Islamic Finance in Nigeria: Benefits,
Characteristics, Principles and
Practices
A Presentation by Dr Bashir Aliyu Umar,
Special Adviser to CBN Governor on
Non-Interest Banking at the Two-Day
NDIC FICAN Workshop 2011, held at
Dutse, Jigawa State, 28,29 Nov 2011
Introduction to Islamic Finance
Definition:
A financial system that offers products, services and
financial instruments based on the Islamic law
(Shariah)
Components:
Islamic Banking e.g. Ja’iz Bank, Stanbic IBTC NonInterest (Islamic) Banking Window
Islamic Insurance (Takaful) e.g. Takaful windows in
Africa Alliance Insurance Plc and Niger Insurance Plc,
Halal Takaful, a division of Cornerstone Insurance Plc
Islamic Capital Markets, e.g. Lotus Capital Plc and Halal
Fund of ARM
Intermediation in Conventional Banks
Assets
Liabilities
Loan
Saving/Investment
Conventional
Bank
Borrower
Interest
Depositor
Interest
Intermediation by Islamic Banks
Assets
Liabilities
Financing/Investment
Client
Mudarabah,
Musharakah,
Murabahah,
Salam, Istisna,
Ijara
Deposit/Investment
Depositor
/Investor
Islamic Bank
Profit on sales,
lease/Profit
sharing/Commi
ssions (agency,
services)
Gift/Profit
Sharing
Wadi’ah, Qard,
Mudarabah,
CMD
Core Contracts in Islamic Finance
• Murabahah (Cost-Plus Sale Contract)
A Murabahah transaction is a sale at a stated profit. In a Murabahah
transaction, the bank purchases something from a third party and sells it
to the client at a stated profit on a deferred payment basis. In this way, the
client can buy something without taking an interest-based loan.
• Ijarah (Lease)
An ijarah is an Islamic lease. The bank purchases an asset and leases it to a
client for fixed monthly payments. An ijarah may include an option for the
lessee to buy the asset at the end of the lease, though such a provision is
not required.
• Mudarabah (Silent Partnership)
A Mudarabah transaction is an investment partnership. In a mudarab
arrangement, the contract is between an investor (or financier) and an
entrepreneur or investment manager known as the mudarib. Risk and
rewards are shared. In the case of a profit, both parties receive their
agreed-upon share of the profit. In the case of a loss, the investor
bears any loss of capital while the mudarib loses his time and effort.
Core Contracts in Islamic Finance
• Salam (Forward trade Contract)
It is a sale where the seller undertakes to supply some specific goods to
the buyer at a future date that is specified in exchange of an advanced
price fully paid at spot. This mode of financing is used to finance the
agricultural sector.
• Istisna’ (Partnership in Manufacturing)
It is a mode of financing where the commodity involved is manufactured
to the specifications of the purchaser. This is widely used in the housing
finance sector, where the client seeks finance for the construction of a
house. The financier may undertake to construct the house on a specified
land either belonging to the client or purchased by the financier, on the
basis of Istisna', with payment fixed in whatever manner the parties may
wish.
• Musharakah (Equity Partnership)
This involves partners providing funds for a venture, with profits shared
according to their invested capital, and the loss is borne by them in the same
way.
Main Differences between Islamic and Conventional Finance
Characteristics
Islamic Finance
Conventional Finance
Interest-based financing


Interest-based financing with a
fixed or floating rate of interest
charged for the use of money.
Interest-based deposits


Deposits are interest-based
and the investor and bank
commit a predetermined rate
of interest with a guarantee of
principal payment.
Interest paid to depositors by
banks is less than the interest
they charge on loans, the
difference being the margin
that the bank makes.

Investment products

Financing is not interest-based
but is asset-backed and based
on generating a profit from
sale of an asset or its usufruct.
Deposits are not interestbased but based on profit and
loss sharing or as interest-free
loans
Banks get a share of the profit
from the business venture to
which it is a party, and in case
of loss devoid of any
negligence on the part of the
bank, the investor forgoes the
reward for the activity during
that period
Asset-backed investment
products like Sukuk (Islamic
bonds) and other shariahcompliant investment
certificates.


Interest-bearing securities like
government bonds
Main Differences between Islamic and Conventional Finance
Characteristics
Islamic Finance
Equity Financing with Risk Sharing


Penalty on Default

Restrictions

Prohibition of Speculation (Gharar)
and Gambling (Maysir )


Conventional Finance
Offers equity financing for a

business or venture.
Losses are shared based on the
equity participation, while
profit is shared based on a pre- 
agreed profit sharing ratio.
No extra money is charged as

penalty for payment default
Dealing in unlawful goods and
services like alcohol, pork,
pornography prohibited
Transactions with elements of
gambling and speculation such
as derivative trading are
strictly forbidden.
Conventional insurance is
prohibited due to the element
of uncertainty embedded in
that contract
Not generally offered but
available through venture
capital companies and
investment banks.
Normally they participate in
management as well.
Permissible charge for late
payment or default.

There are no such restrictions

Trading in any kind of
derivative/futures involving
speculation is allowed.
Conventional insurance is
allowed.

Main Differences between Islamic and Conventional Finance
Characteristics
Islamic Finance
Conventional Finance
Shariah Supervisory Board




Islamic financial institutions
are required to have a Shariah
Supervisory organ appointed
by the Board as part of its
corporate structure to ensure
that all business activities are
Shariah compliant.
There is Shariah audit in
addition to financial audit
There is no such requirement.
Only financial audit
Benefits of Islamic Financial Services on the Nigerian Economy
• Financial market deepening: new market and institutional players will be
introduced e.g. Islamic Money Market, Islamic asset management
companies, Takaful, etc.
• Financial Inclusion: a large number of Muslims in the country that had
hitherto steered away from the organised conventional financial services
due to their aversion to interest and interest-based products will be
integrated in the formal economic sector, which will in turn lead to
replacement of informal markets with formal and regulated ones.
• Enhanced product offering from an array of asset-backed instruments of
finance as alternatives and complements to the conventional ones.
• New competition in the banking industry which is expected to engender a
concomitant reduction of interest rates.
• Enhanced oversight and regulation through an added component of
corporate governance, which is the Shariah supervisory board/committee.
• Enhanced investment in the critical sectors of the economy through the
use of Sukuk, a new financing instrument.
• Development of the real sector of the economy through its asset-backed
financing which will avail funds only to production and real investment
activities.
Practice of Islamic Finance in Nigeria
• Challenges
– Asset Liability Mismatch and absence of Shariahcompliant liquid investment instruments
• Activities in other jurisdictions, CM, Short-term Sukuk
– Treatment of Profit Sharing Investment Accounts
(PSIA)
– Deposit Insurance
– Tax treatment of Islamic finance products
– Shariah Expertise
Conclusion
• Bracing up to the challenge
Thank you