that the challenges and prospects of Islamic banks operating in the Palestinian territories are as follows: Lack of adequate banking law for Islamic banking; Islamic banking marketing mix efforts must be approved by Islamic Shari’ah; existence of unproductive money; lack of awareness; lack of operational difference between Islamic and conventional banks; Islamic banking lacks the ability to channel deposits into long - term investment; lack of experience in Islamic Shari’ah; excessive short - term financial instrument; unable to make use of Mudaraba and Musharaka financial institutions; inferior technical resources and technology;
Islamic banks are compel to recruit staff trained in traditional banking; inability to differentiate ownership from management; and lack of financial innovations.
Njanike (2010) adopts descriptive analysis to explore the problems and challenges that the introduction of Islamic banking in Zimbabwe may likely face. The study finds that the major problems and challenges in introducing Islamic banking in Zimbabwe are political intervention in the selection of borrowers, financial instability, inability of the government to restore law and order in the country, resistance from the banking community, inadequate infrastructure for information dissemination, inconsistence in policy making and
32
implementation of the fiscal and monetary authorities, Central bank control and supervision of Islamic banking with unqualified persons in Islamic finance, absence of Islamic interbank, misperception, current political and economic situation, and default culture.
Saleh et al. (2005) adopted ratio analysis to examine the Lebanese experience with Islamic banking since the foundation of the first Islamic bank. They find that lack of public awareness and acceptance, lack of research and development institutions, inadequate manpower, and high competition from conventional banks offering Islamic windows are the major challenges of Islamic banking in Lebanon.
While Islamic banking in Lebanon will prosper because of its ability to attract more investment and capital into the country, the vital role it plays in financing and developing telecommunications, agriculture, industry sectors in the Lebanese economy, its long term strategy to increase its customer base, and its current support from the general public as well as private business.
Sanusi (2011) explores the issues and challenges of Islamic banking in Nigeria. The study finds that the challenges of Islamic banking in Nigeria are inadequate manpower, lack of Shari’ah – compliant liquidity management instruments, lack of Islamic insurance (Takaful), lack of knowledge of accounting and auditing standard
33
require by Islamic financial institutions, inadequate legal framework, lack of Shari’ah scholars knowledgeable in conventional economics, law, accounting, banking and finance, problem of multiple taxation, lack of tax relief on Islamic banking profits, and misperception of Islamic banking in Nigeria.
Shaukat et al. (2011), state that the lack of ultimate authority that governs Islamic financial industry, inadequate qualified human resource in both conventional banking and Islamic laws, illiquidity of Islamic long - term assets with short - term liabilities, lack of Shari’ah auditing standard personnel, and shortage of short - term investment products are the challenges of Islamic banking system.
They further state that the other challenges facing Islamic banking system are lack of innovation, lack of adherence to local regulatory reporting and operational requirements, lack of transparency and accountability, operating manually, and lack of high quality services.
In short, from both single country as well as general studies on Islamic finance, one can deduce that the importance of adequate human resources qualified in Islamic and conventional settings, financial innovations, awareness, adequate provision of both short – and long – term financial instruments, proper Shari’ah regulating
34
body, adequate legal framework, proper institutional framework e. t. c cannot be over looked in other to improve this institution.
2.4. PROBLEMS OF NON INTERESTING BANKING
These would be presented in detail in the subsequent sub-heading (i.e.
problems and challenges of Islamic banking system).
The following are responses of 5 Islamic Scholars interviewed on the Islamic stand on interest/usury and Islamic banking system generally.
All of the 5 Islamic Scholars interviewed presented and commented on some Qur'anic verses and prophetic tradition that prohibit usury/interest on loans or savings deposits.
They based their reason from the Holy Qur'an and the prophetic traditions, which are the two fundamental sources of Islamic law, have strictly forbidden interest for its tyranny. The Holy Qur'an has laid down rather strict injunctions with regards to interest on money.
These injunctions are repeated over and over with the same forces and emphasis. Sec. the following Surahs (chapters); Surah al-Rum (chapter 30), verse 39; Surah al-Nisaa (chapter 4), verse 160-162;
Surah al-Imran (chapter 3), verse 130; Surah-Baqarah (chapter 2), verse 275-281.
Surah al-Rum (chapter 30), verse 39 state
"They which you give in usury for increase through the property of (others) people will
35
have no increase with Allah; but that which you give for charity, seeking the countenance of Allah (will increase): it is these who will get a recompense multiplied.
Surah al- Nisaa (chapter 4), verses 160-162 it is stated as follows;
"For the iniquity of the Jews we made unlawful for them certain (foods) good and wholesome which had been lawful for them;
and that they hindered many from Allah's way. (160)
"That they took usury, though they were forbidden; and that they devoured 'men's wealth wrongfully; - we have prepared for those among them who reject faith a grievous chastisement". (161)
But those among them who are well- grounded in knowledge, and the Believers, believe in what hath been revealed to thee and what was revealed be/ore thee: and (especially) those who establish regular prayer and pay Zakat and believe in
Allah and in the Last. Day: to them shall we soon give a great Reward". (162)
Moreover, in Surah al-Imran (chapter 3) verse 130, it is categorically stated;
"O ye who believe! Devour not usury, doubled and multiplied; but. fears Allah;
that ye may (really) prosper "
However surah al-Baqarah (chapter 2) verses 275-281 gives more detailed expression with full force on the issue of usury, thus;
"Those who devour usury will not stand except as stands one whom the Satan by his touch hath driven to madness. That is because they say: "Trade is like usury", but Allah hath permitted trade and forbidden usury. Those who after receiving admonition from 'their Lord, desist, shall be pardoned
36
for the past; their case is for Allah (to judge); but those who repeat (the offence) are companions of the Fire', they will abide therein (forever). (275)
'"Allah will deprive usury of all blessing, but will give increase for deeds of charity: for He Lovett no! any ungrateful sinner". (276)
"Those who believe and do deeds of righteousness, and establish regular prayers and give Zakat, will have their reward with their Lord: on them shall be no fear, nor shall they grieve". (277)
"O ye who believe! Fear Allah, and give up what remains of your demand for usury, if ye are indeed believers ". (278)
"If ye do it not, lake notices of war from Allah and His messenger: but if ye repent ye1 shall have your capital sums: deal not unjustly and ye 'shall no! he dealt with unjustly. (279)
The five Islamic scholars interviewed made reference with some or all of the above Qur'anic verses and Hadiths to rule that the present day conventional banking is operating based on RIBA (usury/interest) which have been forbidden and prohibited as indicated above.
And this is the reason of global crisis in the world economy. They are all pleased with the idea of Islamic banking, which they know, are operating on interest free and profit and loss sharing basis. They opined that, despite the fact that, even the Islamic banks are not without some degree of problems but are more divinely inclined, and transact legitimate deals, hence, they are better than the conventional- banks, which based their transaction on interest.
37
The problems of Islamic banks as identified by those interviewed among the customers and staff of Stanbic IBTC bank, the Islamic scholars and based on the existing literatures include:
The preferred investment patterns of Islamic banks have appeared to be a mix of a loan and investment. It is a mix, which has most of the characteristics of a Riba-based loan and flows of the western capitalist system. The system fails to highlight the features of Islamic investment
"If the debtor is in a difficulty, grant him time till it is easy for him to repay. But if ye remit it by way of charity, that is best for you if ye only knew". (280)
"And fear the Day when ye shall be brought back to Allah. Then shall every soul be paid what it earned, and none shall be dealt with unjustly "(281)
The Scholars also presented the following Hadiths:
i. From Abdullah Ibn Hamzah: The Prophet, Peace Be Upon him said; "A dirham (lowest denomination of currency) of riba (usury) which a man receives knowingly is worse than committing adultery thirty-six times".
Bayhaqi has also reported this Hadith with the addition that;
"Hell befits him whose flesh has been nourished by the unlawful. "
ii. From Abu Hura rah: The Prophet, Peace Be Upon him, said;
"RIBA (usury) has seventy segments, the ' least serious being equivalent to a man committing adultery with his own mother. "
38
iii. From Jabir: who reported that the Prophet, Peace Be Upon him
"Cursed /he receiver of RIBA, the payer of RIBA, the one- who records it and the two witnesses to the transaction and said: They are all alike (in guilt)."
2.5 Problems and Challenges of Islamic Banking
The emergence of Islamic banking in the World financial arena has recorded great success. But this is not without some degree of problems. The problems of Islamic banks as identified by those interviewed among the customers and staff of Jaiz bank, the Islamic scholars and based on the existing literatures include;
The preferred investment patterns of Islamic banks have appeared to be mix of a loan and investment. It is a mix, which has most of the characteristics of a riba-based loan and flows of the western capitalist system. The system fails to highlight the features of Islamic investment based on risk-sharing and real investment. It does not the guarantee of the capital or its return.
The depth of issue and its continuity is illustrated by the fact that the organizational charts of the banks, which have been drawn from conventional banks do not pay any attention to portfolio management in terms of volume or allocations, so they can absorb all kinds of productive economic activities. The system succeeded in cleansing
39
activities of riba but has not gone beyond the reality and impact of the riba-based banking system.
Other problems and challenge of the banking can be identified us:
A. Organization and Management Structure
i. Conventional-banking, over a period of three hundred years, has taken the present shape. Islamic banking has been developed to work in the environment created by this system.
To achieve the objectives of Islamic economics, the Islamic bank needs a distinct organization and management structure to suit their purposes.
ii. The professionals working in Islamic banking system have to face bigger challenges to cope with the new and growing system, to create new ideas and design Shari’ah compatible new instruments to meet the growing needs of the customers.
iii. Islamic bankers must have a better understanding of industry, technology and the management of the business venture. They also have to understand the moral and religious implications of their investments with the business ventures.
B. Need for Customers Orientation in Islamic Banking
i. Most of the investment clients do not have proper understanding of shari'ah specially in respect of Riba, Bai and
40
Shirkah as well as other modes and mechanisms of Islamic transactions. Many of them lack commitment towards Islamic financial transactions. This is a particular case of Bangladesh and other countries where the system is operating.
ii. Distributive efficiency of Islamic banking is lost, when an Islamic bank shift operation under conventional banking, framework. Any shift from profit and loss sharing modes leads the system to break the direct relationship between the income of entrepreneur bank and depositor.
iii. Most of the Islamic banks operate on Bai Murabaha, Bai Mu'ajjai and Bai salam nodes of investment, which substitute the pledge and hypothetical modes of conventional banking.
iv. Mudarabah and Musharakah are the unique and ideal modes of operation of same banking, which do not correlate with or substitute the conventional modes.
These two are yet to be widely introduced in Islamic banks.
v. Most of the Islamic banks are working1 along with the interest based banking system. Therefore, it requires close observation of the Shari'ah performance of the bank by any-independent house of authority.
41
vi. Islamic banks came into existence in an environment where laws, institutions training and attitude are set to serve the economy based on the principles of interest.
vii. It is evident from the research findings that Islamic banking could be the most efficient system if it were allowed to operate as a sole system in an economy.
C. Need for Professional bankers
i. Islamic banks have a high regard of training for their workers to give a broader outlook about Islamic banking for enhancing attitude, skill and knowledge about the system so that they can better serve the community's needs.
ii. Most of the banks' professionals have been trained in capitalist economics. They the requisite vision and conviction to run Islamic banking. Institutional arrangement for their need-based training is very limited.
iii. Without the basic knowledge of Shari'ah and adherence of clients to the concepts of Halal and Haram (i.e. permitted and forbidden) Islamic banking is difficult.
iv. Lack of shari'ah knowledge and also because of the application of limited modes of investment such as Bai Murabaha and Bai
42
Mu'ajjal, clear distinction could not yet made between Islamic banks and conventional banks.
v. The banker-customer relationship in conventional banking is mainly based on debtor and creditor while in Islamic banking the relationship is based on partners in business, buyers and sellers of goods etc. This concept has not been properly clarified to the customers.
vi. Majority of the investment clients are pre-occupied with their own business and are interested only in procuring investment facility for their businesses. It is very difficult instill in them the interest for acquiring the knowledge of working principles of Islamic banks. To succeed in establishing Islamic banking, is very important and essential for the Islamic bankers to face and overcome these challenges.
D. Theoretical Research and Knowledge Sharing
i. The financial products and services related to conventional banking have largely developed over period of centuries while Islamic banking is lagging behind; though it has immense potentiality to develop to meet the growing needs, Islamic banks should take initiatives for developing new and innovative products and instruments.
43
ii. Islamic banks are facing challenges to devise instruments and modes to address various needs related to foreign exchange operation.
iii. Non availability of financial instruments simultaneously consistent with Islamic principles and acceptable to interest based banks including foreign banks is also one if the problems, of Islamic banking.
iv. Many Islamic banks also lack the necessary expertise and institutional capacity for research and development (R&D) that is not only necessary for the realization of their Ml potential, but also for its very survival in this age of fierce competition in the sophisticated markets and the informed public.
v. Blending of approach of Islamic scholars and academicians with the practicing bankers. Is a pre-requisite for the progress of Islamic banking system, and this is somehow missing.
vi. There is and will be tendency in the bankers prating in Islamic banks to mould or modify the Islamic principles to suit the requirement for transactions at hand. Whereas, the main goal of the Islamic banks is to comply totally with the Islamic principles in all their financial Dealings, they will have to get' accustomed with carrying out their jobs remaining within the bounds laid by Islamic Shari'ah.
44
vii. Islamic scholars active in research on Islamic banking and finance typically have a normative approach, i.e. they are more concerned with what ought to be. A very few of them are knowledgeable about banking or needs of the customers.
viii. It is essential to establish a combination of the professional bankers' priorities with those of the Islamic, scholars and thinkers.
E. Regulatory Environment
i. Most of the Islamic banks around the world are working in such an environment. Where governments lack adherence to shari'ah, and lack determination towards gradual islamization of their respective banking systems, as they have made theft commitment in the international forum of-Islamic countries in 1974.
ii. The relationship between Islamic banks and monetary authorities is a delicate one. The central banks exercise authority over their respective Islamic banks under laws and regulations engineered to control and supervise traditional banks.
iii. The operations of Islamic banks do not come fully under the jurisdiction of existing civil laws if there are disputes to be handled, civil courts are not sufficiently acquainted with
45
rationale of the operations of Islamic banking in most of the countries.
F. Asset Management
i. Due to lack of knowledge in blending assets in respect of risk and uncertainty, Islamic banks cannot capably handle their financial assets.
ii. Islamic banks cannot freely choose business according to their needs in most of the cases, their operations are not demand- oriented and do not, set flexibly with the conventional structure of economic settings as well as preferences of customers.
iii. Clients normally do not withdraw a certain portion of the short- term fund at maturity; these funds are used for medium or long term financing. A pre-condition for this maturity transformation is that the bank be able to obtain liquidity from external purees in case of unexpected withdrawals.
iv. Islamic banks, without having an interest free Islamic money and capital market, have no adequate instruments to meet this pre-condition for effective maturity transformation.
v. Adequate financial mechanism still needs to be developed, without which financial intermediation, especially the risk-and maturity transformation, cannot be performed properly.
46
vi. Many Islamic banks do not have the diversity of products that are essential to meet the growing needs of their clients.
G. Liquidity Management
i. Many Islamic banks lack liquidity instruments such as treasury bills and other Marketable securities, which could be utilized either to cover liquidity shortages or to manage excess liquidity.
This problem aggravated since Islamic banks work under operational procedures different from those of the conventional banks.
ii. Participation Term Certificate (PTC) and Mudarabah certificates in Pakistan and Government Investment Certificate (QIC) in Malaysia are being practiced with limited scope to meet the liquidity needs of their respective Islamic banks.
H. Failure to Choose Priority Sector
Islamic banks with the rare exceptions did not pay much attention to the development of banking services in some socially desirable directions. The realm of the management of estates, trusts, orphanages etc have remained outside the area of merest of Islamic banks.
I. Use of Advanced Technology
i. Technological advancements brought dramatic changes in both back and front offices of banking industry throughout the
47
world with improved products and services. But Islamic banking community, with very few exceptions, is far behind to compete with its conventional counterparts in this regard.
ii. Given the potentiality of advanced technology, Islamic banks must have to come to terms with the rapid changes in technology, and redesign the management and vision- making structures and above all introduce modern technology in its operations.
J. Publicity, Propagation and Use of Media
Islamic banks have so far ignored the use of media. Even Muslims in many areas remain in dark about Islamic banking that is being practiced in different parts of the world. Sadly’, Islamic banks have failed to use the media effectively to publicize their activities. The authorities, concerned in Islamic banks should address these issues on a priority basis.
2.6 Prospects for Islamic Banks
Without doubt, there are good prospects for Islamic 'banks' to develop themselves in terms of concept and techniques and so on. Among these are the growing Islamic wakening and the Ummah's (Islamic nation) trend to return to the Book of Allah and the Sunnah (Prophetic way of living) of His Prophet. This involves a great
48
commitment of sound and Shari'ah compatible financial transactions and the channeling of considerable financial resources to Islamic banking. This calls for a technical readiness to absorb these resources and to give the assurance to financiers that their funds would be properly invested within the context of Shari'ah. Similarly, the world is complaining about shortages and bottlenecks in real goods and sources. This is indeed a good opportunity for Islamic banks to make efforts to exploit the resources with which the Almighty has blessed this universe, by effective modes of investment. Among the positive aspects which may develop Islamic financial activities is an increased scruitinisation of investments and their conversion liquidities, besides more locus on the attraction of small savings and giving the opportunity to a major sector of the people to acquire Islamic financial instruments for mistake of investment, thus implying an increased availability of savings geared wards investment.
Moreover, tremendous developments in communications, technological inventions and the trend towards a linearization of banking transaction is a good opportunity for Islamic banks to exploit in bringing their customers closer and attracting more customers. This can be achieved by providing distinguished modern services that go beyond the kind of services they presently provide.
49
In Nigeria, the prospects cannot be under estimated, even though; at present Jaiz Bank and Stanbic bank are the only two existing Islamic Bank. But when Habib Nigeria Bank Limited was operating its Non Interest Banking window, the patronage was fantastic but there are issues around the structure Also when Jaiz International bank Plc a proposed profit sharing bank, issued its Initial Public Offer (IPO) to the tune of 2.5 billion ordinary share of M each at 141 per share in November-December, 2003; the offer was oversubscribed. This indicated peoples' interest on Islamic banking. It was the#25 billion re-capitalization requirements by the Central Bank of Nigeria for all commercial banks operating in Nigeria that put a halt to the successful take off of the bank, but with these present financial meltdown effort is being put in place for the bank to commence its business operations very soon, it is perhaps a known fact that, there are thousands of Muslims, and even the non-Muslims alike who are only transacting with conventional banks in the absence of any alternative or substitute on ground. This is because of their exploitative nature and their incompatibility with the religious injunctions (both Islam and Christianity). Should there be any, they will obviously go 'back to it. So this is a-good opportunity for Islamic banks to step in and prevail, and the rich Nigerian men as well as governments (Federal, Stales or a group of local governments can
50
come together and make it real (people like Dangotes, Dantatas, Folawiyos and the like can do it.
51
CHAPTER THREE
RESEARCH METHODOLOGY 3.1 Introduction
This chapter deals with the methods of data collection, the population of the study, sampling sample technique and size, method of data collection and method of data analysis, as well as difficulties encountered during the course of data collection.
3.2 Population of the Study and Sample Size
Research population is the aggregate of element from which a sample is selected. The population of this consists of staff of Jaiz Bank Sokoto that directly work under Islamic Banking and the customers of the bank. A sample of 7 staff of the bank who were with the department of Non-interest banking of Islamic Banking of IBTC Bank Plc Sokoto, and 8 customers that enjoyed their services were selected.
Also to form part of this research populations are 5 Islamic scholars whose opinions were sought and analyzed accordingly.
Many literatures both published and unpublished also form part of this research population. They include articles obtained by different writers via internet, Newspapers and journal Articles, Textbooks and students thesis and project works.
52
3.3 Sample Technique and Size
The population of the study determines the sampling procedure to be used for the purpose of this work; a random sampling procedure is used. This is suitable because, it is a system of selection, which gives each individual of the population equal chance of being selected. The essence of this procedure is to avoid subjected bias arising from personal choice.
3.4 Method of Data Collection
In any kind of research work, data can be gathered from one or more of the following method;
a. Study of the existing documents.
b. Interview.
c. Questionnaires.
d. Observations.
Much emphasis is placed on adequacy of data collected, the timing and its accuracy in order for the research to be able to ascertain the validity of the work. Consequently, methods adopted for this work are those that can give the desired result and information needs. These methods are categorized into the primary and secondary source of data.
53
i. Primary source of Data: - These are basically those data that are obtained from conducting interviews, structured or unstructured questionnaires. And personal observations. These are data collected explicitly for a specific purpose. The major advantage of obtaining such data is that the exact information wanted is obtained.
For the purpose of this research work interviews were conducted. Some staff and customers of Jaiz Bank and some Islamic scholars were interviewed. First hand data were also gathered from the holy Qur'an and the Hadith (prophetic traditions), which are primary sources of shari'ah. A few Islamic scholars were also interviewed and their opinion as expressed in one preaching or the other was also gathered in this work.
ii. Secondary source of Data:-These are second hand data, which include information from past work, i.e. what some authors have done in the same or similar fields of study that are documented or published. Basically, such data are gathered from internet, Libraries, Seminars, Workshops, and Lectures, print or electronic media etc.
54
CHAPTER FOUR
DATA PRESENTATION, ANALYSIS AND INTERPRETATION
4.1 Introduction
This chapter present interprets and analyzes the opinion of those interviewed, during the course of data collection for this research work. Qur'anic verses and prophetic tradition that prohibit usury would also be presented, and problem of Islamic banking based on the existing literatures and the result of the data gathered during the interview would be presented too. All these and more will be discussed at the end of which summary of findings would be identified.
4.2 Presentation and Data Analysis
A total number of 20 people were interviewed. They include, seven staff of Jaiz Islamic banking department, eight customers of the bank that had at one time or other enjoyed the service of the Non- interest banking window of Jaiz different Islamic scholars were also interviewed.
Simple percentage method has been adopted for the presentation and analysis of the interviews.
These are presented as follows;
55
Table 4.1: Former Bank before Habeeb Bank
Responses Number of respondents Percentages
Jaiz bank 9 75
Others 3 25
Total 12 100
Source: Field Survey 2014
The table above represented the number of staff of Jaiz bank who was consulted by the research for interviews. From the table we can see that, out of the 12 staff consulted, 9 started their banking career with Jaiz Bank
Table 4.2: Working under Non-interest Banking Department Responses Number of response Percentage
I worked there 7 58
I did not work there 5 42
Total 12 100
Source: Field Survey, 2014.
The table above shows the responses of staff of Jaiz Bank when ask whether they worked under the department of non interest Islamic banking of Jaiz 58% of those asked worked under department and 42% of them worked in different department most of them worked there between 1-2 years.
