CBN’s interest-free banking gains momentum

Following the introduction of new guidelines for non-interest banking by the CBN on 21 June 2011; the issuance of a license to Jaiz International Bank to launch the country’s first interest-free bank subject to fulfilling the bank authorization requirements within six months; and the revelation that the Nigerian Treasury’s Debt Management Office is working on the feasibility of issuing the country’s debut sovereign sukuk within the next year or so, the CBN last week awarded Stanbic IBTC Bank a license to set up an interest-free subsidiary subject to complying with the approval terms within the six months.

Stanbic IBTC Bank is the Nigerian subsidiary of one of the leading banks in South Africa, Standard Bank, which has recently restructured its Islamic finance business away from London and Dubai and to concentrate on markets in sub-Saharan Africa. Standard Bank last year disbanded its Islamic finance team in London which included David Testa, former CEO of Gatehouse Bank, the UK authorized wholesale Shariah-compliant bank, who was a consultant to the Bank on Islamic capital markets; and in Dubai from where Standard Bank acted as an intermediary in a number of sukuk issuances and as a participant in syndicated Murabaha facilities.

Earlier this year it was clear that the focus has shifted to sub-Saharan Africa, where in Tanzania, Standard Bank launched a number of Islamic consumer finance products in Tanzania including Zanzibar. These include Islamic mortgages, leasing and account facilities.

Nigerian banking sources stress that two more interest-free banking licenses may be in the offing, which included promoters from the Gulf Cooperation Council (GCC) countries. One or two of Malaysia’s top banking groups including CIMB are also studying the West African market possibly with Nigeria as its hub. Indeed, the dream of Sanusi is to see Nigeria developing into the hub for interest-free finance in West African in the same way Kuala Lumpur has developed into the Islamic finance hub for Asia and as a wider international Islamic financial center.

It is no secret that Sanusi is an admirer of the dual model Malaysian banking system, where an Islamic banking system operates side-by-side a conventional banking system, cooperating with each other but not inter-acting so as to pre-empt co-mingling of funds. In fact, Bank Negara Malaysia, the banking regulator, has provided the CBN with technical assistance in its interest-free banking strategy. Similarly, the CBN is also getting technical support especially on Islamic capital markets products such as sukuk from the World Bank Group, under a technical cooperation agreement with the Islamic Development Bank, of which Nigeria is a major equity subscriber.

In fact, there was a decent Malaysian turnout, inter alia participants from South Africa, the UK and elsewhere, at the recent International Islamic Finance Conference organized by the CBN in early July 2011.

The good news is that more and more prominent Nigerians from various faith traditions are now becoming aware of the reality and nature of Islamic banking, although some of them would have preferred the Nigerian government to have introduced it as interest-free or alternative banking from the onset instead of Islamic banking or Shariah banking, especially in a religiously sensitive and highly sectarian country.

One of the promoters of Jaiz International Bank, Muhammed Mustapha Bintube stressed at the CBN conference that Islamic finance is an alternative mode of financing based on equity, fairness and transparency, It also empowered people by not financing anything that is harmful to society.

Osaro Eghobamien, a senior advocate of Nigeria and a Christian, speaking to The Daily Independent newspaper recently warned that objections to Islamic banking in Nigeria is a result more from a lack of understanding of what the banking products are really about and how the system works. “You see, all the leading banks in the world provide Islamic banking desk. There is absolutely nothing wrong with it. But maybe we need education. I have heard some inflammatory comments from very senior leaders in Nigeria. It just demonstrated ignorance because they need to ask what it entails. It is only a product that is being delivered by a bank and you have a choice,” he emphasized.

Concomitant with the reality of Islamic banking in Nigeria is the business case for it in a market with a minimum potential of 75 million or so that may rise to over 100 million as the phenomenon and market education about alternative interest-free banking takes root. A survey conducted by Enhancing Financial Innovation and Access (EFInA), a financial sector development organization funded by the United Kingdom’s Department for International Development (DFID) and The Bill and Melinda Gates Foundation, suggested that just under 30 percent of the total adult population of Nigeria would use interest-free banking products when they are introduced in the country. This translates into an immediate market of about 23 million to 30 million people, which for instance is larger than the entire GCC market.

Nigerian like many other emerging countries has a large unbanked population with one estimate suggesting that some 70 percent of the country is unbanked. As such, the CBN could have introduced interest-free banking not only as an alternative system of financial products but also under financial inclusion policies to give more of those unbanked millions access to basic banking services. Some of the most successful efforts in this respect has been in Malaysia through non-bank savings institutions such as Tabung Haji (a mutual society savings institution for pilgrims); the Ar-Rahnu Pawnbroking Schemes; Bank Rakyat, the interest free Cooperative Bank of Malaysia, 70 percent of whose customers are non-Muslim Chinese; SME financing and various microfinance initiatives.

All these initiatives could easily be structured in a Nigerian banking context which would help ordinary Nigerians and the Nigerian economy in mobilizing additional savings which is otherwise lost by the conventional mainstream banking sector for manifold reasons.

In the wider economic context, interest-free financing could play a major role in financing Nigeria’s dire need for infrastructure development especially through the issuance of off balance sheet sukuk (interest-free Trust certificates). The Nigerian government’s own estimate of current infrastructure funding deficit is 32 trillion Naira in sectors such as transportation, power, water supply, education, housing and health. Both sovereign Nigeria and corporate issuers can go to the market to raise financing based on asset-based or asset-backed sukuk structures.

But to do this and to attract investors from abroad, the ministry of Finance will have to introduced enabling legislation to facilitate the introduction of Sukuk including trust laws, SPV (special purpose vehicles) laws; tax neutrality measures for sukuk similar to equivalents in conventional bonds especially for land and real estate based transactions. Here the World Bank is already assisting the CBN and the debt management office under the Joint IDB-World Bank Technical Assistance Program. The World Bank Group has already launched sukuk under its own mantle or jointly with local originators in Malaysia and the Middle East. In Saudi Arabia, the International Finance Corporation (IFC), the private sector funding arm of the World Bank Group, has even launched a joint venture Islamic mortgage company in anticipation of a huge demand for housing finance once the Saudi mortgage law is finally adopted.

Indeed the Federal Nigerian government is currently negotiating a financing facility to finance infrastructure projects under the Public-Private Partnership (PPP) arrangement.

Sanusi for one also appreciates the bigger picture of how sukuk and interest free banking can play a defining role in contributing to economic growth and development, and to financial stability in Nigeria especially in the aftermath of the global financial crisis which was precipitated by the market-based conventional banking system. He is too aware of the potential role Sukuk can have as a diversification of sources of funding for the Nigerian Treasury especially from the international market to finance urgently needed infrastructure, development and SMEs; and at the same time helping to develop and broaden the nascent Nigerian capital market.