Islamic Banking, Bad Economics and Sanusi Detractors!
Author: Ola Onikoyi, Jr.
Many people would agree with the Fulani-Hausa smart and astute central banker in the name of Sanusi Lamido Sanusi on almost every issue bothering on the Nigerian financial system, but not on Islamic Banking! Unfortunately, Sanusi's Islamic banking model has come at the most threatening period of the Nigerian experiment; when Islamic terrorism has reached it heights.
How unfortunate! Sanusi's Islamic banking model has come at a time when the northern establishment is argued by many; the number one threat to the Nigerian existence, when Sharia states for over the past 10 years have brought nothing good to write home about and when the Boko Haram would hit at anything and everything that frowns at it.
Unfortunately for Sanusi, his Islamic banking model has come when the sanctity, morality and objectivity of his Islamic religion have been subjected to questioning and moral probity in the public space like never before.
Sanusi's Sharia compliant banking has come at a bastard decade of Islamophobia and indeed a popular epoch of Islamic extremism when the adherents of Islam are claimed to be "do no goods" but destroyers and selfish warriors that brings down anything good.
But let's balance the equation here. Sanusi's Islamic banking has also come at a very good time ÔÇô and for those who know ÔÇô it's an era of extreme capitalism which makes the poor poorer and the rich richer. It's what many conscious citizens would know: that capitalism has no soul ÔÇô is insensitive to human needs and at the root of all wars.
Sanusi's interest free banking has truly come at a dire time, when mainstream economics has lost its sense ÔÇô and conventional banking has gone bizarre. How under the sun could an interest rate be 18-25% where the poor needs to survive?
Fortunately for Sanusi, his Islamic banking model has also come at a very critical time when the global business mantra is all about sustainability, sustainable development and about social entrepreneurialism which are all borne out of the need to balance the inequity which are more often than not the offspring's of capitalism.
Forget zero banking, forget Sanusi and forget northern politics, all these moral principles are exactly the fundamental ethics of Islamic banking and finance (See: Ainley et al 2007, FSA, 2005).
To further quote the authors above:
The emphasis of Islamic model of banking is on fairness through equity, social justice and macro-economic prosperity, the banking model specifically prohibits Riba (interest) and the financing of gambling, prostitution, pornography, armaments, alcohol and speculation.
As an alternative to interest based finance, Islamic banking has several operational principles which are in accordance with the ethics of Sharia. However, the two main ones are mudarabah (partnership) which is based on sharing of profit and loss between the bank and its customer and musharaka (joint venture) which is usually based on jointly contributing to a business venture and jointly sharing the profits and losses together between the bank and the customer.
Frankly, many of the interest free products of Islamic banking have been less effective in many climes and are often less competitive in contrast with conventional banks in certain cases. However, Islamic finance also has its own credible merits and benefits which outweighs any other model so far.
Sadly though, many of the arguments against the introduction of this banking system to Nigeria have been irrational and based on unfounded sentiments. Not on the risks, the economics, the benefits or the real disadvantages.
From newspaper pages down to the blogosphere, the argument has always been about the illegitimacy and bias behind the establishment of Islamic banking by Sanusi's central bank - and that is forgivable in a nation where Islamic extremism has gone berserk and secularism is fast apace.
What is worrying and unforgivable is the conscious ignorance, myopia and flagrant pessimism which has taken over the public space about the introduction of this banking system. For example, a group called; the Anglican Bishops in Nigeria recently issued a statement to the National Assembly advising the lawmakers not to identify with Sharia banking. More recently, another group called "the Concerned Citizens of Nigeria" did a full page advert in the Daily Sun newspaper crying foul about the gradual "Islamization of the central bank".
More and more disappointing debates are going on in our public spaces about Islamic banking and the bias of the central bank but no one has indeed bothered to truly and objectively examine what Islamic banks entail and how it would in reality be of benefit or disadvantage to Nigerians. Until today, no organisation, association or group has published a research of how Islamic banking will do no common good or will step on the economic rights of the non-Muslims.
Till today, no group, religion or association has come up with credible alternatives to solving the problems of conventional banking, the challenges of soaring interest rates, and the growing elitism of Nigerian banking. No group, individual or association has come up with any form of tested social system of banking whose interest is at the heart of society and not the few who wants to make money. It would therefore be instructive to question the rationale and intention behind the argument against Islamic banking in our public spaces. Why exactly is it greeted with so much sentiments, resentments and na├»vet├ę by those who know nothing about how it works and indeed how it would operate?
To draw a sound debate here, one must first acknowledge that Sanusi might have introduced the banking model at the wrong time and a supposedly wrong period given the recent frivolities of boko-haram as well as other recent negative news about Islam in and around the world. But this argument has been discountenanced by the CBN's recent claims that Sanusi is not responsible for the policy:
Hear the CBN spokesperson:
"Islamic banking is not a Sanusi Lamido Sanusi programme, but started by his predecessor, Chukwuma Charles Soludo."This policy has been on for about three years and has been approved in principle for some time now. I can recall that Jaiz International Bank Plc has been given approval in principle to operate as an Islamic Bank."
This statement automatically nullifies any argument against Sanusi's timing because most of the policy concerning the Islamic banking system had been formulated and implemented by Sanusi's predecessor ÔÇô except that the banks themselves couldn't comply as of that time and more investors couldn't afford to start an Islamic bank.
Another argument against Islamic banking has been the assertion that Nigeria is a secular society, the CBN is a secular authority and so regulations, policies and any activity of the body must be secular in nature without favour for any religion or sect.
Yes indeed, Nigeria is not a Muslim country nor is it a country for any religion or sect ÔÇô the question then is whether the approval of an Islamic bank is right in such society.
The simple answer is yes it is right and not against any secular law or principle because it is an alternative product to conventional banking that would further diversify the Nigerian banking system. Moreover, any religion, group, association or sect can come up with its own model of banking and apply for a CBN license and that's the beauty of secularism. Diversity drives competition and competition drives markets.
In a recent guideline called the framework for the Regulation and Supervision of Institutions Offering Non-Interest Financial Services in Nigeria," (Grab a copy here: https://www.proshareng.com/reports/3360), the CBN makes it clear that non-interest banking is not limited to Islam and so other forms of non-interest banking model from any religion, sects or investors are welcome.
This CBN guideline also nullifies any argument against whether Islamic banks should be created in a secular society such as Nigeria. Unfortunately, the argument about secularism has led the debate about whether Islamic banking is right in Nigeria or not, but it does seem that proponents of such arguments are living in their own world.
In other secular societies around the World, Islamic finance is gaining currency not as the main system of banking but as alternatives to those to whom it appeals. In South Africa for example, there is Al-Baraka Bank offering solely Islamic products and services to its discerning customers http://www.albaraka.co.za/home.aspx, there is also the HBZ Bank which offers Islamic products and Sharia complaint services to its customers. There are more and more other small service firms which offer Islamic insurance, products and services in South Africa and the industry is growing.
In the United Kingdom, there is the Islamic Bank of Britain (http://www.islamic-bank.com) offering Sharia compliant products and services to its customers. In the UK, other mainstream banks like HSBC and Lloyds also offers products and services which are tailored in Sharia compliant ways through their Islamic banking windows (http://www.hsbcamanah.com). There are other such small financial service firms offering varied products and services such as financing and insurance to their vast customers (Muslims and non Muslims) in and around the country.
In many other secular climes around the world; like Europe and America ÔÇô Islamic banks are well greeted without fear and without mudslinging in spite of the alarming spate of Islamic terrorism. Where there are no such banks, mainstream banks are opening windows where Islamic products and services are specifically tailored to their discerning customers. It's in Switzerland, www.faisalprivatebank.com and it's coming up in France.
The Islamic banking model is simply accepted because it works and is a model found within the legal and ethical framework of the regulators. It is sustainable and does not put unnecessary burden on people who are trying to eke out a living out of their small struggles like conventional banking often does.
Another unfounded argument which Sanusi's detractors would often advance is that ÔÇô the CBN can approve Islamic banking but should concern itself less about it. For example, they argue that the setting of the CBN Sharia Advisory Committee is biased and should have been left with the banks to determine their own principles and operational ethics.
Such argument is grumpy and ill-informed because it simply means the abdication of responsibilities by the authority which would eventually lead to chaos and irregularity within the Islamic banking system because while some Sharia principles are based on clear and simple guidelines from the Quran. Some are determined by the interpretations of Sharia scholars based on modern understanding and what is acceptable within the laws.
The implication of not having such advisory committee is that while scholars of some school agree on certain terms as been Sharia compliant those from other schools might consider such terms as unacceptable to Sharia. This is also found in mainstream economics and in many areas where there are theories so nobody needs to cry foul. Another advantage of creating such committee is that it would create standards, eliminate irregularities and ensure that the activities of the banks are in compliance with CBN rules.
More so, in many other climes around the world where there are Islamic banks, regulators take interest in staying informed with issues concerning products and the bank's compliance with regulation and the jurisprudence under which they were licensed.
In 2003, shortly before the Islamic Bank of Britain was approved by the Financial Service Authority, Sir Howard Davies who headed the authority made it clear that: he had ÔÇśno objection in principle to the idea of an Islamic bank in the UK provided they met the FSA's regulatory requirements, the UK had ÔÇśa clear economic interest in trying to ensure that the conditions for a flourishing Islamic market are in place in London'. A soundly financed and prudently managed Islamic institution would, he argued, be ÔÇśgood for Muslim consumers, good for innovation and diversity in our markets and good for London as an international financial centre".
Since the introduction of Islamic Bank in Great Britain in 2004, the FSA has taken keen interest in ensuring that the bank fulfils its obligations and does not fall behind any regulatory requirement. According to a report published by the UK economy and finance ministry (HM treasury, 2007)
"The UK is at the forefront of developments in Islamic Finance and London continues to seize new opportunities - two of the largest sukuk issued in the first half of this year were listed in London".
The report also says that: "the FSA now has good and growing links with the Islamic finance industry, other regulators and Islamic working groups in international organisations. It is also a participant in the recently established HM Treasury Islamic Finance Experts Group."
To be very objective, the only problem in Islamic banking from experience seen around the World so far is that they sometimes have the same risk management issues as conventional banks and in many cases have their own unique risks.
Like in conventional banking, Islamic banks also have the potential for liquidity, credit, systemic and market risks. These risks could threaten their operations, their credibility and if care is taken can lead to failure like every conventional bank which we have seen so far.
Liquidity risk could happen for example if an Islamic bank funds a project in partnership with an entrepreneur in a venture where losses are recorded at the end of the day. The bank and the entrepreneur will share the losses unlike conventional in banking where the entrepreneur solely bears every loss. The challenge for the Islamic bank involved however is that if such losses occur frequently, is big in nature or happen severally, there could be no sufficient cash to pay customers who need their funds instantly. This could lead to higher risks of liquidity depending on the scale of losses.
Another issue in Islamic banking concerns how they manage risks. Although, there are risk management instruments which conventional banks often use, but such instruments (like credit default swaps, inter-bank deposits, etc.) are not considered Sharia compliant. Hence, it is left to banks to be innovative and develop their own interest free models failing which can lead to other forms of risks.
Indeed, given the risk potential of the Islamic banking system it is very important for the central bank to keep close eyes on the banks and other forms of future non-interest banking and institute stringent regulation to make certain that depositors are not exposed to any form of undue risks.
Future Islamic banks must also critically bear in mind that we live in a secular society and so the interest of everybody has to be represented irrespective of ethnic or religion as long as the customer is ready to comply with its ethical guideline as approved by the central bank. These include reasons why the central bank must keep close eyes.
Beyond that, innovation is key, and credible risk management tools must be constantly developed to reduce risks and be a better option to conventional banks.
Amongst the interesting news (which many myopic eyes would not see) about the introduction of Islamic banking to Nigeria is that it would not be an alternative to conventional banking whose interest rates are bizarre but would definitely be the beginning of another banking era and system in Nigeria because in the next few years, the introduction of other models of non-interest banking from the redeemed church, the Catholics, the Aposthelics, Pentecostals and other churches as well as religious sects would be most likely and such is a brilliant idea.
That is what we need to build a prosperous state - that is creative capitalism and that is required in order to move forward as a society, and indeed a people bound by one common purpose. But nevertheless, Sanusi must thread carefully!
Saying No to Islamic banking is saying no to development and the millions of poor whom it will benefit.
That is stupid economics!
And if you say No - who is your teacher?