ASSESSING THE DETERMINANTS OF PROFITABILITY OF
ISLAMIC BANKING IN NIGERIA (A CASE STUDY OF JAIZ
BANK PLC)
CHAPTER ONE
NAME:
ELLIOT EHIOROBO
NUMBER:
169029295
COURSE NAME:
Research Project
PROGRAMME:
Masters of Business Administration
COURSE CODE:
MBA 805
SUPERVISOR:
Dr Peter Amah
INTRODUCTION
1.1 Background to the study
Organisations across the world are finding new ways to remain competitive, accessing untapped
markets in order to sustain their profits and relevance (PwC, 2017). Consumer segments are seen
to be divided across income classes, social and even religious dimensions. Banks as such are
developing new products and services to meet these unique and different consumer segments,
identify their preferences and keep them satisfied. A key consumer segment that has shown slight
apathy to modern day conventional banking are the Muslims, or those who practise Islam as a
religion. Islamic ideology, teachings and ideology dictates forbid this consumer segment from
consuming interest otherwise known as riba while also negating investments into “islamically
prohibited businesses” such as gambling, alcohol business, futures tradings amongst others.
Interest refers to amount on all loans of money or paid on depositors funds used for loans by
commercial banks (Raza, Hena & Saeed, 2017). In response, this has led to the proliferation of
new Islamic banks (banks that practise based on Islamic law) across the world and even in Nigeria.
In a similar fashion, the conventional banks are also evolving products that meet the interest of the
Muslim population and Islamic fundamentalists to tap into these markets.
Islamic banking, also known as non-interest banking, is a banking system that is based on the
principles of Islamic, or Shari'ah, law and guided by Islamic economics. Two fundamental
principles of Islamic banking are the sharing of profit and loss and the prohibition of the collection
and payment of interest by lenders and investors. Islamic law prohibits riba or usury. defined as
interest paid on all loans of money (although some Muslims dispute whether there is a consensus
that interest is equivalent to riba) (Farooq, 2005).
These prohibitions have been applied historically in varying degrees in Muslim
countries/communities to prevent un-Islamic practices. In the late 20th century, as part of the
revival of Islamic identity, a number of Islamic banks formed to apply these principles to private
or semi-private commercial institutions within the Muslim community (Usmani, 1998). Their
number and size has grown, so that by 2009, there were over 300 banks and 250 mutual funds
around the world complying with Islamic principles, and around $2 trillion was sharia-compliant
by 2014. Sharia-compliant financial institutions represented approximately 1% of total world
assets, concentrated in the Gulf Cooperation Council (GCC) countries, Iran, and Malaysia
(Mohammed, 2014).
The steady expansion of Islamic banks has been the hallmark of the Muslim world financial
landscape. With a network that spans more than 50 countries, Islamic banks are now playing an
increasingly significant role in their respective economies. Based on their charters, Islamic banks
have the flexibility of becoming shareholders and creditors of firms, as well as the advantage of
providing investment-banking services. In this respect, Islamic banks are rapidly gaining market
shares in their domestic economies. In retrospect, the presence of Islamic banks exemplifies the
empirical success and the viability of eliminating fixed interest payments from financial
transactions (Yueh, 2014).
Nigeria’s first licensed Islamic bank, Jaiz Bank Plc commenced full operation of its non-interest
commercial banking in Nigeria in 2012 and its currently the only bank in Nigeria that solely
operates non-interest commercial banking. The introduction of islamic banking is part of a drive
by the Central Bank of Nigeria, CBN, to propel Nigeria’s economy and promote financial inclusion
by introducing alternative products. The non-interest regime offers veritable incentives and
attractive options for investors (Kareem, Raheem, 2011).
The Islamic bank in Nigeria performs the same financial intermediation as conventional banks. It
is a deposit-institution whose scope of activities includes all currently known banking activities
except borrowing and lending on the basis of interest (riba) (Kareem, Raheem, 2011). The banking
does not involve in all forms of Maisai or gharar (speculative ventures like gambling, derivatives)
nor any activities that is against the teachings found in the Quran or Hadith. Islamic banking
services include profit sharing investments, safe keeping, leasing, cost-plus financing and joint
venture agreements. The bank’s philosophy is to deliver world-class sharia-compliant financial
services to its clientele irrespective of class, creed, race or religious belief and to contribute to the
socio-economic development of the society.
Profit and loss sharing modes — musharakah and mudarabah — where financier and the user of
finance share profits and losses, are based on "contracts of partnership (Jamaldeen, 2012). These
have been called the "real and ideal" modes of Islamic finance (as Islam calls for sharing of rewards
and losses by all who contribute capital to a commercial enterprise, according to Taqi Usmani
(1998). The variance in the business model of Islamic banks and that of conventional banks has
led the researcher to investigate the determinants of profitability of these banks.
1.2 Statement of Problem
Every country has financial institutions to embody the financial guidelines and ensure the
economic growth as well as, control of money for the country. The financial institutions are
responsible to manage and control all the resources related to financing. The presence of banking
institution is to help the growth of economic activity in a country (Samail, Zaidi, Mohammed,
Kamaruzaman, 2018). In Nigeria there are four types of banks that are privately owned, namely
commercial banks, merchant banks, micro-finance banks and Islamic bank.
Conventional banks make substantial portion of its profit from interest charged on credit facilities
as well as fees for providing various services to its customers. Islamic banks in general are
forbidden from charging interest on funds lent out. The performance of the financial system has
big influences on the growth of Islamic banking. According to previous study, financial
performance plays an important role in the economic in the whole country (Blejer, 2006). Thus, in
this research we will determine the variables that will affect the financial performance in Islamic
Banking in Nigeria.
In order for the banks to continue to provide these services as stated above, it needs to make
adequate profit and return on its assets. However, there has been little knowledge in qualitative
terms on how Islamic banks make profit and similarly there is a scarcity of literature that profiles
the various Islamic products and services in terms of their investment and sales potential.
According to Hassan & Bashir (2003), the issues of viability of Islamic banks and their ability to
mobilize saving, pool risks and facilitate transactions did not get enough coverage in the existing
literature.
Islamic banking places emphasis on asset-based lending and hence would contribute to the
development of the real sector of the economy. However Islamic banking is a new development
in Nigeria, there is currently just one bank (Jaiz Bank Plc) which began operations in 2012. Hence,
there is a need to ascertain which products /services are more readily acceptable in the Nigerian
market and what the intrinsic strengths and weaknesses of these products contribution to profits.
A broad knowledge of these scenarios will assist in assessing the profitability of Islamic banking
in Nigeria. Furthermore, investigations into the profitability of Islamic banks are rarely explored
for developing economies like Nigeria, hence this work intends to bridge this gap.
The following are financial activities performed by the Islamic bank in Nigeria; Murabaha
transactions, Ijara transactions, Mudaraba transactions, Musharakah, and investment in Sukuk.
This study would conduct a research into the relationship between the variables and the
profitability of the bank.
1.3 Objective of the Study
The primary objective of the study is to examine the determinants of profitability of Islamic banking in
Nigeria. The specific objectives are:
i.
To determine the impact of Murabaha transactions on the profitability of Islamic banking
in Nigeria.
ii.
To determine the impact of Ijara transactions on the profitability of Islamic banking in
Nigeria.
iii.
To determine the impact of Mudaraba transactions on the profitability of Islamic banking
in Nigeria.
iv.
To determine the impact of Musharakah on the profitability of Islamic banking in Nigeria.
v.
To determine the impact of Investment in Sukuk on the profitability of Islamic banking in
Nigeria.
1.4 Research Questions
i.
Is there a significant relationship between Murabaha transactions and profitability of
Islamic Banking in Nigeria?
ii.
Is there a significant relationship between Ijara transactions and profitability of Islamic
Banking in Nigeria?
iii.
Is there a significant relationship between Mudaraba transactions and profitability of
Islamic Banking in Nigeria?
iv.
Is there a significant relationship between Musharakah and profitability of Islamic Banking
in Nigeria?
v.
Is there a significant relationship between Investment in Sukuk and profitability of Islamic
Banking in Nigeria?
1.5 Research Hypotheses
The hypotheses of the study are stated in NULL FORM as follows:
Hypothesis One
Ho: That there is no significant relationship between Murabaha transactions and profitability of
Islamic Banking in Nigeria.
Hypothesis Two
Ho: That there is no significant relationship between Ijara transactions and profitability of Islamic
Banking in Nigeria.
Hypothesis Three
Ho: That there is no significant relationship between Mudaraba transactions and profitability of
Islamic Banking in Nigeria.
Hypothesis Four
Ho: That there is no significant relationship between Musharakah and profitability of Islamic
Banking in Nigeria.
Hypothesis Five
Ho: That there is no significant relationship between Investment in Sukuk and profitability of
Islamic Banking in Nigeria.
1.6 Scope of the Study
The main purpose of this study is to establish the factors that influence the profitability of the
Islamic bank in Nigeria. The study is delimited to one Islamic bank in Nigeria (Jaiz Bank Plc.)
Jaiz Bank is the only operational Islamic bank in Nigeria. Data is collected from financial
statements of the bank from 2013 to 2018 financial years.
1.7 Significance of study
This study is of importance to researchers, shareholders, management, economists and business
analysts as it looks into the financial activities of Islamic bank and determines how profitable these
activities are. Hence the significance of the study cannot be over-emphasized. Thus, the
significance of this study is itemized as follow:
i.
The findings of this study will guide shareholders on the various factors that drive the
bank’s profitability.
ii.
The findings will be of immense help to management as it would determine key factors
responsible for the bank’s profit and hence aid decision making.
iii.
The finding will also assist economist in determining the relevance of Islamic banking on
the economy as whole and if more of these banks should be encouraged.
iv.
The study will be very useful to academia and intellectuals thus adding to their body of
knowledge.
1.8 Outline of the Study
This research work will be divided into five chapters. The first chapter will be introduction.
Chapter two will focus on the literature review and theoretical framework of the determinants of
profitability of Islamic banking in Nigeria. The third Chapter will be based on the methodology
stating the research and sample design and the sampling method to be used. Chapter four would
comprise the interpretation and analysis of the result obtained. While the final chapter, which is
chapter five, comprises the summary of findings, conclusion, and recommendation.
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