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Let me say from the outset, that this week’s write-up is from the perspective of a financial lawyer. This is all the more so for the technical nature of the subject matter, and the need for wider public education about it. In a novel capital market move last week, September 29, 2020, Jaiz bank’s floating of N13bn “private placement” barely made the headlines except for a cursory mention in a couple of dailies. This is probably because it has become run-of-the-mill, or that the public just does not give a hoot. Neither of these is true in essence, although it is fair to say that Jaiz bank is no longer associated with the more common label, ‘Islamic bank’, even if that is what it actually is. It is also rational to eschew the label given that a host of other banks in the high street are being fronted by people of the Christian faith, but none of them is tagged ‘Christian bank’. Islamic banking has only really gained currency in mainstream finance fairly recently, starting with the opening of the first of such banks in Dubai in 1975. Its presence now (in over 70 countries), is a reflection of the growing confidence and financial power of majority Muslim states around the world, but most notably in Asia and the Middle-East.
Nigeria, with a substantial Muslim population, but ethnically diverse, is avowedly a “secular” state by design. Bizarrely though, it is a member of the Organisation of Islamic Cooperation. Fifty three of its 57 members are majority-Muslim states. Those who pushed for Nigeria’s membership of the OIC despite its secular constitution, point to the country’s membership of the Commonwealth countries and their Anglophone worldview, and the need to counterbalance that with the OIC with its Islamic worldview. The former fervently believes in interest (riba) as an equitable reward, the latter does not.
The first thing that should strike the reader at this juncture is, how come people are not rushing down to Jaiz bank in a stampede for their allocation of interest-free loans? After all, mainstream commercial banks in this country are notorious for the exorbitant interests they charge on loans (22% on average, though the Central Bank of Nigeria guidelines are considerably lower). How come any bank dares throw money at people with no obligation to pay interest? Why, ipso-facto, is Jaiz bank not found on every corner of the major towns and cities in Nigeria, dishing out well-needed cash to businesses struggling with crippling interest rates? Well, Jaiz bank or not, Islamic finance or not, it is still the power of market forces, is it not? And, you guessed it, there is no such thing as a free lunch in capitalism. That begs the curious question as to how non-interest banking survives and even thrives in the dog-eat-dog world of finance and capital accumulation. Let us remember, 20% of the world’s population is of the Islamic faith, and less than one per cent of global securities (in the capital markets) are Sharia-compliant. Total Sharia-compliant products in the world are under $2tn so, there is a considerable scope for growth in that sector. Still, how does a bank that charges no interest recoup its investment? One thing for sure is, unlike teachers, Islamic banks are certainly not hoping for their rewards in heaven.
First, let us examine the content of the Jaiz bank’s “private placement”. What exactly does that entail? The answer is, it is simply another way of saying offer of shares. Public offer involves the issuance of fresh shares not to the ‘public’ at large (contrary to what the layman might assume), but to a wide group of institutional investors. “Private placement” is simply a different type of offer made to a smaller group of institutional investors say, a dozen or thereabouts. And, it is called a ‘placing’ where only a handful of institutional investors between them will take up the whole issue either to keep or sell-on. Jaiz bank says they are doing this in order to generate capital that they plan to invest in small and medium-sized enterprises. They are also doing that, I would add, because it is cheaper and cost-effective. The businesses so benefited will, of course, turn in tangible profits for the bank. Jaiz bank wants to be the “leading non-interest financial institution in sub-Saharan Africa”, according to its Managing Director, Hassan Usman. Judging by the bank’s recent profit forecast of N600m after tax, it is on track to fulfil that goal. So far, so good, it seems. Why then is the bank not expanding more rapidly, scooping up new customers along the way? It is because Islamic finance has strict limits to the type of business they extend funding to. Speculative markets (gharar), brewing, gambling industries, entertainment and a host of others are excluded. Furthermore, all investment packages have to be vetted and approved by an Islamic board of scholars. And, these scholars do not always subscribe to the same doctrinal interpretation of Sharia law. It goes with the territory; lawyers, by nature, often draw different inferences from similar facts in front of them. The lack of uniformity is a hindrance to the development and growth of Islamic finance as Muslims in different regions do not always accept products sanctioned under a different interpretation of Sharia.
In respect of making money, Islamic banking is more in tune with asset finance. Rather than make loans like the typical high street bank does, they fund the assets for customers by buying them, then, selling (either simultaneously or later) back to the customer for payment at an agreed date with a “mark-up” (murabaha), generating a healthy return for the bank. Islamic banking is somehow insulated from the credit crunch afflicting the market in bad times, but it needs a much larger pull of customers to sustain growth. So, is there an attempt to ‘Islamise’ the country where Islamic banking operates? The answer is of course No! That is even an absurd suggestion by any objective assessment. Does it promote Muslim ‘brotherhood’ and potentially augment tolerance of the Islamic faith? Of course, it does. And, why not? Christians too have (or used to have) a phobia for moneylending. Jesus Christ threw out the moneylenders from the Temple, remember? Besides, interest-free banking is only ‘Islamic’ in a limited way. Interest-free finance of consumer goods has been a major way of boosting sales in high street malls for half a century in Western economies. Even the Sharia idea of prohibition on investment in ‘non-Islamic’ products is not exclusive to the Muslim faith either.
‘Ethical’ investors in Western economies also create their own list of contraband items. Apartheid South Africa suffered from international boycott of its manufacture exports for decades, Iran currently suffers from a wholesale boycott of its international trade initiated by the Trump administration in America, with third party consequences. What Islamic banking struggles with more than anything, is image, underlined by the irrational fear that any wealth accumulated in its name might be diverted to further the cause of religious fundamentalism at some unfathomable point in the future.Or, in the case of Nigeria, to ‘Islamise’ the country. No such thing is ever possible while Nigeria remains. Money, it is said, is the root of all evil. That too is a shared belief across all religions. It has taken a while before Islamic banking became rooted on the Nigerian soil. It is actively encouraged across Western markets where there is no immediate fear of Islamisation, and frankly, where non-interest banking is less beneficial to the populace. It is treated with apprehension here in Nigeria, ironically, where there is a greater need for such, and apprehension because Islam remains a political, and not a religious philosophy.
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