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Thursday, December 29, 2011


          As sub Saharan African second largest economy and most populous country in Africa, the decision by Nigerian authorities to introduce Islamic finance into the country financial sector should be welcome by the global investment and Islamic banking and finance community. With the seventh largest population in the world, Nigerian market is large enough to attract any type of financial market players to participate in her increasingly sophisticated financial industry. The history of the introduction of ethical finance into the Nigerian economy can be traced back to the period of colonialism when an institution that did not engaged in any interest related dealing was established to cater for the need of Muslim pilgrimage for an ethical vehicle through which they can channel their saving toward the annual pilgrimage.  The agency popularly known as WAPA, though not a bank as the term is commonly understood, in some ways perform the bank job of deposit taking and also perform the functions of bureau de change. But the actual effort to established a fully pledge Islamic bank can be traced to the 1980s after the liberalization of the banking sector and establishment of what are today called new generation banks. The promulgation of Bank and other financial institution degree (BOFIA) of 1991 acted as watershed as it provided the legal and constitutional background for the establishment of Islamic banks in the country. Thereafter, the establishment of community banks everywhere across Nigeria paved way for some interested Muslims to apply for the establishment of zero-interest charging community banks. Habib Bank Nigeria limited (an affiliate of Habib bank Pakistan) was the first big conventional bank to open a window that cater for Islamic finance in 1996. Because of the absent of full support from the regulatory authorities no any other Nigerian bank followed the example of Habib bank for some years to come. After the return of democracy in 1999, a more concrete effort to establish a fully pledge Islamic bank was initiated. This time around, because of the initial positive posture of the authorities towards the scheme, shares of the proposed Islamic bank (called Jaiz) was opened for the general public to subscribe, which was later oversubscribed to signal to you how eager Nigerian public are for this system. But the decision of the then new central bank governor (Soludo) to increase the capital base of banks from N2.5 Billion (as at 2003) to N25 Billion did a lasting blow to this effort and delayed it for some nine years time.
Sanusi Lamido’s banking reforms
    Since becoming Nigeria’s central bank governor in May 2009 (after a short span as managing director of one of Nigeria’s largest bank) Sanusi Lamido has introduced far reaching reforms that led to the transformation of the Nigerian banking landscape. At the period Sanusi assumed duty as governor of the CBN, Nigerian banking sector was passing through the devastating impacts of the last global financial crisis that left Nigerian financial sector in a protracted coma. There was the wide spread fear that some major Nigerian banks were facing threat of total collapse with major repercussions for the Nigerian economy as whole. This left Sanusi with difficulties concerning alternatives to chose from, should he allowed these banks to collapse (about eight of them) or should he allowed the government to rescue them? He took the last alternative by providing government rescue money, but before that he made sure he sacked all the managing directors of these banks who most people blame for the situations in their banks. Sanusi later introduced far reaching corporate governance reforms that include limiting of bank’s MDs tenure to only two terms of five years, Central banks screening of who is going to be appointed as director in a bank, bringing an end to the cult of family own bank, banning of former CBN governors from holding strategic positions in banks until long time after, and new succession guidelines. Other reforms introduced by Sanusi includes, uniform financial year ending, replacing of universal banking model with differentiated banking model that allowed for the establishment of specialized banks including Islamic banks, establishment of asset management company of Nigeria to buy toxic assets from Nigeria’s banks, new rules on result publication, cashless economy road map, curtailing banks lending to capital market, establishment of credit bureaus among others. Today in Nigeria, CBN intervention of 2009 is hailed as the only banking intervention that ordinary depositors do not loose their money and one in which the confidence of the Nigerian public in the financial system was enhanced.
How the reforms affect Islamic finance industry?
    Before the coming of Sanusi there was only the intent to establish Islamic banks in the country as there was no any realistic time table on when the banking system is going to be introduced. Soludo (the CBN governor before Sanusi) has compiled some policy documents on Islamic banks but his other policies like the sudden introduction of higher capital ration for all categories of banks proved a stumbling block to the system. In addition, Soludo has refused to put the needed regulatory and legal requirements for the establishment of Islamic banks. Despite these, Soludo introduced Nigeria into Islamic Financial Service Board (IFSB) in January 2009. But, Sanusi is credited with using the BOFIA degree of 1991 to restructure his non interest specialized banks in 2010 to confirm with Islamic Banking requirements. With the dismantling of universal banking model, the capital requirement for the establishment of Islamic bank was reduced from 25 billion naira to 5 billion Naira for a regional bank, and 10 billion Naira for a national bank. The Nigerian Deposit Insurance Corporation (NDIC) also joined CBN by releasing draft framework for non interest (Islamic) deposit insurance scheme. Central bank under Sanusi also joined the International liquidity Management Corporation based in Malaysia in October 2010. Sanusi also introduced the office of adviser to the CBN governor on Islamic banking, in addition to sending the staff of the apex bank for training in and outside the country on various aspects of Islamic banking. All these led to drastic changes in the Islamic Banking environment, despite the opposition it experienced from some quarters.  Currently, Jaiz bank plc has been registered to operate as a full pledge Islamic bank, making it the first Islamic bank in the country. Stanbic IBTC Nigeria limited (a subsidiary of standard bank of South Africa) has been given the licenses to operate a window of Islamic banking. Many other existing conventional banks operating in Nigeria are also planning to enter the lucrative market. Lotus capital plc has been registered since 2008 to operate as Islamic fund management firm. There are also a lot of micro finance institutions that are operating some kind of windows of Islamic banking across the country. In the area of Islamic insurance (Takaful) there are some significant progress that has been recorded among which is the introduction of Takaful products by existing conventional insurance firms such Africa alliance, Niger insurance, and Royal insurance among others.
Opportunities and potentials for Islamic banking in Nigeria
  The opportunities for all categories of Islamic finance products is enormous in Nigeria, with a very big religious population (according to many cross country survey) Nigeria boost of large population of religiously conscious people. Like most developing countries, the number of the unbanked Nigerians is very substantial, according to the Economist magazine (the special report on international banking, May 14, 2011) about 67 million of the adult population are out of the formal banking system. It is believed by many analyst that the introduction of Islamic banking into the country financial system will lead to the deepening of the financial system, thereby, reducing the total number of the unbanked in the country. Islamic insurance and fund management in particular have already started making headway into the country formal financial sector. Nigeria hopes to become the hub of Africa financial transaction, a kind of Africa International financial centre (IFC), hence the lunching of financial system strategy (FSS) 20:2020 in 2005. It was realized (though reluctantly) that for Nigeria to be included among the 20 largest economies in the world by 2020 it must include some kind of Islamic (non interest) banking both for the attraction of foreign investment and to help increase financial deepening. The FSS 20:2020 has further help to spur the potentials of Islamic banking in the country. The existing conventional bank that originated from Nigeria are listed among the largest banks in Africa, some of them have operations across many African countries. There is no doubt that Lagos (Nigerian financial capital) is the biggest financial centre in the whole of west Africa; with the third biggest economy in the whole of Africa ( following after South Africa and Egypt, respectively) there is no doubt that the potential for Islamic banking in Nigeria is enormous. Nigeria also hopes to become Africa hub of international Islamic finance transactions.
Conclusion and Recommendations
   But there are still important things that Nigerian authorities need to do to help the opening up of the Nigerian financial market to Islamic finance. Most important among these is speedy introduction of new legislations that are favorable to Islamic banking and finance, because some of the existing legislations still act as barrier to some aspects of Islamic finance for example Sukuk issuance. Next is the creation of Islamic money market, as some of the instrument currently traded in the conventional money market cannot be bought by the Islamic bank, and not doing this will put Islamic financial institutions at greater disadvantage compared to their long established conventional competitors. On this issue Nigeria should borrow from Malaysia on how favorable environment was provided for Islamic banks to compete with their conventional rivals. The central bank of Nigeria should as a matter of necessity collaborate with the more established countries in the field around the world; such countries should include Malaysia, Bahrain and Pakistan. Investors in the Islamic finance industry (to some extent) are just like there conventional counterparts, before committing their money in any country they first calculate the risk and benefit of doing so, thus Nigerian authorities should include these facts as they Endeavour to establish Nigeria as centre of Islamic finance in Africa. Lastly, is greater enlightenment of the Nigerian public, as there are still many people that are ignorant of the workings of Islamic finance; hence, the recent opposition to it introduction from some quarters.

Abdullahi, S. A. (2011), “Islamic banking in Nigeria: the journey so far”, people daily Nigeria (, May 3, 2011
The Economist; May 14th 2011,
The Nation, Nigeria; June 7, 2011
Sanusi, S.L. (2011), “Islamic finance in Nigeria: issues and challenges”, Lecture delivered at Markfield institute of higher education, Leicester, UK