Islamic Banking in Nigeria: A Promising Alternative Finance System

Islamic banking in Nigeria, also known as Shariah-compliant banking

It is a unique and rapidly growing financial system that adheres to the principles and values of Islam.

However, Islamic banking in Nigeria has its origins deeply rooted in faith.

Islamic banking has gained significant traction in Nigeria, a country of Muslims more than half of the population.

However, In this article, we will delve into the principles and practices of Islamic banking in Nigeria. Exploring its history, concepts, operations, types, and impact on the country’s economy.

As a practicing Muslim and a finance enthusiast. I have a personal connection to Islamic banking and its principles, which makes this topic close to my heart.

Historical Background of Islamic Banking in Nigeria

Islamic banking in Nigeria has its roots in the late 1970s. This was when the Islamic Development Bank (IDB) initiated efforts to establish a financial system that aligns with Islamic principles.

Afterward, the Nigerian government established the Jaiz Bank, which became the first Islamic bank in the country.

Over the years, more Islamic banks have been established, including Stanbic IBTC Bank, Taj Bank, and Jaiz Takaful Insurance, among others. Making Nigeria one of the leading countries in Africa with a significant presence of Islamic banking institutions.

Principles of Islamic Banking

At the heart of Islamic banking are the principles of Shariah, which is the Islamic law based on the Quran and the Hadith (sayings and actions of Prophet Muhammad).

In addition, these principles guide the operations and transactions of Islamic banks and provide a framework for conducting business in a manner that is consistent with Islamic teachings.

Some of the key principles of Islamic banking include:

1. Prohibition of Interest (Riba):

Islamic banking prohibits charging or paying interest on loans or deposits, as it is considered usury and exploitative.

Instead, Islamic banks engage in profit-sharing arrangements. Where returns are generated from legitimate business activities and shared between the bank and its customers based on pre-agreed ratios.

This promotes risk-sharing and encourages productive economic activities.

2. Ethical and Socially Responsible Investing:

Secondly, Islamic banking promotes ethical and socially responsible investing. By adhering to the concept of Halal (permissible) and Haram (prohibited) in business activities.

Investments in sectors such as alcohol, gambling, tobacco, and pornography are strictly avoided.

While investments in socially responsible sectors such as healthcare, education, and renewable energy are encouraged.

3. Asset-Backed Financing:

Thirdly, Islamic banking emphasizes asset-backed financing, where transactions are backed by tangible assets such as real estate, commodities, or equipment.

Actually, this promotes transparency, accountability, and risk-sharing.

The bank and the customer both have an ownership stake in the underlying assets.

4. Prohibition of Speculation and Uncertainty (Gharar):

Also, Islamic banking discourages speculation and uncertainty in business transactions.

Currency Futures Trading in Forex is a typical example.

Contracts that involve excessive uncertainty, ambiguity, or speculation are not allowed.

Instead, contracts are required to be clear, transparent, and based on mutual consent.

5. Prohibition of Financing Harmful Activities:

Islamic banking prohibits financing activities that are harmful to society or the environment.

Such as those that involve pollution, destruction of natural resources, or exploitation of labor.

So. this promotes sustainable and responsible business practices.

Practices of Islamic Banking

Islamic banks in Nigeria offer a wide range of financial products and services that are designed to be Shariah-compliant.

Some of the common practices of Islamic banking in Nigeria include:

1. Murabaha:

Murabaha is a cost-plus-profit arrangement, where the bank purchases an asset on behalf of the customer.

Afterward, sells it to the customer at a marked-up price.

The customer pays the price in installments, making it a popular mode of financing for asset purchases like cars, machinery, etc.

2. Mudarabah

Mudarabah is a profit-sharing arrangement, where the bank provides the capital and the customer provides the labor and expertise.

Profits generated from the business venture are shared between the bank and the customer based on pre-agreed ratios.

Mudarabah is commonly used for financing small and medium-sized enterprises (SMEs) and investment projects.

3. Musharakah

This is a partnership arrangement, where two or more parties contribute capital to a business venture.

Also, they also share profits and losses based on pre-agreed ratios.

Musharakah promotes shared ownership and risk-sharing and it is commonly used for financing large-scale projects and joint ventures.

4. Ijarah

Ijarah is a leasing arrangement, where the bank leases an asset to the customer for a specified period of time and for an agreed-upon rent.

Also, at the end of the lease period, the customer has the option to purchase the asset at an agreed price.

Ijarah is commonly used for financing equipment, vehicles, and real estate.

5. Wakalah

Wakalah is an agency agreement, where the bank acts as an agent on behalf of the customer to invest funds in Shariah-compliant investment opportunities.

The bank charges a fee for its services, and the customer bears the investment risk.

However, Wakalah is commonly used for investment accounts and wealth management services.

Impact on the Nigerian Economy

Islamic banking has had a significant impact on the Nigerian economy. One of the key contributions of Islamic banking is its role in promoting financial inclusion.

Nigeria, like many other developing countries, faces the challenges of financial exclusion.

With a large portion of the population being underserved or unserved by conventional banks.

Actually, Islamic banking has provided an alternative financial system that caters to the needs of the unbanked population.

They do so by offering accessible and inclusive financial products and services that are in line with their religious beliefs.

Also, Islamic banking has also contributed to the development of the Nigerian capital market.

Islamic banks in Nigeria have issued Sukuk (Islamic bonds) to raise capital for infrastructure projects.

This helped bridge the infrastructure deficit in the country.

Sukuk has gained popularity as an alternative investment for investors seeking Shariah-compliant investment opportunities and has contributed to the growth and deepening of the Nigerian capital market.

Furthermore, Islamic banking has played a role in promoting responsible and ethical business practices in Nigeria.

The principles of Shariah, which emphasize ethical investing, asset-backed financing, and prohibition of harmful activities, have encouraged businesses to adopt socially responsible and sustainable practices.

Presently, this has led to increased awareness and adoption of ethical and sustainable business practices in various sectors of the Nigerian economy.

Challenges and Future Prospects

Despite its significant growth and impact, Islamic banking in Nigeria faces some challenges.

One of the key challenges is the lack of awareness and understanding among the general public about Islamic banking and its principles.

Many people still have misconceptions or limited knowledge about Islamic banking, which can hinder its growth and acceptance.

Another challenge is the regulatory framework for Islamic banking in Nigeria.

Although the Central Bank of Nigeria (CBN) has issued guidelines and regulations for Islamic banking operations.

Still, there is a need for further clarity and harmonization of the regulatory framework to ensure a level playing field for Islamic banks and promote investor confidence.

However, the future prospects of Islamic banking in Nigeria are promising.

There is an increasing demand for Shariah-compliant financial products and services.

Coupled with the growing awareness and acceptance of Islamic banking among the population, presents opportunities for further growth and expansion of Islamic banking in Nigeria.

Islamic banks can continue to innovate and develop new products that cater to the unique needs of the Nigerian market.

It can collaborate with other stakeholders, such as regulators, scholars, and the community, to overcome challenges and promote the growth of Islamic banking in the country.

List of Islamic and Non-Interest Banks in Nigeria

1. Jaiz Bank

This is the first Islamic bank in Nigeria, and it was established in 2012. Jaiz Bank PLC is a national bank and a quoted public company owned by over 26,000 shareholders spread over the six geo-political zones of Nigeria.

Presently, the Bank is publicly quoted on the Nigerian Stock Exchange (NSE) with a balance sheet size of N233 billion (as of December 31st, 2020) from N12 billion in 2012.

Financing and Investment assets also grew from over N30 billion in 2012 to N166 billion (as of December 31st, 2020).

Other critical parameters such as customer deposits, branch network, and profitability have all been growing year on year since inception.

Since its debut, the Nation’s premier Non-Interest Bank has maintained its leadership role by deepening this alternative model of financing, thus providing the foundation for its expansion, and providing the needed ethical funding for infrastructural development in the country.

Briefly, the Bank maintains the record of being the first Islamic Bank in the world to break even within the first three years of operations even when there were no Islamic banking and finance instruments to invest in in the country.

2. Lotus Bank

Lotus Bank is a Non-Interest Nigerian Bank deeply rooted in ethical banking, committed to ethical investing and ethical prosperity.

Also, they are committed to deepening financial inclusion and broadening the array of non-interest products available to the banked, unbanked, and under-banked population.

Their values are bold and ethical, and birth new ideas. They are a testament to their desire to deliver a differentiated customer experience that supports Nigerian businesses and delivers shareholder value.

They’re Proud to be PARTNER. What are you waiting for? Bank with LOTUS…

3. Stanbic IBTC Bank

Stanbic IBTC Bank is a subsidiary of Standard Bank Group and offers Islamic banking products and services in Nigeria.

The Bank caters to both individuals and businesses through carefully designed retail and business banking products.

Also, offer self-service channels powered by sophisticated technology to bring convenient banking to customers.

They offer current, savings, and domiciliary accounts; personal loans, vehicle, and asset finance; MasterCard debit cards, Visa credit cards; home loans; internet banking; small and medium scale enterprise (SME) loans etcetera.

In addition, their clients can also get custodial services through Stanbic IBTC Nominees Nigeria Limited, their custody arm, and non-pension asset custodian, acting in a nominee capacity for clients’ transactions in securities and other investments.

No doubt they are a key player in financial inclusion and are poised to take banking to the doorsteps of its customers; taking care of the banking needs of different categories of persons and businesses.

4. Sterling Alternative Finance

Sterling Alternative Finance believes that everyone should have a viable and credible Alternative to the conventional banking model.

Their solutions are borne out of a detailed customer value architecture where they create specific offers to assist with customers’ financial needs.

They commenced operation in January 2014 following the granting of Sterling Bank’s license to offer non-interest banking (NIB) services as a window by The Central Bank of Nigeria.

However, they are dedicated to ensuring adherence to Non-Interest Banking principles through the appointment of an Advisory Committee of Experts (ACE).

The ACE is tasked with the review and approval of all the products and processes after ensuring full compliance with NIB principles.

Welcome to the Alternative, where you are not a customer, you are a partner.

5. Taj Bank

Taj Bank is Nigeria’s second Non-interest bank, operating under Islamic banking principles, established in Nigeria with its headquarters in Abuja, the capital city of the country.

The institution was founded in 2019, as TAJBank Limited. On 3 July 2019, TAJBank received a license from the Central Bank of Nigeria, the national banking regulator, to operate as a regional bank.

On 2 December 2019, the institution commenced business as TAJBank Limited in offices and branches in Abuja.

However, TAJBank opened its second branch at Kano in the process of expanding to other urban centers in the Federal Republic of Nigeria.

The Bank also opened a branch in Sokoto State on the 24th of August 2020.

TAJBank recorded its early success in August 2022 culminating in the issuance of a National License by the Central Bank of Nigeria.

On February 14, 2023, TAJBank listed its N10billion Mudarabah Sukuk issuance at the Nigerian Exchange Limited (NGX)

6. SunTrust Bank

From the inception of SunTrust Bank Nigeria Limited, a 5-year strategy anchored on two new focal pillars was developed to drive future growth and create superior value for shareholders. These two focal strategic pillars are:

• Tapping into the huge Non-Interest Banking (NIB) market with the launch of its non-interest Banking window.

• Leveraging Financial Technology Solutions to drive efficiencies and unlock new possibilities.

Thus, SunTrust Bank Nigeria embarked on its journey to establish its FinTech Non-Interest Banking Window, building on a synergistic mix of both strategic pillars.

And on February 18, 2019, the Bank obtained its final license to operate the NIB.

SunTrust Bank Non-Interest Banking Window is poised to create value for its customers by leveraging competencies and a team of highly motivated staff that work tirelessly to develop and provide a broad range of unique financial services and products for consumers, small businesses, corporations, governments institutions, and agencies, which positively impacts their business operations and meets their intrinsic needs.

SunTrust Bank is a full-service commercial bank in Nigeria that offers Islamic banking products and services.

It operates under the principles of Shari’ah law and offers savings accounts, current accounts, investment accounts, and financing products.

Overall, Islamic banking in Nigeria is a growing industry, and more banks are expected to offer Islamic banking products and services in the coming years.

Conclusion Islamic banking in Nigeria

Islamic banking in Nigeria has come a long way since its introduction and has emerged as a viable and important segment of the country’s financial system.

It has contributed to financial inclusion, capital market development, and responsible business practices while adhering to the principles of Shariah.

The success of Islamic banking in Nigeria can be attributed to various factors, including a favorable regulatory environment, increasing awareness and acceptance among the population, and innovative product development by Islamic banks.

However, there are still challenges to be addressed, such as improving public awareness, further enhancing the regulatory framework, and addressing misconceptions about Islamic banking.

Looking ahead, the future prospects of Islamic banking in Nigeria are promising.

There is a growing demand for Shariah-compliant financial products and services, and Islamic banks have the opportunity to continue innovating and expanding their offerings to meet the unique needs of the Nigerian market.

Collaborative efforts among stakeholders, including regulators, scholars, and the community, will be crucial in overcoming challenges and ensuring the sustainable growth of Islamic banking in Nigeria.

As someone who is interested in the financial landscape of Nigeria, I have personally witnessed the growth and impact of Islamic banking in the country.

It has provided access to financial services for previously underserved segments of the population, promoted ethical business practices, and contributed to the overall development of the Nigerian economy.

In addition, I am optimistic about the future of Islamic banking in Nigeria and look forward to seeing further advancements and contributions in the years to come.

Do you operate any of the above-listed Banks? If not, do you think you will try it out? Let me know your opinion in the comment section.