Islamic Banking in Nigeria

Islamic Banking in Nigeria

Islamic banking in Nigeria

Nigeria has a significant Muslim population of about 46% and has witnessed the emergence of major banks offering Islamic banking in Nigeria. For those intrigued by the Islamic banking landscape, understanding its unique features and principles is essential, as it can help align your financial goals with your personal beliefs.

This article aims to provide a clear overview of the core principles and prohibitions governing Islamic banking under Sharia law. We will also highlight the top banks that offer Islamic banking services, delving into their products and offerings.

Furthermore, we will explore the tangible benefits of Islamic banking compared to conventional banking systems, offering a comprehensive understanding of why it may be a preferable choice for your financial needs.

Principles of Islamic Banking Under Sharia Law

Several fundamental principles guide sharia-compliant finance. First, Islamic law is cautious about lending arrangements involving interest payments, as it favors the lenders and deems the practice of charging excessive interest, known as Riba, exploitative. Instead, Islamic banks earn profit through profit-sharing and asset-backed financing arrangements.

The Islam kaw also believes in the sharing of financial risks and rewards of transactions. This fosters mutual responsibility as business ventures, investments, and other financing arrangements are shared.   

In addition, Sharia finance is deeply committed to investing in businesses or industries that align with Islamic ethics and values. This makes Islamic banks avoid investing in activities considered Haram (forbidden), such as gun manufacturers, gambling dens, or producers of forbidden/harmful foods like pork and alcohol. 

Furthermore, under the concept of maysir, speculative investing is considered a violation of Sharia law. This encompasses gambling or entering into contracts that generate wealth based on uncertain future events. Sharia law perceives wealth accumulation through chance as unproductive and incompatible with its principles. 

For a bank to be considered Sharia-compliant, it must adhere to Sharia laws such as avoidance of riba, risk sharing, asset-based banking, ethical investments, and other core Islamic finance principles.   

Major Banks Offering Islamic Banking Products in Nigeria   

Now that we’re clear on Islamic banking principles, let’s go over the major Sharia-compliant banks offering Islamic banking services in Nigeria.   

1. Jaiz Bank Plc

Jaiz Bank, established in 2003, is a non-interest bank in Nigeria that offers a range of financial products and services that comply with Sharia law.  

Offerings

Jaiz Bank offers a wide range of banking services tailored to meet various needs, and they include 

  • Personal banking: Jaiz Bank provides personal banking services, including Current Accounts (Qard), Savings Accounts (Mudarabah), Kids’ Accounts (Mudarabah), Premium Savings Accounts (JAPSA), Auto Finance (Murabaha), Household Appliances Finance (Murabaha), General Consumer Finance (Murabaha), Home Finance (IjarawaIqtina), and Ijara Services. These accounts operate on the Mudarabah principle, a profit-sharing partnership between the bank and the customer. 
  • Corporate banking: For businesses, Jaiz Bank offers a range of corporate banking services, including Jaiz Wakala Investment, Working Capital Financing (Murabaha), Project Financing/Construction (Istisna’), Lease to Own (IjarawaIqtina Corporate) finance, Ijara Service Corporate, Equity-Based Finance (Musharaka), and Bonds and Guarantee (Wakala/Kafala). 
  • Trade finance: If you’re involved in import/export business, Jaiz Bank provides solutions such as Import Finance (Murabaha) and Export Finance (Murabaha). 
  • Special support facility: Additionally, Jaiz Bank offers a special support facility that includes the Jaiz Premium Savings Account (JAPSA) Term Deposit. This innovative investment product allows customers to earn higher profits on their deposits, making it an attractive option for those seeking to grow their savings.  

2. TajBank

TajBank promises to be Nigeria’s most innovative non-interest bank. This bank focuses on being a forward-thinking institution, leveraging the power of technology to its users, and expanding the presence of the industry in Nigeria.   

Offerings  

Jaiz Bank provides a comprehensive range of banking services tailored to various customer segments: 

  • Private banking: Their private banking services encompass a suite of offerings, including Wakalah (Agency) Investment Services (WIS), Mudharabah (Partnership) Time Deposit, Sukuk Investment Service, and Domiciliary Account Services. 
  • Retail banking: To meet the evolving needs of retail customers, Jaiz Bank offers seamless services through innovative technology solutions like the MyTaj Mobile Banking App. Their non-interest products in this category include Savings Accounts, Rubies (Children) Accounts, Partnership (Mudharabah) Savings Accounts, Payroll Current Accounts, MFT – Murabaha for Traders, Youth Accounts (Vibe), Lease (Ijara) Finance, Domiciliary and Cost Plus (Murabahah) Asset Finance.  
  • Business banking: For businesses, Jaiz Bank offers a bouquet of non-interest finance products, including Cost Plus (Murabaha), Import Finance for Business Imports, Lease (Ijarah) Finance, and Construction/Manufacture (Istisna) Finance, among others. 
  • Public sector: Jaiz Bank supports government operations and processes. They offer sustainable value through services such as TAJ Corporate Current and TAJ Sole Proprietorship to cater to various public sector needs. 

3. Lotus Bank   

Lotus Bank is a non-interest bank rooted in ethical banking, investing, and prosperity.   They offer smart banking, e-banking, e-naira, and special products like Sukuk (certificates of equal ownership in tangible assets).  

Offerings  

  • Individual and business funding: Lotus Bank offers financial solutions to individuals and businesses. These financing options encompass various contract types, including equity-based, fee-based, sale-based, and lease-based contracts. 
  • Accounts and deposits: Lotus Bank offers various account and deposit options, including current accounts, savings accounts, and term deposits. These accounts adhere to the Mudarabah principle, establishing a profit-sharing partnership between the bank and its customers. 
  • USSD banking: For added convenience, Lotus Bank provides USSD banking services, enabling customers to perform many tasks, such as checking balances, settling bills, transferring funds, withdrawing cash, and more. 
  • Car financing: Lotus Bank facilitates car financing solutions, allowing customers to acquire new or pre-owned vehicles from reputable dealers. These car financing solutions revolve around competitive and affordable monthly rentals or repayments. 
  • Sukuk: They offer “certificates” of equal value representing common shares in ownership of tangible assets, usufruct, services, or (in the ownership of) the assets of a particular project or a specific investment activity. 

4. Sterling Alternative Finance   

With Sterling Bank’s Alterative Finance subsidiary, customers can now operate with Sharia-compliant transactions.  The bank has taken lengthy steps to ensure its alternative finance options are designed to align with ethical and Sharia guidelines.  

Offerings   

  • Alt Drive: Alt Drive represents a car financing solution that empowers customers to acquire new or used vehicles from certified dealers. 
  • Alt Power: With Alt Power, customers can access a financing solution to purchase solar panels and other renewable energy products. 
  • Investment platform: Sterling Alternative Finance has introduced an investment platform focused on the real sector of the economy, dedicated to assisting its partners in creating a meaningful impact. 
  • Savings and current accounts: Sterling Alternative Finance offers savings and accounts operating on the Mudarabah principle, establishing a profit-sharing partnership between the bank and its customers. 
  • Consumer and business financing: Sterling Alternative Finance provides financing solutions for individuals and businesses, employing equity-based, fee-based, sale-based, and lease-based contracts. 

5. Stanbic IBTC Bank Shari’ah   

Stanbic IBTC Bank provides Islamic financial products, including savings accounts, current accounts, and home finance solutions tailored to Sharia principles.  The bank also has a mutual fund, ‘The Stanbic IBTC Shari’ah Fixed Income Fund’, which is aimed at providing ethically minded investors with liquidity by investing in quality Shariah-compliant securities such as Sukuks and other eligible fixed-term contracts.   

Offerings  

  • Shari’ah fixed income fund: The Stanbic IBTC Shari’ah Fixed Income Fund is a mutual fund designed to cater to ethical investors. Its primary objective is to offer liquidity and competitive returns by investing in high-quality fixed-income securities. 
  • Money market fund: The Stanbic IBTC Money Market Fund is structured to achieve two key goals: stable income generation and capital preservation. This is accomplished by directing 100% of the portfolio assets towards investments in top-tier short-term money market instruments. 
  • Transactional products and services: Stanbic IBTC Bank Shariah offers clients an extensive range of cash management, conventional, and unconventional transactional products and services to meet their financial needs. 
  • Islamic banking platform: Stanbic IBTC Bank Shariah presents an Islamic banking platform that provides Shariah-compliant products, processes, and services. These offerings are aligned with Islamic principles and deliver effectiveness, efficiency, and competitive pricing for customers. 

6. Sun Trust Bank   

Sun Trust makes significant efforts to tailor their Islamic banking offerings to meet the diverse financial needs of individuals and businesses in Nigeria while ensuring strict adherence to ethical and Sharia-compliant principles.  

Whether it’s savings accounts, current accounts, home finance, or trade finance, customers can access various financial products and services that align with their values and beliefs. 

Offerings   

  • Conventional banking services: Conventional banking services encompass a diverse array, including personal, SME, corporate, and agribusiness banking.  
  • Non-interest banking services: It encompasses different offerings such as the Ihsan Current Deposit Account, Ihsan Savings Deposit Account, Ihsan Term Deposit Account, Ihsan Murabaha Financing, and Ihsan Ijarah Muntahia Bi Tamleek Financing (LEASE TO-OWN).  

Differences Between Islamic Banking and Conventional Banking

Against popular belief, Islamic banks are not exclusive to Muslims. With banks like TajBank opening their service to all tribes, religions, and ethnic groups, the system is a major contender to the established conventional banking we’ve all learned.   

At their surface level, both systems are similar in offering the basic products one would expect from a financial institution: Services like savings and current accounts, loan disbursements, mutual funds, card holding, etc.   

However, the differences became more evident with the introduction of Sharia-compliance to Islamic finance. Thereby providing unique features and benefits that align with the ethical and moral principles.   

Here, we will highlight the differences between conventional and Islamic accounts.  

Islamic BankingConventional Banking
Riba-free earnings Deposits are invested in Sharia-compliant ventures, and profits are shared between the bank and the account holder. Account holders receive fixed or variable interest rates, often subject to market fluctuations. 
Risk and reward sharing Promotes profit-sharing arrangements, fostering fairness and mutual responsibility.  Account holders receive predetermined interest rates regardless of bank profitability or investment performance. 
Interest rates  Avoids interest-based transactions and overdraft charges, operating on a fee-based structure. May involve overdraft fees and interest charges on negative balances in current accounts. 
Charges Committed to transparency, clearly communicating fees to account holders. May impose hidden fees or interest charges, making it challenging for account holders to understand the true cost of banking services. 

Challenges of Islamic Banking in Nigeria  

Although Islamic banks like Jaiz Bank have been present in the country for over a decade, the Islamic finance industry is still in its infancy. Like many other countries, the industry faces several challenges as it seeks to establish and grow within the financial industry. Such challenges include 

  • Regulatory framework:  While Nigeria’s central bank has made efforts to create guidelines for Islamic finance, there remains a need for a more robust and specific regulatory framework to ensure consistency and clarity in Islamic banking practices.   

In an interview with Business Day, co-founder of TajBank, Hamid Joda, spoke on the This is a major problem, and even though the CBN has developed some instruments, a lot more work needs to be done. Concerning opportunities, Nigeria is a huge market, and people are yearning for non-interest banking because of the zero-interest-based financing model, adherence to fair practices, and certainty in all transactions.   

Hamid Joda, Co-Fonder TajBank
  • Lack of Awareness:  A lack of awareness and understanding of Islamic banking principles among the Nigerian population is a significant hurdle. Many potential customers and businesses are unfamiliar with the concepts and benefits of Islamic banking, leading to a reluctance to adopt these services.  
  • Human Capital Development: Developing a workforce with expertise in Islamic finance and Sharia compliance is essential but challenging. There’s a need for specialized training and education in Islamic banking to ensure that professionals are well-equipped to meet the industry’s demands.  
  • Liquidity Management: Managing liquidity consistent with Islamic principles can be complex. Islamic banks must ensure that their funds are deployed in Sharia-compliant investment opportunities, which can sometimes be limited.  

According to Joda,” the biggest challenge of the industry today is the dearth of liquidity management instruments in the sector. There are several instruments, including but not limited to bonds, treasury bills, open market operations, robust interbank market, and a host of other instruments for the conventional banks, but for non-interest banks, beyond the FGN Sukuk, there are no other significant instruments to manage liquidity.”  

  • Limited ATMs and Bank Branches: Due to its low penetration in Nigeria, there’s a significant lack of presence in the everyday workings of normal Nigerians. The amount of brick-and-mortar buildings for direct customer service and ATMs for money withdrawal. , making customers   

Rounding Up    

Despite these challenges, Islamic banking in Nigeria continues to grow and evolve. Regulatory bodies, financial institutions, and stakeholders are actively working to address these issues and promote the development of a robust and vibrant Islamic banking sector in the country.  

More Sharia-compliant banks are popping up, and the masses are becoming more aware of the industry and its benefits. If you prioritize ethical and Sharia-compliant financial solutions that resonate with your values and beliefs, Islamic banking may be your right choice. It offers a financial ecosystem where responsible conduct and ethical principles take center stage.  

FAQs

Is Islamic banking legal in Nigeria?

Yes, Islamic banking is permitted in Nigeria. By setting favorable rules, the Central Bank of Nigeria (CBN) has made it easier for Islamic banking to grow. The CBN has permitted Jaiz and Taj banks to be full-fledged Islamic banks, while Sterling Bank and Stanbic IBTC can offer Islamic banking services alongside their regular services.

What are the challenges of Islamic banking in Nigeria?

Numerous obstacles hinder the growth of the Islamic banking system in Nigeria. These include misconceptions about the system, a lack of connections and investment institutions, insufficient understanding, and the pervasive issues of unethical business practices and corruption in the country.

What are the main prohibitions of Islamic banking in Nigeria?

Three main prohibitions guide Islamic banking. Firstly, it strictly forbids charging interest on loans or deposits, known as Riba, considering it both illegal and unethical. Instead, it encourages profit and loss sharing among investors, financial intermediaries (banks), and entrepreneurs.  

Secondly, it prohibits Gharar, which denotes excessive uncertainty or risk in financial transactions, as it can lead to exploitation and injustice. To address this, Islamic banking promotes transparency and clarity in financial dealings.  

Lastly, Islamic banking prohibits Maysir and Qimar, which refer to gambling and speculation, due to their association with high levels of risk and uncertainty. Instead, it encourages investments in tangible assets and productive economic activities.

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