IMPACT OF SHARIAH GOVERNANCE ON CBN GUIDELINES ON NON INTEREST BANKING SYSTEM: A CASE STUDY OF JAIZ BANK
1.1 BACKGROUND TO THE STUDY
The most recent and significant development in the banking industry is the emergence of Islamic Banking System and Interest-Free Banks (IFBs) in Nigeria through the CBN guideline on non interest banking. This is in response to the failure of the conventional interest based banking system to cater for the developmental needs of the country which also apply to other developing economies (Ahmed, 2000).
According to Adebayo (2010), many Muslims are not satisfied with the operation of the conventional interest-based banking system which is against the spirit of their religion and would have prefer a banking system within the Sharia governance framework. They are however incapacitated by the fear of exposing their money to risk of theft should they decide to keep their money at home, or the fact that their wages will be paid to them through the banks, or rather, some other unavoidable transactions with these conventional banks which do not operate in line with the dictate of Allah. Those who opted for current accounts with these banks still stand the risk of moving in the periphery of usurious transaction, as this product has percolated element of interest to customers as well.
The Central Bank of Nigeria recently joined other countries like Turkey, Jordan and Malaysia to come up with specific guidelines and regulations for the establishment of Islamic banks, with the difference that she (Nigeria) opted for non-interest banking just like Turkey which refers to it as “Special Finance House” and it’s within the framework of Sharia governance. This gives a sign of relief to the Muslims who were not satisfied with the transaction of the conventional banks, following the replacement of the Banking Law in Nigeria (Banking Act of 1962) with the 1991 Banks and other Financial Institutions Decree (BOFID), which came with the necessary framework for the establishment of Profit and Loss Bank in Nigeria. On March 4, 2009, another Draft Framework for the Regulation and Supervision of Non-Interest Banks (NIBs) in Nigeria was publicised. The objective of the Sharia governance framework is to provide minimum standards for the operation of non-interest banking in Nigeria. Among the issues discussed inguideline include:-
– Meaning of non-interest bank
– Licensing requirements
– Models of non-interest banking
– Non-interest financial instruments
– Corporate Governance
– CBN Shariah Council
– Conduct of Business Standards
– Profit Sharing Investment Accounts, (PSIA)
The independence of the supervisory board in the mission of supervision and the consistency of Shariah ruling can contribute to an efficient Shariah governance framework. The confidence on part of the stakeholders in the product of the Islamic financial institutions generally and the Islamic bank in particular will be enhanced with the existence of an efficient Shariah governance framework. (Hamza, 2013).
The concept of Islamic Banking and Interest-Free Banking are synonymously used in Islamic Economics literature as an alternative banking framework to the interest-based conventional banking practice. Although in technical terms, there is a difference between an interest-free bank and an Islamic bank but they are sometimes used interchangeably. Ahsan (1988) defined an Islamic bank as “a financial and social institution whose objectives and operations as well as principles and practices must conform to the principles of Shariah and which avoid the use of interest in any of its operations. It stands for an alternative financial system based on Islamic ideals. It is not only a financier but also a partner in productive economic development”.
While stating the difference between Islamic Banking and Interest-Free Banking, Gusau (2000) argues that “Islamic banking system is supposed to operate completely within the Shariah in all its activities both in sourcing of funds and disbursement of the funds. It not only avoids interest in all its ramifications but also it avoids all other Islamically prohibited activities. Interest-free banking system on the other hand, does not engage in interest but there is no reason to suppose that all its other activities will be done strictly according to Shariah”.
From the above, three things have become clear, namely: Islamic Bank must;
1) Charge no interest
2) Conform to Shariah principles in all its operation
3) Promote Islamic ideals