The Non-interest Financial System
Most of non-interest financial institutions, from the beginning, are otherwise known as Islamic financial institutions basically because they operated and still operate, on the rules and principles of Islamic commercial jurisprudence that generally recognise profit and loss sharing and the prohibition of interest on deposits and other transactions.
Regardless, these financial institutions serve the same purpose of providing financial services as do conventional financial institutions except that it operates in accordance with principles and rules of Islamic commercial jurisprudence. It is not just that interest payment is prohibited, there are other non- permissible transactions in Islamic financial jurisprudence that they uphold.
For instance, in Islam, non-admissible trade practices include gambling, speculation, unjust enrichment, exploitation, unfair trade practices and dealings in pork. Others are dealing in alcohol, arms and ammunition, pornography and; other transactions, products, goods or services which are not compliant with the rules and principles as clearly defined and stated in Islamic commercial jurisprudence.
For some time, it was difficult to convince the banking world that is already steeped in capitalistic financial principles of interest generation and profit motive that a system exists that can operate successfully without resort to demanding interest on financial and banking transactions.
Over the years, due to its acceptability even by the capitalist system, Islamic finance has grown at a rapid pace globally. It is estimated to control a sizeable chunk of the financial world with a market value put at more than $3.5 trillion. That it has achieved this level of penetration is possible because of the inherent benefits derivable therefrom. It has the potential to attend to the financial needs of those excluded from the financial system as a result of the demands of the conventional banking institutions. This explains why it is seen as being capable of engendering financial inclusion.
Even the World Bank, the heartbeat of capitalism, defines financial inclusion as ‘a process that enables individuals and businesses have access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit and insurance – delivered in a responsible and sustainable way. This is a subtle acceptance of an indispensable role the non-interest financial institutions can play in taking care of the areas not included in the traditional banking system. The conventional banking system, it needs to be emphasised, is based, primarily, on interest payments at a rate pre-set on the deposits of money. Payment and receipt of interest is prohibited under Sharia Law, so Muslims abstain from banking. However, through Islamic banking, financial inclusion can be promoted and it brings a larger pool of savings in the local and global economy. An important development is that though the initial target clientele was Muslims, it has come to be attractive to non-Muslims alike.
It is pertinent to point out that non interest financial institutions, operating on the dictates of Shariah principles, forbid any transactions that support industries or activities which are forbidden in Islam. For example, usury, speculation, and gambling – whether these are legal or not in the place of transaction. Other religions are beginning to realise the danger to society of promoting those harmful products and practices thereby reducing their impact.
One of the considerations of this financial system is the enhancement of the principle of financial justice. This helps Islamic finance products function in a Sharia compliant way. The Western financial system looks at making profit through interest payments and makes the beneficiary liable for any risk. Islamic finance paves way for the sharing of profit/loss and risk involved in proportional manner.
For any investor, stability in investments is key. That is one of the attractions of the non-interest financial system that allows investments to be approached with a slower, insightful decision-making process, when compared to conventional finance. And because of the availability of financing on terms and conditions that are investor-friendly, economic development is somewhat accelerated. This will eventually result in a high return on investments both for the bank and the depositors.
It is from this perspective that this newspaper commends the Central Bank of Nigeria (CBN) for putting in place a set of guidelines for the effective and efficient operation of that specialised financing model in a multi-religious and multi-cultural economic environment as obtains in Nigeria.
The objective of the guidelines as stated by the regulator is to provide minimum standards for the operation of IIFS in Nigeria. To that extent, the guidelines are applicable to IIFS only and do not seek to regulate other non-interest financial institutions which may be established from time to time.
The guidelines also made it clear that discrimination on grounds of faith or ethnicity or any other grounds in the participation by individuals or institutions as promoters, shareholders, depositors, employees, customers or other relevant parties in any transaction regarding a non-interest financial institution, whether based on Islamic or other model is strictly prohibited.
With this, in our opinion, the non-interest financial institutions are most likely going to open new vistas for the investing public and other fund seekers most especially for those who are incapacitated by the stringent requirements needed for the accessing of funds from the conventional financial institutions.