by Chinq Yee Chong - Africa -

MICROCAPITAL STORY: Islamic Microfinance – What Next? Nigeria Promotes “Non-Interest” Banking

In a recent speech before the senate, Lamido Sanusi who is the governor of the Nigerian Central Bank (CBN) governor, emphasized that it is important to ensure that banks do not claim to offer Islamic banking products when they are in fact running a conventional banking business.

According to a report dated 14 June 2009 by Oluwaseyi Bangudu in the 234Next news portal, the CBN defines Islamic banking as “non-interest banking”. Furthermore, the CBN considers a non-interest bank to be a bank which carries out the business of banking, engages in trading, investments and commercial activities, and provides financial products and services in accordance with the principles and rules of Islamic commercial jurisprudence. Transactions that involve “interest; uncertainty or ambiguity relating to the subject matter, terms or conditions; gambling; speculation; unjust enrichment; or exploitation/unfair trade practices” will not qualify as Islamic-compliant transactions or products.

In March 2009, a framework for non-interest banking was released by the CBN. This was also reported on the 234Next portal on 13 June 2009. According to D.A.N Eke, the Acting Director of Banking Supervision at the CBN, “the objective of the framework is to provide minimum standards for the operation of non-interest banking in Nigeria while serving as an exposure for comments, suggestions and/or inputs by stakeholders”. Apart from Nigerian conventional banks in Nigeria such as Fin Bank Plc and Bank PHB, some microfinance banks such as Integrated Microfinance bank (IMFB) in Nigeria offer Islamic banking products.

Islamic-compliant banking products were introduced by IMFB in mid-2008 and three products are now being offered – the Ijara, the Musharaka Marana and the Musharaka Nasat. In each of these products, customers contribute funds and both the bank and the customer share in the profits from the product. According to IMFB’s profile on the MIX Market portal, IMFB was established in 2006 and has a gross loan portfolio of USD 24,465,673, total assets in the amount of USD 42,382,289 and a profit margin of 23.35% as at 30 September 2008. It has 23,305 active borrowers as at the same date. IMFB has been given a rating of 5-diamonds on the MIX Market portal.

The report by Oluwaseyi Bangudu goes on to state that industry analysts do not currently think that things will be “in place” in the near future to provide a suitable environment for the expansion of Islamic banking services in Nigeria as most Nigerian banks are still trying to avert losses and maintain a fair balance sheet.

Islamic-compliant microcredit products are not entirely new although it cannot be said that they are widespread at the moment. According to a report by Rahilla Zafar entitled “Islamic microfinance gains popularity in war-torn Afghanistan” on the INSEAD business education website, FINCA has been particularly successful in offering non-interest bearing Muharaba Islamic loans (credit agreements where sellers declare their cost and profit) to Afghan borrowers since it first started disbursing them in 2006. The country director of FINCA in Afghanistan, Paul Robinson, has said that the Muharaba products are not just better and more widely received than conventional loans but that the Muharaba practice is also better for business. “The advantage of Murabaha loans is that 100 per cent of the money goes into the business. When you do small business lending at Bank of America for instance and you are a small business, as a banker, I would give you a cheque with the name of the store, rather than giving the borrower cash to make sure all the money goes into the business,” Robinson says. He adds that Islamic products are not difficult to develop but an MFI that intends to supply such products must understand client needs and build delivery systems that such customers are comfortable with. Providing Sharia-compliant loans has allowed FINCA to expand in areas of Afghanistan where other MFIs have been turned away for charging interest. FINCA (Afghanistan)’s profile on the MIX Market portal shows that FINCA (Afghanistan) has a gross loan portfolio of USD 11,815,480, total assets of USD 22,603,830 and 63,571 active borrowers as at 31 December 2007. FINCA (Afghanistan) has a rating of 4-diamonds on the MIX Market portal.

A case study on “Islamic microfinance and socially responsible investments” was produced in 2005 by Chiara Segrado and is available on the Global Development Research Center website. This report discusses the key principles of Islamic banking and how these can be applied in the microfinance sector. Examples of Sharia-compliant microcredit products in Yemen and Mali are discussed briefly. Another report dated November 2008 by A. Frasca that is currently available on the Microfinance Gateway portal entitled “A Further Niche Market: Islamic Microfinance in the Middle East and North Africa” explores the possible expansion of Sharia-compliant microfinance in the MENA region by offering Islamic financial instruments to those who are reluctant to try conventional financial products. The paper also considers two case studies: the Sanduq project in Syria and the Hodeidah microfinance program in Yemen, both of which have been relatively successful. The author’s aim is to demonstrate that Islamic MFIs can compete with conventional MFIs in the MENA region and can more effectively meet the demand for religiously tailored financial services from lower income groups. The paper concludes by adding that the growth of Islamic microfinance in the MENA region will depend on the direction and scope of future regulation. In a similar vein, Hans Dieter Siebel who in April 2008 published the report “Islamic microfinance in Indonesia: the challenge of institutional diversity, regulation, and supervision” on the Journal of Social Issues in South East Asia, observed that forays into Islamic microfinance have been sporadic and scattered. The author suggested that Islamic rural banks and cooperatives in Indonesia can do more to promote a better understanding of Islamic microcredit products amongst potential customers. Improvements in management and governance within Islamic microfinance institutions is also likely to boost the Islamic microfinance sector in the country in the future.

It will be interesting to see whether Islamic law will be employed more extensively and innovatively to provide Sharia-compliant microfinance products to more Muslim borrowers around the world going forward.

By B Chong

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