Nigeria: Islamic Finance - Bridging the Gap Between Real And Financial Sectors

By Olufemi Sunmonu

At the Islamic Business Law session during the recently concluded conference of the Section on Business Law of the Nigerian Bar Association, participants discussed how to strengthen the national economy through providing Shari'ah compliant business solutions in the arena of Islamic financial services.

When the breakout session on Islamic Business Law was proposed as part of the just concluded NBA-SBL business law conference, it seemed as if the Chair of the Section and his council members were overreaching themselves by planning a sail of uncharted waters. Thursday, March 27 disproved that thesis from every angle.

The attendance and quality of presentation and discourse at the session once again affirmed that the SBL annual conference is the place to be if you are interested in new concepts and articulation of the paradigms that would impact the business and legal landscapes in the years ahead.

The session was chaired by Justice 'Wale Abiru of the High Court of Lagos and had in attendance all the scheduled speakers in the persons of: Mr. Nathif Jama Adam, CEO of First Community Bank Kenya, Mustapha Bintube, CEO of the Jaiz International and Hajara Adeola, CEO of Lotus Capital who deflected from her gruelling schedule of marketing the Lotus Halal Fund to complete the stellar panel.

In his presentation titled Islamic Business Law - Alternative Ethics and Practices for Development, Mr. Nathif Adam set the tone for the day by drawing attention to the following facts: Prophet Mohammed PBUH was first a businessman before his call to prophethood. He was popularly known as Al-Amin (the trustworthy) due to his refined manners and the transparent sincerity with which he conducted trade.

His first wife - Khadijah was his employer before she proposed marriage to him; Documented mutuality, equity, moderation, compassion and ethical dealing in trade and social matters were recurrent features in the Quran and the authenticated sayings and practices of the Prophet; Islamic ethics and business concepts are not new to global commerce - for example the hawala system practiced by Medieval Muslims allowed remote payments for goods purchased in spatial locations. Instead of carrying heavy and vulnerable instruments of exchange like gold, international traders used Sak (a form of paper checks) to make payments. These concepts were taken by to Europe by the invading Crusaders.

With illustrations, he explained the centuries old Islamic heritage of Islamic ethics and values that governed personal, professional and business life. For Mr. Adam, no system of governmental controls, corporate governance rules, however well conceived would influence organisational behaviour unless the people running these organisations imbibed the right moral conscience and ethical content. Segregating ethics from a free market was a call for socio-economic imbalance and hardships.

Emphatically, Mr Adam pointed out that the disconnection of spirituality from the post-modern business world were the primary causes of the corporate and economic meltdowns in the last few decades. He also argued that socio-economic development could not be sustained for long when spirituality and morality were divorced from the material and political.

Next to speak was Hajara Adeola. Her presentation was from the perspective of an investment manager trading based on Islamic ethical considerations. She lamented that as usual, whilst Nigerians were playing from the rear other jurisdictions (all with fewer Muslim populations) had entrenched Islamic Finance as alternative and 'must have' assets class.

She explained that what the Shari'ah prohibitions were as follows: Riba - the prohibition against the charging of interest but it is wider than this - usury or unjust enrichment; Gharar - uncertainty - there must be full disclosure (e.g. certainty as to the subject matter or price of a contract); Maysir - speculation or gambling; Unethical Investment - Islam is intolerant of certain products (e.g. alcohol, armaments & pork) and activities (e.g. gambling, adult entertainment) and any income derived therefrom.

For her, the fulcrum of ethical economic activity is the conduct of trade and enterprise to generate real wealth for the benefit of the community as a whole, with partners sharing profits and losses. Ethical finance is also a safeguard - against the negligence, wilful wrongdoing or breach of contract of customers/ partners.

She illustrated to the audience how a typical Islamic Finance House would sift its products and businesses through a Shari'ah supervisory board made up of independent Islamic scholars with experience in Islamic commercial jurisprudence. The primary function of Shari'ah Committee is to review activities of the Islamic financial institution to ensure compliance with Islamic Shari'ah principles.

Mrs. Adeola enumerated the economic consequences of Islamic finance for an emerging economy such as Nigeria's to include: a more equitable allocation of risk in the finance system - rate of interest is replaced by the rate of profit on equity and profit-sharing finance, by mark-ups on credit-purchase finance and by rental rates on leasing finance; a curb on excessive credit creation and curtailment of speculative trading due the disapproval of margin trading and derivatives; the minimization of bankruptcies as banks, savers and investors jointly absorb losses - because a profit-loss sharing system essentially spreads the net positive or negative outcomes of the business between money capital and human capital.

Furthermore, Islamic finance portends for better integration of the real and financial sectors of the economy - banks and savers, investors and fund owners are all strongly tied together leading to an economic system with a high degree of integrity that can withstand shocks; better business ethics - banks only entertaining economically viable financing requests; transparent transacting with clients, depositors as well as fund-seekers - due to compliance with the avoidance of gharar (ambiguity) resulting in clear contracts for every transaction; greater economic stability - it is well known in traditional finance literature that interest based debt finance is an important source of economic instability when compared with equity finance.

Finally, she was of the opinion that Islamic finance was crucial to the alleviation of poverty - it would ensure equity through income redistribution through the mobilization of idle resources to more dynamic recipients.

Last but not the least to speak was Malam Mustapha Bintube, CEO of Jaiz International Plc, promoters of Jaiz Bank, soon to be Nigeria's first wholly Shari'ah compliant banking institution. Coming from a background of conventional banking, Malam Bintube spoke with the passion of a convert.

His presentation was from the perspective of a banker offering Shari'ah compliant banking services and products albeit in an environment unaccustomed to the offerings.

After taking the audience through the spectrum of Shari'ah compliant techniques and the typical product and service offerings by an Islamic bank, Malam Bintube delved into the background of Jaiz Bank and the reasons why it was slow in taking off.

Primary was the lack of a legal and regulatory framework for the operation of Islamic banks. Prospective technical partners cum investors invariably developed cold feet for the Nigerian market whenever they were confronted with the reality that the regulatory institutions were yet to lay down the operational parameters for the sector.

He explained that due to the peculiarities of Islamic finance, adjustments would have to made to monetary and tax policies to capture the returns from the sector appropriately. Happily, the CBN had taken up the task of sorting out the legal and regulatory matters and hopefully categorical pronouncements would be made in the foreseeable future.

Based on the background of presentations made by other speakers, Malam Bintube was of the opinion that given the weight of the Nigerian economy, our population of 140+Million people of which approximately 50% profess Islam (making 1 in 2 West African Muslims a Nigerian) Nigeria stood at the threshold of becoming a hub for Islamic financial services on the continent and beyond. Furthermore, the opportunity Shari'ah compliant financing mechanisms like the Sukuk offer could be a veritable tool for the settlement of the financial inadequacies clogging the development of infrastructure within the country.

In summation, all present agreed that Nigeria could not play laggard in a sector that was conservatively a $500Billion per annum affair. Lawyers were advised to rise to the challenge of acquiring the competencies to help strengthen the national economy through the whole gamut of providing business solutions that were Shari 'ah compliant particularly in the arena of Islamic financial services.