Nigeria is potentially the largest market for Islamic finance in Africa. It is with South Africa one of the two largest economies on the continent. However, due to political and religious sensitivities, the country is a latecomer to licensing non-interest banks and products. With a dynamic new governor at the Central Bank of Nigeria, the country’s policy is changing through the recognition that non-interest finance is an alternative form of financial management and is open to anyone interested in ethical and socially-responsible finance irrespective of religion and region. The central bank also recognizes that if the UK, Singapore, Thailand, South Africa and a host of other countries can have Islamic banks and global banks such as HSBC, Citigroup, Standard Chartered can have Islamic banking subsidiaries, why should Nigeria be at a disadvantage in not facilitating such alternative banking products and services? After all Islamic finance can contribute financial inclusion and financial stability to the Nigerian economy. Here Mallam Sanusi Lamido Sanusi, governor of the Central Bank of Nigeria, discusses the bank’s policy toward Islamic finance; the challenges that lie ahead and the potential and opportunities for the industry in the oil exporting country.
Excerpts:
What is the policy of the government and Central Bank of Nigeria regarding Islamic finance?
We have had a policy on Islamic finance for some time. In 1991 the bank and other financial institutions act was amended to allow for what was then called non-interest banking. The whole idea was to allow the licensing of Islamic banks. Because of the sensitivities in Nigeria, the act did not specify Islamic banking but non-interest banking. At that time the condition was that a bank should not call itself Islamic or Christian or northern or southern. This was at a time of heightened religious sensitivities. The Central Bank of Nigeria actually issued approvals in principle, the first one in 1992 to promoters who were interested in establishing an Islamic bank, but this came to nothing in the end. There was another license issued a few years ago to a group floating a bank called Jaiz, but they were caught up with the consolidation requirements for banks requiring a minimum capital of 25 billion Naira which they were not able to raise. The latest development is that we have had a request from the Jaiz promoters to reduce the capital requirement from 25 billion Naira to 10 billion Naira as an exception. We are not opposed to that in principle. We would like to do it as part of a total review of the capital adequacy requirements of the banks. So if we are going to have monoline regional specialized banks have different capital adequacy requirements from the national and international domestic money banks, we want to do that as part of that package. We do not want to do it just on the basis of an exception for a single bank. This issue comes under policy and I think we will review the policy because for instance you have mortgage banks who also want to take deposits or banks that are focused on small-and-medium-term enterprises (SMEs) or on farmers. Then we can have a lower capital arrangement.
Has there been any interest from foreign investors and promoters to establishing an Islamic or non-interest bank in Nigeria?
The Islamic Development Bank (IDB) in Jeddah has given Jaiz technical support in its application to the central bank. Jaiz has also linked up with an Indonesian Bank that will provide some management skills. As is in such matters, investors and promoters are usually waiting for the first non-interest bank to be established. Once you have one established, others follow.
I assume the Central Bank of Nigeria applies the ‘fit and proper’ rules for senior management as in most other jurisdictions.
That is a major issue for me as the regulator. In terms of the board there is no problem and the person who is the managing director is obviously an experienced banker. Our view is that Islamic banking, while on the face of it appears very simple profit-and-loss-sharing, it actually carries a lot of risk, and as such requires practical hands-on experience for it to be successful. It is not enough for promoters or investors to say “Oh we are good Muslims”. We need to make sure that if they are getting depositors’ funds, that they understand the risks they are running and the products, and how to manage those risks.
What is the central bank’s policy regarding types of banking authorization — commercial or investment banking or asset management. Has Jaiz applied for a commercial banking license?
Our policy is to have universal banks. We allow banks to go into a number of areas. But obviously this is all part of the capital adequacy review process. If you want to do asset management or investment banking or stock broking, then you have to satisfy different levels of capital requirements. One thing that is clear to me is that we need to deepen the Islamic banking market as a stabilizing force, because the focus on the real economy and the very low leverage and the very low level of speculation in Islamic banking means that developing Islamic banking products will in itself be a key component in the progress toward financial stability.
Potentially of course Islamic finance can contribute a lot to the Nigerian economy and to financial stability in Nigeria.
Yes it can. But the challenge is how one communicates Islamic finance so that people understand that this is a product which is available to anybody irrespective of religion — to both Muslims and non-Muslims — and that this is something done in the UK; and by US banks all over the world. That HSBC has its own Islamic banking subsidiaries; that in the UK you have Islamic mortgages. The more people begin to understand that, the more people will realize that Nigeria is the only place where Islamic banking is seen as a religious issue.
Will there be any restrictions on the Islamic banks using the word “Islamic banking” in their marketing literature?
No. I don’t think so. But I have to check the law. What the law says that in the name or title of a bank, you cannot have a religion or a region. At that time Nigeria had just become a member of the OIC (organization of the Islamic Conference) and there were some religious tensions in the north and south, and the government tried to use words that are as sedate as possible so as to avoid any kind of unnecessary backlash.
How do you see the Islamic finance market developing in Nigeria? Do you have a vision or a timeline for certain milestones?
The potential for Islamic banking in Nigeria is huge because of the size of the market (about 150 million) and the fact that about half (75 million) are Muslims. What I would like to see is for the central bank to develop its own capabilities. Part of what we have done in asset banking in the past is that we have sometimes approved products and structures without figuring out the regulatory implications. This was a mistake. Part of the discussions we are having with Bank Negara Malaysia, the central bank, is on cooperation in capacity building; understanding the implications of Islamic products, structures from a regulatory perspective. Our government has not issued a sukuk so all that capabilities and tax neutrality measures have got to be adopted. We do not have non-interest bearing instruments at the central bank for reserve and liquidity management for Islamic banks. All these instruments have to be looked at and developed. Maybe we can develop these even before the Islamic banks are established to tell the market that these products are available and offered and approved by the Nigerian government. We can talk to our Debt Management Office and see how we can structure and offer sukuk; so that they become available in the market for managing liquidity.
Will Nigeria follow a dual banking model such as in Malaysia where an Islamic banking system operates side-by-side with the conventional one or will you follow the UK model where Islamic banks will be authorized under the general banking act and be introduced as part of a financial inclusion policy? Do you also have an Islamic advisory group at the Central Bank of Nigeria?
Yes we do have an advisory group. I also just recently appointed Bashir Ali, an Islamic legal expert as a part-time adviser. He has both Western and Islamic education. I have spoken to the IDB and they have indicated that they have technical assistance programs which they offer either directly through their own aegis or through a joint program with the International Monetary Fund (IMF). Since we have a technical agreement with the IMF, we will broaden that to include Islamic banking and to give that technical assistance at the regulatory level. And we can work with the Ministry of Finance also to structure sukuk backed by projects which we can issue as required.