A Presentation by Dr Bashir Aliyu Umar Special Adviser to CBN Governor on NonInterest Banking at the TwoDay NDIC FICAN Workshop 2011 held at Dutse Jigawa State 2829 Nov 2011 Introduction to Islamic Finance ID: 675056
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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 2011Slide2
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 Non-Interest (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 ARMSlide3
Intermediation in Conventional Banks
Assets Liabilities
Depositor
Conventional Bank
Borrower
Interest
Interest
Saving/Investment
LoanSlide4
Intermediation by Islamic Banks
Assets Liabilities
Depositor/Investor
Islamic Bank
Client
Profit on sales, lease/Profit sharing/Commissions (agency, services)
Gift/Profit Sharing
Deposit/Investment
Financing/Investment
Wadi’ah
,
Qard
,
Mudarabah
, CMD
Mudarabah
,
Musharakah
,
Murabahah
, Salam,
Istisna
,
IjaraSlide5
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.Slide6
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
.Slide7
Main Differences between Islamic and Conventional Finance
Conventional
Finance
Islamic Finance
Characteristics
Interest-based financing with a fixed or floating rate of interest charged for the use of money.
Financing is not interest-based but is asset-backed and based on
generating a
profit from
sale
of an asset or its usufruct.
Interest-based financing
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.
Deposits are not interest-based 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
Interest-based deposits
Interest-bearing
securities like government bonds
Asset-backed investment products like
Sukuk
(Islamic bonds) and other
shariah
-compliant investment certificates.
Investment productsSlide8
Conventional Finance
Islamic Finance
Characteristics
Not generally offered but available through venture capital companies and investment banks.
Normally they participate in management as well.
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.
Equity Financing with Risk Sharing
Permissible
charge for late payment or default.
No extra money is charged as penalty for payment default
Penalty on Default
There are no such restrictions
Dealing in unlawful
goods and services like alcohol, pork, pornography prohibited
Restrictions
Trading in any kind of derivative/futures involving speculation is allowed.
Conventional insurance is allowed.
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
Prohibition
of
Speculation
(
Gharar
)
and
Gambling (
Maysir
)
Main Differences between Islamic and Conventional FinanceSlide9
Conventional Finance
Islamic Finance
Characteristics
There is no such requirement.
Only financial audit
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
Shariah Supervisory Board
Main Differences between Islamic and Conventional FinanceSlide10
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.Slide11
Practice of Islamic Finance in Nigeria
Challenges
Asset Liability Mismatch and absence of Shariah-compliant liquid investment instruments
Activities in other jurisdictions, CM, Short-term
Sukuk
Treatment of Profit Sharing Investment Accounts (PSIA)
Deposit InsuranceTax treatment of Islamic finance products
Shariah ExpertiseSlide12
Conclusion
Bracing up
to
the challenge
Thank you