Islamic banking originated from Pakistan and Egypt. Islamic banking is very common in Arab countries and in the Northern states of Nigeria. This type of banking differs from the Western form of banking. However Islamic banking is of related purpose to other forms of banking except that it operates using Sharia rules known as Figh al-Muamalat (rules for Islamic transactions). One basis principle of Islamic banking is the sharing of profit and loss and the prohibition of the rate of interest. Notable concepts in Islamic banking are safekeeping (Wadiah), joint venture (Musharakah), cost plus (Mubarahah), leasing (Ijarah), profit sharing (Mudharabah).
Features Of Islamic Banking
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- Musharakah (Joint venture): This financial technique is one in which the capital owner provides finances investments in the business of another party. Extra finance is provided to the party which may be an individual or group that already have some funds for investment. The provider of the finance makes additional funds available with a condition of sharing profits realized in the business. The ratio of sharing between the provider of the finance and the party receiving additional fund is fixed and pre-determined and this is made known to all concerned. There is also sharing of loss according to the proportion of the capital invested.
- Mudharabah(Profit sharing) : This financing technique is the one in which the owner of the capital makes funds available to the capital user for some productive activity on the condition that the generated profits will be shared between them. Here, the capital owner bears the loss incurred in the normal process of the business and due to misconduct or neglect by the capital user. Both parties know the predetermined and fixed ratios for the sharing of profit. This technique is similar to Musharakah since there is both sharing of profits in both and the provider bears the losses of the investments. Islamic banks have a norm which is to access the profitability of a project, back projects with higher profit rates and this is taken to be safest and most beneficial for the society.
- (Ijarah) Leasing: This is a financial technique in which an individual who is short of funds may approach another with a surplus who is referred to as the financier in order to fund the purchase for the productive asset involved. The financier can do this by renting or buying it out to the one who needs the asset. This enables the investor to overcome the financial difficulties that has to do with purchasing the required asset. He does not incur the capital investment involved in the purchase of the asset.
- Ijarah wa l iqtina(Higher Purchase): This has to with a higher purchase agreement between the clients and its banks. In this case, the bank agrees to rent or buy a building, equipment or other facility for the client in union with the undertaking that is signed by the client to make incremental payments into an account. Profits are added to the paid installments at the end of the year in order to purchase the facility or equipment. The owner of the financed equipment becomes the client and that is the end of the contract.
- Bai ’al Mu’ajjal (Deferred Payment): There is immediate delivery of goods, inputs or implements while the agreed price is paid by the purchaser at a particular date in the future. The component of the price include the cost, plus the reasonable margin that covers the administrative costs. Example is that if a farmer sells inputs to farmers on a deferred basis, then the transaction is seen as a sale and not a loan. There is provision for the sale of goods for cash or credit on the condition that the price upon the agreement between the parties at the time of the bargain is not changed even if payment is not made when due.
Advantages Of Islamic Banking
- Reduction on bank exploitation by charging interest: Exploitation by banks due to charging of interest is reduced since Islamic banking uses the non-interest banking technique. The charging of interest by conventional banks have been noted as exploitative and the Islamic banking system is seen as a better option.
- Attraction of idle money: A lot of Muslims do not see saving money in conventional banks as a worthwhile option, but now that there is Islamic banking, they will now be encouraged to utilize idle money into meaningful ventures.
- Promotion of employment: This happens due to its mode of operation giving the investors more chance to get access to direct financial opportunity. This to an extent promotes employment. It provides better opportunities to businessmen.
- Promotion of the Nigerian economy through non-interest banking: A lot of economic proposals to better the economy of Nigeria have encouraged Islamic banking methods as an instrument to promote the economy of Nigeria. Non-interest banking will deepen the financial market. This allows a large portion of Nigerians to engage to actively participate in economic development owing to its nature and ability to offer an array of products that can take care of the financing needs of the Nigerian public.
- Adoption of asset-backed finance: This method has to with the transfer of funds and this is not based on making money from money alone as obtainable from interest-driven transactions. Ijarah (Leasing) and Musharakah (Joint venture) are examples.
Problems Of Islamic Banking In Nigeria.
- Inefficient Support From Central Bank: The Islamic banking system in Nigeria is yet to receive effective support from the Central Bank Of Nigeria. This have reduced the impact of this banking system on the Nigerian economy
- Low Western Patronage: Banks like the World Bank are not yet given proper assistance to the Islamic banking system as they give to conventional banks. This also has an effect on the Islamic banks in Nigeria.
- Legal Factor: The Banking Decree preventing banks from using direct Islamic names as bank names has also diminished the increase of Islamic banks in Nigeria as banks that want erupt using an Islamic name will find it difficult. Most Islamic banks in Nigeria operate without using an Islamic name.