Is a bank not making mountain out of a molehill when you borrow N200,000 and has to repay it with not less than N5 million as interest, after about a decade of non-repayment of the loan? The way lending rate operates is one of the reasons why proponents of non-interest banking canvass for interest-free banking. BUKKY OLAJIDE examines the relevance of interest-free banking in a dynamic global financial system.
DESPITE its criticisms, interest-free banking is a thought provoking activity, which demands organised approach because of its delicate religious implications.
While conventional banking demands that banks charge you for approving your loan, you still have to pay for the risk that the bank has taken for granting you the loan in the first place.
On the other hand, interest-free banking demands that only the proceeds or profits of the loan taken will be shared between the loan giver and the taker.
Non interest banking is a banking activity that is consistent with the principles of Islamic law and its practical application through the development of Islamic economics.
Islamic banking is actually based on Islamic law, that is, Shariah. This means ,this particular form of banking must follow the Islamic rules on transactions.
The first Islamic bank was established in Malaysia in 1983. By 1993, commercial banks, as well as, finance companies started offering Islamic banking products and services under the Islamic Banking Scheme (IBS banks) interest-free banking is not new. Many people operate it all over the world. In Sweden, a co-operative member set up tagged: JAK operate a bawl that charges no interest on its loans (a principle of shares with Islamic banking).
JAK operate under the premises that the taking of interest is inimical to a stable economy while interest causes unemployment, inflation and environmental destruction.
On the other hand, the conventional banking system takes huge amounts of money as interest from the borrower whether the venture for which the loan was meant was successful or not.
Proponents of non-interest rate believed that the charging of interest sets up a growth compulsion in the economy and that, as perpetual economic growth is unsustainable, the development of a non-interest banking system is a key step towards building a sustainable economy.
In the beginning, Islam, as well as, Roman Catholic Church frowned on interest. This was because, gold was used as currency and therefore as means of borrowing. Since gold does not multiply itself, asking the borrower to pay interest is simply trying to impoverish him.
Like a lot of people frequently asked: Is Islamic banking meant for Moslems only ? Of course not, Islamic banking is for all individuals regardless of their religious belief.
The difference between Islamic and conventional banking is the fact that Islamic banking must follow the Shariah based on transaction rules, among whom, is the ‘Mudharabah.’
Mudharabah is a profit sharing arrangement between two parties, which is usually an investor and an entrepreneur. Since Shariah prohibits the payment or acceptance of specific interest or fees known as Riba or Usury for loans of money, investing in business that provide goods or services considered contrary to Islamic principles is also forbidden. (Haraam)
The interest-free banking demands that the lender must have a share from the profits or the losses that occur to the borrower or the borrowing enterprises. Sharing profits, as well as, losses is therefore mandatory.
Interest-free banking is gaining ground not only in Africa but also in Europe. Some European financial institutions now offer financial services on interest-free basis while some multi-national banks have opened separate divisions, commonly known as Islamic windows.
Because of peoples’ interest in this kind of banking, Dow Jones Islamic Market Index has been created for people, who wish to invest according to Islamic investment guidelines.
Using turkey as a case study of a country that practices interest-free banking, as a secular Moslem country, Turkey made a particular effort in the early 1980’s to encourage capital inflow from the Middle East and North Africa (MENA) region.
To achieve this, interest-free financial institutions were introduced to the financial markets in 1985 while the special financial houses were established to offer interest-free products and services.
Saduman Okumus, who did a research on the study of the theoretical and practical aspects of interest free banking in Turkey attempted among other things to assess the degree of customer awareness.
The awareness was made simpler because 97 per cent of the population are Moslems.
Consequently, Okumus decided that non-interest banking can be used as basis for savings and financing schemes that suit the socio-demographics of the customers.
This is by way of making the quality of service and the products and services offered to be compatible with the principles of interest-free finance, as well as, with the facilities of the conventional banks.
Meanwhile, in Nigeria, the introduction of non-interest banking has generated a lot of reactions. This is because people see it as a purely religious activity,
However, other Christian-owned institutions also seek to introduce interest-free financial products to serve clients regardless of their religion because they can now see that it ispart of the international financial system, which is an alternative system of financial management as opposed to the market-based conventional system whose excesses nearly collapsed the world banking system through junk derivatives as collaterised debt obligations backed by mortgages in the United States.
Meanwhile, The Central Bank of Nigeria has offered explanations regarding its recent actions on Islamic banking.
On the allegation that the governor is introducing Islamic banking as part of the alleged “northern agenda”, it explained that the fact is that Islamic banking/non interest banking (or whatever it is called) has already been approved by the CBN during the tenure of Prof. Chukwuma C. Soludo.
According to the apex bank, in fact, provisions of BOFIA Act 1991 as amended, Sections 9, 23 and 52 provided for the establishment of Islamic banking in Nigeria. Consequent upon this, the former Habib Bank was given an approval in 1992 to operate a window of Islamic banking, which is still operational with Bank PHB.
“The approval by the CBN under Professor Soludo saw the emergence of the proposed JA’IZ Bank, which has been working to raise the N25 billion capital base required. It is obvious therefore that Islamic banking was already in Nigeria years before Sanusi Lamido Sanusi became the governor of Central Bank of Nigeria,” said the apex bank.
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