Islamic Finance in Nigeria: Benefits, Characteristics, Principles and Practices

1. Islamic Finance in Nigeria: Benefits, Characteristics, Principles and Practices A Presentation by Dr Bashir Aliyu Umar, Special Adviser to CBN Governor on Non-Interest Banking at the Two-Day NDIC FICAN Workshop 2011, held at Dutse, Jigawa State, 28,29 Nov 2011

2. Introduction to Islamic Finance Definition: A financial system that offers products, services and financial instruments based on the Islamic law (Shariah) Components: Islamic Banking e.g. Ja’iz Bank, Stanbic IBTC Non-Interest (Islamic) Banking Window Islamic Insurance (Takaful) e.g. Takaful windows in Africa Alliance Insurance Plc and Niger Insurance Plc, Halal Takaful, a division of Cornerstone Insurance Plc Islamic Capital Markets, e.g. Lotus Capital Plc and Halal Fund of ARM

3. Intermediation in Conventional Banks Assets Liabilities Loan Saving/Investment Borrower Conventional Bank Depositor Interest Interest

4. Intermediation by Islamic Banks Assets Liabilities Financing/Investment Deposit/Investment Client Islamic Bank Depositor/Investor Profit on sales, lease/Profit sharing/Commissions (agency, services) Gift/Profit Sharing Mudarabah, Musharakah, Murabahah, Salam, Istisna, Ijara Wadi’ah, Qard, Mudarabah, CMD

5. Core Contracts in Islamic Finance • Murabahah (Cost-Plus Sale Contract) A Murabahah transaction is a sale at a stated profit. In a Murabahah transaction, the bank purchases something from a third party and sells it to the client at a stated profit on a deferred payment basis. In this way, the client can buy something without taking an interest-based loan. • Ijarah (Lease) An ijarah is an Islamic lease. The bank purchases an asset and leases it to a client for fixed monthly payments. An ijarah may include an option for the lessee to buy the asset at the end of the lease, though such a provision is not required. • Mudarabah (Silent Partnership) A Mudarabah transaction is an investment partnership. In a mudarab arrangement, the contract is between an investor (or financier) and an entrepreneur or investment manager known as the mudarib. Risk and rewards are shared. In the case of a profit, both parties receive their agreed-upon share of the profit. In the case of a loss, the investor bears any loss of capital while the mudarib loses his time and effort.

6. Core Contracts in Islamic Finance • Salam (Forward trade Contract) It is a sale where the seller undertakes to supply some specific goods to the buyer at a future date that is specified in exchange of an advanced price fully paid at spot. This mode of financing is used to finance the agricultural sector. • Istisna’ (Partnership in Manufacturing) It is a mode of financing where the commodity involved is manufactured to the specifications of the purchaser. This is widely used in the housing finance sector, where the client seeks finance for the construction of a house. The financier may undertake to construct the house on a specified land either belonging to the client or purchased by the financier, on the basis of Istisna', with payment fixed in whatever manner the parties may wish. • Musharakah (Equity Partnership) This involves partners providing funds for a venture, with profits shared according to their invested capital, and the loss is borne by them in the same way.

7. Main Differences between Islamic and Conventional Finance

8. Main Differences between Islamic and Conventional Finance

9. Main Differences between Islamic and Conventional Finance

10. Benefits of Islamic Financial Services on the Nigerian Economy • Financial market deepening: new market and institutional players will be introduced e.g. Islamic Money Market, Islamic asset management companies, Takaful, etc. • Financial Inclusion: a large number of Muslims in the country that had hitherto steered away from the organised conventional financial services due to their aversion to interest and interest-based products will be integrated in the formal economic sector, which will in turn lead to replacement of informal markets with formal and regulated ones. • Enhanced product offering from an array of asset-backed instruments of finance as alternatives and complements to the conventional ones. • New competition in the banking industry which is expected to engender a concomitant reduction of interest rates. • Enhanced oversight and regulation through an added component of corporate governance, which is the Shariah supervisory board/committee. • Enhanced investment in the critical sectors of the economy through the use of Sukuk, a new financing instrument. • Development of the real sector of the economy through its asset-backed financing which will avail funds only to production and real investment activities.

11. Practice of Islamic Finance in Nigeria • Challenges • Asset Liability Mismatch and absence of Shariah-compliant liquid investment instruments • Activities in other jurisdictions, CM, Short-term Sukuk • Treatment of Profit Sharing Investment Accounts (PSIA) • Deposit Insurance • Tax treatment of Islamic finance products • Shariah Expertise

12. Conclusion • Bracing up to the challenge Thank you