CRITICAL ANALYSIS OF THE LEGAL AND INSTITUTIONAL FRAMEWORK FOR ISLAMIC BANKING IN NIGERIA

CHAPTER ONE GENERAL INTRODUCTION

      Background to the Study

Nigeria’s financial system is dominated by the universal deposit money banking sub- sector. Generally, it has witnessed significant transformation since banking business started  in the country in the mid-nineteenth century. Before the establishment of the Central Bank of Nigeria in 1958, the financial system operated largely, under a Laissez faire system and was characterized by the systemic instability and episodic bank failures.1 The emergence of the Central Bank of Nigeria (CBN) brought about a measure of systemic stability as supervision and regulation were enthroned and efforts were made to ensure that only ‘fit and proper’ persons were granted a banking license.2 Similarly, the specialised financial institutions as well as the insurance and pension fund sub-sectors have remained minor players in the financial system, even after several reforms.

Historically to the Muslims, banks were looked upon as a “sinful place” meant for the rich non-Muslims, because it practiced ‘riba’3 which is prohibited in Islam. Their pessimism and fear was based on the provisions of the Quran, which provides thus;

— they say that trade is like interest (riba), but God hath permitted Trade and forbidden interest (riba)4

At that time, no one, not even Muslims, ever thought that there would one day be such a thing as Islamic banking, Islamic finance and takaful, what more in the next two decades.5 The term takaful comes from the Arabic verb kafal meaning joint guarantee. Takaful is the concept of brotherhood and solidarity. A group of participants pool their resources with the intention of mutual assistance or mutual insurance. What had started as an attempt by Muslims to avoid committing a sin had over a period of three decades developed into a multi- million dollar business. Non-Muslims saw the benefits in it and wanted a share of it. “Conventional” banks also did not want to be left out. Hence they opened “Islamic windows” or Islamic subsidiaries in their banks as part of the banking services offered. Even countries where the word “Islam” was frowned upon and the word “Shari’ah” was almost unknown began to show interest in Islamic banking, Islamic finance and takaful. Indeed they vie to be the Islamic finance hubs in their regions.6 As a result, Islamic banking and finance has become an increasingly important component of the international financial system. As of September 2012, there were more than 600 Islamic financial institutions operating in more than 75 countries across the globe.7 One of the countries most responsible for the unprecedented expansion and popularity of the Islamic finance is Malaysia. Malaysia is the largest Islamic financial hub in the Asia-Pacific region and a role model, in terms of legal and Shari’ah infrastructure, for other countries aspiring to develop their own Islamic finance industry.8

Islamic banking is a non-interest banking that is based on Islamic Law (Shari’ah), it follows the sharia’h, called fiqh muamalat (Islamic rules on transactions). The rules and practices of fiqh muamalat come from the Quran, the Sunnah, and other secondary sources of Islamic Law such as opinions collectively agreed among Sharia Scholars (ijma), analogy (qiyas), and personal reasoning (ijtihad). Although Islamic banking (I-banking) has been institutionalised in North Africa, South Asia and the Middle East since the 1970s, Nigeria, which is reputed as the country with the highest number of Muslims in Sub-Saharan Africa is yet to fully establish it.9 The enactment of the Banks and Other Financial Institutions Act (BOFIA) in 1991, however, set the stage for the institutionalisation of “Profit and Loss Sharing banking” (PLS banking).10 Though, the BOFIA did not provide any specific guidelines for the establishment of “PLS banks”, the Governor of the Central Bank of Nigeria (CBN) has the power to make rules and regulations for the operations, control, supervision and regulation of all financial institutions, including PLS banks.11The introduction of non-interest banking by the apex bank is seen as another major turning point in the history of banking operations in the country. As expected, the move was greeted with steep resistance from all and sundry in religious groups including experts with astounding years of practise in conventional banking, and the gullible public.12The key issues of concern, especially among the religionists were that the attempt by the CBN was meant to Islamise the industry and expose non-Muslims into some form of financial exclusion