Is Islamic Banking relevant in Nigeria? [Conclusion]

July 22, 2011

The implications of Islamic banking in Nigeria

By Dr. A. Ajetunmobi


Implicit in the idea of establishing Islamic banking is the idea that it is superior to conventional banking system in terms of being more equitable, fair, and compassionate and is better able to help improve the living standards of the Muslim communities. On the plus side, by using Islamic sounding labels for its products, Islamic bank may be able to attract deposits from gullible and innocent Muslims, thereby increasing savings rate amongst the Muslims. But the negative side, as highlighted above, outweighs the effect of increased savings. And more importantly, Islamic banking makes very few if any loans on venture capital model, i.e. where the financier is no longer a lender but a partner, and its lending practices have not been shown to have any difference in improving the level of honesty, fairness, compassionate and equity in the Muslim community. For instance, Islamic banking has not helped to curtail poverty and inequality in the Middle Eastern countries where it has been operating for years. In Europe and America where Islamic windows have been established by major Western institutions mentioned earlier to cater to local Islamic communities, evidence suggests that Islamic banking there is generally speaking a ‘big business’ for wealthy Muslims and it has no discernible effects on poverty reduction, especially among the ‘poorest of the poor’ in the Muslim communities.

Nigeria is a conglomeration of religions and ethnicities. While both Islam and Christianity are the two main religions that contend for the Nigerian state, there are also traditional religious beliefs and practices who do not respond to either. Although these traditional religious beliefs and institutions seem to be stagnant with the lethargy of ages and disintegrating forces of Islam and Christianity, but they also claim the allegiance of Nigerians in the different part of the country. Indeed, it is a lamentable fact that few Nigerians, and fewer Nigerian intellectuals, are thoroughly familiar with indigenous thought. There lingers still in many minds the overbearing conviction that indigenous thought and life are unworthy of our consideration and are of the devil. But, the fact that the question of the legitimacy of our traditional faiths prevails in many minds is sufficient reason why it should be squarely faced and met, in the light of this proposal for Islamic banking in the country. Of course, the truth, as we know, is sometimes not what we want to hear and for this reason and for fear of causing offence, many people may be hesitant about stating it. But one has to be candid about the facts. A Muslim philosopher, Al-kindi, has remarked about 1200 years ago that “For him who scales the truth there is nothing of higher value than truth itself, it never cheapens nor abases him.”

In this respect, it is imperative that we ferment our life of saturated ignorance. The life in which many believe in dogmatic assertion (or is it ecclesiastical hegemony?) that the stem of religious evolution in the world is confined to Middle East. The fact is that, in the realm of comparative religion, all religions, including traditional religious beliefs, equally with Islam and Christianity, are the same. Let me put it another way: All religions, including Islam, Christianity and various traditional belief systems equally arose out of purely natural antecedent causes; and, in the nature of the case, traditional beliefs are as perfectly adapted to meet the needs of traditionalists as Islam or Christianity is to meet the needs of Muslims or Christians. Accordingly, a just view of the evolutionary principles warrants the premise that if Christianity and Islam can enjoy certain state privileges in the country, traditional religious beliefs should be accorded the same.  So, the message is obvious. If we have a full-fledged Islamic banking, the disturbing effect of this is that we should also have Christian banking,Orisa banking for the Yoruba traditionalists, and so on? But focusing of Islamic banking now, will it be right for an agency of Federal government to use the instrument of power at disposal to promote a particular faith-based banking, yet omitting to recognise the sentiments of other Nigerians of faith and of no faith? To do so will be an assertion of partisan interest over common public interest. This is not fair. In terms of understanding this unfairness, it is important to reflect back the effect of federal and state governments’ involvement in religious pilgrimages in the country.

The hajj or pilgrimage to Makkah is a pillar of Islam and is mandatory for every adult Muslim who is in a position to do so at least once in his/her lifetime. It is purely a Muslim affair. However, from 1955, when the late Sir Ahmadu Bello (the Sardauna of Sokoto) was first sponsored by the Northern Nigeria Regional Government, the appointment later of three pilgrims’ representatives by the Federal Government to travel to Saudi Arabia to look after the welfare of Nigerian pilgrims, to the establishment of Pilgrims Welfare Board in 1958 and in 1965 by Western Regional Government under the leadership of the late Chief Obafemi Awolowo and Northern Nigerian Regional Government respectively, governments at both state and federal levels have been expending huge national resources to promote the ritual of Hajj operations for the Muslims. Of course, piqued by this development and to rival the Muslims, Christians later demanded federal and governments’ investment in their own pilgrimage to Jerusalem. All the more pointed because both pilgrimages to Makkah and Jerusalem are now statutorily circumscribed. And, maybe with the imbibition of religious awareness, the traditionalists too may also start to demand governments’ meaningful participation in their own religious pilgrimages, for instance, in the yearly pilgrimage to Osun River in Osun State, in order to balance religious equation in the country. After all, it is hard to see how we can demand a source for certain religious’ goose, yet deny it for the other’s gander.

To sum up, the secular state sprang up in the present times so that no religion is allowed to lord it over another. It is not beyond the bounds of possibility that the only people who stand to benefit most in a full-fledged Islamic banking in Nigeria are going to be the Shariah courts’ judges and Muslim religious scholars who, though may be blissfully unencumbered with any knowledge of economics and banking, are going to be charged with the responsibility of ruling on, and directing the activities related to Islamic finance in order to make them compliant with Shariah principles. But, should a secular country like Nigeria entrust the running of its national economic system into the hands of unaccountable Shariah courts’ judges and Islamic board members, whose ethos, commitment and social responsibility are, at best opaque, and at worst skewed around certain religious doctrines? Moreover, apart from the influential roles the Shariah courts’ judges and Muslim religious scholars are likely going to play, Islamic banking could also become liquid paraffin for Islamic fundamentalism in the country. This is not a hollow point, it has some plausibility. For instance, in “Islam and Mammon: The Economic Predicaments of Islamism,” Timur Kuran, a professor of Economics and Political Science & Gorter Family Professor of Islamic Studies at Duke University, while challenging the linkage between Islam and economic performance, noted that, so far, Islamic banking “has promoted the spread of antimodern … currents of thought all across the Islamic world. It has also fostered an environment conducive to Islamist militancy.” (p. ix)

What the country needs at the moment is a massive investment in infrastructure. Of course, the country also needs effective financial instrument that can foster not only productivity but also flexibility and innovation. However by establishing Islamic banking whose modes of financing is not at all different from the conventional interest-based sector, this may likely churn up religious campaigns for the establishment of similar banking operation for the Christians and other non-Muslim religionists in the country. To forestall such divisive campaigns, I invite Nigerians of all faiths and none to debate this new proposal more openly. They should step outside their closed study of their individuals’ religions into the open air of the comparative field of study, and share their thought on the implications of a faith-based bank of full rank or status to the secular status of the country.

Perhaps quite wary of CBN’s proposal to introduce Islamic banking in the country, the Catholic Archbishop of Lagos, Anthony Cardinal Okogie announces in a news report (see below) a rival prospective Vatican Bank. With this announcement, it means that the country may soon have to contend with religious banking rat race. This shouldn’t be so.

As previously noted, based on systematic inquiry into the theoretical formulation and empirical analysis of Islamic banking operations, there is no de facto difference between Islamic banking and conventional banking. Islamic banking appears to simply replace conventional banking terminology with terms from Classical Arabic and provide much the same services to its clients, albeit, at a higher cost. Indeed, inIslamic Finance in the Global Economy, Ibarahim Warde observes that “no definition of an Islamic bank is entirely satisfactory” (p. 6). Therefore, since both its overall efficiency vis-a-vis conventional banking, and its claim to provide a ‘better’ option for observant Muslims fall short of its aspirations, also since any “commission, fee, profit or mark-up” charged by it in its modes of financing can be understood as implied interest, what is the need for transforming the nation’s banking system along a full-fledged Islamic lines now?  Should anyone able to fathom the analysis in which the CBN has based its decision in that regard, I’ll be happy to consider such breadth of comprehension.

Let’s not chase the shadow and leave the substance untouched. This is not about spreading of propaganda or aggrandising about the problems with conventional banking. Yes, the current interest-based debt contract conventional banking which evolved over centuries of operation in an asymmetric information environment has teething troubles.  Yes too, Islamic jurisprudence previously banned banking and insurance, dismissing them as wholly un-Islamic (see Editorial Report. “Islamic Fiqh Council Deliberations”, Saudi Economic Survey, I January 1986, p. 3). Now that economics has become important to daily life everywhere, as a viable alternative to conventional economics, there are substantive issues about Islamic banking which have to be addressed to clear the air that it is not just a window-dressing for  conventional banking, closely mimicking its practices. So what are they?

The advocates of Islamic Banking claim that it involves wider ethical and moral issues than simply ‘interest-free’ transactions. They argue that these ethical and moral issues make Islamic banking more economically efficient than conventional banking and promote greater economic equity and justice. Now, a person may adopt the view he prefers, but when he does so, he should arrive at the conclusion he prefers after carefully studying the matter and considering the evidence in support of that view.

In this respect, I’ll rephrase my last question: To what extent, then, do actual Islamic Banking practices live up to the ideal, and how different are they from conventional banking?

Dr. Ajetunmobi is a Lecturer in Law at the University of Portsmouth in the U.K.



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