Since its debut in the Nigeria economy in the early 2000s, non-interest finance has gained ground in the country as several products in the banking, insurance, retirement savings, bond as well as infrastructure financing have been introduced since its debut in the country.
Presently there are three non-interest banks in the country with about four commercial banks offering non-interest banking services alongside conventional banking services. Asides this, insurance companies as well as pension managers have since begun to offer non-interest financial services.
The key difference between traditional finance and non-interest finance is the non-acceptance or payment of interest on money. The reason for this is simple; money is viewed purely as a medium of exchange in Islamic banking which is the basis for non-interest banking, unlike traditional banking where money is considered an asset.
Interest is believed to contribute to inequality and exploitation, so there are no real ‘loans’ in the Islamic banking system. Here is how loans work for Islamic finance; for the Islamic Bank to make a return on the money lent, it would have to acquire equity or shareholding in a non-monetary asset. This also requires the lender(s) to participate in risk-sharing.
Other key principles guiding Islamic finance include non-involvement in immoral or ethically problematic enterprises not permitted (for example, arms production or alcohol production; financing must be linked to real assets and returns must be linked to risks.
In all more than N374 billion had been raised through non-interest financing, particularly Sukuk Bonds, over the years to finance critical infrastructure either at the federal, state or private levels, making it one of the success stories of non interest finance in the country.
Non-Interest Finance, is a series of financial products developed to meet the requirements of specific group of investors. Non-Interest Finance is built on principles that uphold a positive ethical message derived from the holy Quran and the Sunnah, moral considerations, fair and just trading practices.
This includes the avoidance of ribah (interest and gharar), contractual and legal uncertainty, as well as leniency to debtors where the borrower can prove mitigating circumstances. Also avoided are investments in forbidden commodities such as alcohol, tobacco and companies whose debt exceeds one-third of its assets.
In 2008, SEC launched the first Islamic mutual fund by Lotus Capital, in 2010 Rules and Regulation on Islamic Collective Investment Schemes (ICIS) was released, in 2012, NSE launched the NSE lotus Islamic Index to track the selected shariah-compliant equities.
In 2013, SEC came up with a regulation in Sukuk issuance, the Osun State National Sukuk N11.4 billion with seven-year tenure. At the moment, Nigeria has raised over N362 billion through the issuance of three rounds of Ijarah Sukuk to finance road infrastructure across the six geo-political zones.
A sukuk is an Islamic financial certificate, similar to a bond that complies with Islamic religious law commonly known as Sharia. In a typical ijarah sukuk, the issuer sells financial certificates to an investor group who will own the certificates before renting them back to the issuer in exchange for a predetermined rental return.
As with the interest rate on a conventional bond, the rental return may be a fixed or floating rate pegged to a benchmark, and the issuer makes a binding promise to buy back the bonds at a future date at par value.
Asides Sukuk, non interest banking has also gained ground in the country with the country now boasting of two fully operational non-interest banks with many other conventional banks offering non-interest and ethical products for customers.
The prevalent types of Islamic financing/transaction practiced in Nigeria include Profit-and-Loss Sharing Partnership which is a partnership arrangement for profit-and-loss sharing. Under this type of agreement, the owner of the capital releases capital to an expert manager who is responsible for managing and investing the capital.
In this agreement, the profit-sharing ratio is agreed upon by all parties before the contract is signed and allocated at the end of the project between the capital owner and the expert manager. In the event of a loss, the owner of the capital shall bear all financial losses and the principal shall be reduced by the amount of the loss. The only loss that the expert manager will incur is their time and work.
There is also the profit and loss sharing joint venture where both parties contribute capital and share profit and loss on a pro-rata basis (that is based on how much capital they put up). It is only considered a profit-and-loss sharing partnership if more than two parties provide the capital to finance a project – often an investment in real estate or movable assets – either on a permanent or diminishing return basis.
The profit and loss sharing joint venture comes with the most risk out of all the non-interest banking modes, as well as the potential for gaining the highest reward. It is worthy to note that all partners can participate in the project management process.
Also, there is leasing which is a contract for the sale of the right to use the asset for a specified timeframe. Similar to the transaction between a landlord and a tenant, the lessor transfers property ownership to the lessee for the duration of the contract in exchange for a stream of rent as the purchase payment.
Although ownership remains with the lessee for the duration of the contract, the asset may be reclaimed by the lessor in the event of non-payment. However, unless harm to the leased asset arises from the negligence of the lessee, the lessor is also liable for asset repair.
