Non-interest banking gains mass appeal, converts
Eight years after Non-interest banking started in Nigeria, the idea is fast catching on as corporate entities both public and private are developing financial products and services to attract Nigerians. Assistant Editor NDUKA CHIEJINA looks at that journey so of non-interest banking
Non-interest banking in Nigeria is a relatively new concept that is fast gaining mass appeal and converts. Non-Interest banking is an alternative financial service to conventional banking services available to all irrespective of religious inclination.
It is a growing global financial services experience that can be found in many countries and institutions across the world, including the United States of America, China, United Kingdom, Canada, South Africa, Kenya, Singapore and Malaysia. HSBC, Citibank and Barclays Bank are among the list global banks that have embraced non-interest banking products and service.
A distinguishing factor between Non-Interest (Islamic) banking and conventional banking practices is that non-interest Islamic banking is based on adherence to the Sharia or Islamic law. It offers services, products and instruments based on compliance to Sharia law.
Such institutions do not give or receive interest nor finance anything that is against certain religious practices like the sale and consumption of alcohol, tobacco and gambling. They also avoid speculation, extreme uncertainty and deceptive trades while upholding the precepts of rewards, equity, fairness and justice.
Sharia prohibits payment or acceptance of interest charges (riba) in financial transactions, as well as carrying out trade and other activities that provide goods or services considered contrary to its principles.
Money in Islam is viewed purely as a medium of exchange and under Sharia law, administering interest can lead to injustice and exploitation.
Non-interest banking is fast becoming attractive to individuals and corporate bodies because it offers a captive market of about 50 per cent of Nigeria’s population many of whom are outside the banking space.
The attraction to non-interest banking is hinged on its philosophy of ethical banking services which provide for socially responsible investment outlets and the orientation that both the bank and its customers share profit and loss. Besides, the mode of financing is mostly on mark-up, rent, leasing and partnership basis.
Jaiz Bank leads the way
Jaiz was incorporated in April 2003 as a Special Purpose Vehicle (SPA) called Jaiz International Plc. It was granted an operating licence on the 1st of November, 2011 and commenced full Non-interest banking operations in January 2012.
Jaiz Bank PLC is a publicly quoted national bank owned by over 26,000 shareholders spread over the six geo-political zones of Nigeria. In the eight years of the bank’s existence, its balance sheet has grown from N12 billion in 2012 to about N62 billion, with asset financing of over N30 billion.
Nigeria’s premier Non-Interest Bank in Nigeria started with a regional license obtained from the Central Bank of Nigeria to operate in the Northern part of the country but quickly became a National Bank on May 12, 2016 with presence in all the geopolitical zones of the country.
The Managing Director of the bank, Mallam Hassan Usman, said the bank operates ethical and non-interest banking according to Islamic tenets, however, the bank’s products are open to all Nigerians irrespective of religious leanings.
According to him, “we are the face of a new concept in banking. One important point we will continue to emphasise is that Jaiz Bank products are not religious products. They are open and available to all, irrespective of their faith or religion.”
JAIZ bank, he said, does everything other banks do and is regulated by the Central Bank of Nigeria. “The only thing that separates us from conventional banks is that there are ethical principles which we believe that bank and customers must meet before transacting business. For instance, Jaiz bank will in no way open an account or transact business with a beer-brewing company or a manufacturer that is into pig rearing or gambling business.”
On the bank’s partnership model, Usman explained that “it is a mode of financing that tries to address human needs directly by providing goods and services on a payment basis different from conventional banking that we know.
“Literarily, that is what non-interest or Islamic banking is doing anywhere in the world. It is about providing financing to people who cannot afford to buy directly with their resources at a time.
“So, rather than give money, we provide the services and goods people are looking for to meet their consumption needs or businesses. We have seen from our operations so far that all manner of persons come to us and we do business with them. This, I believe, is what we have been doing.”
Jaiz bank has a balance sheet size of N152 billion (as at September 31, 2019) from N12 billion in 2012. Its financing assets have grown from over N30 billion in 2012 to N138.84 billion (as of September 31, 2019). As at the end of the third quarter of 2019, Jaiz Bank made a Profit After Tax of N1.25 billion.
Other critical parameters such as customer deposits, branch network and profitability have also been growing year-on-year since inception.
The bank employs three methods of making profits, firstly, through buying and selling; that is, it buys an asset and sells at a profit. Because of their nature, Islamic Banks are the only institutions authorized to engage in trade.
Secondly, the method is through leasing. Under the leasing arrangement, the Bank can finance a factory’s need for equipment and machinery and then lease out the same on a rental basis.
The third profit-making mechanism the bank uses is through partnership. Here, it can go into partnership with either an individual or corporate body on a joint venture which is based on a pre-agreed profit and loss sharing formula. Under this arrangement, both parties can jointly contribute capital to a business and then share profit or loss based on agreed ratios.
As a partner, “an Islamic Bank will simply buy the product and sell to the importer at a mark-up. It can also go into partnership with a Real Estate developer, build houses, Industrial Estates, etc, and share in the profit according to an agreed proportion.”
Evidence of a growing interest in Non-interest banking manifested when Jaiz Bank broke-even in its third year of operation and graduated from a regional to a national bank with branches increasing from three at the start of operations in 2005, to 39 branches spread across most of the six geopolitical regions in the country.
The bank recently released its 2019 audited results for the period ended December 31, 2019, declaring a Profit After Tax (PAT) of N2.4 billion. This represents a massive leap of 193 per cent from N834.4m realized in the corresponding period of 2018.
In the report submitted to the Nigerian Stock Exchange (NSE), the Bank declared a 135 per cent growth in Profit Before Tax (PBT) for the period under review from N879.7 million as at December 31, 2018 to N2.1 billion as at December 31, 2019.
Key extracts of the report showed that Gross Income grew by 80 per cent to N13.5 billion as at December 31, 2019 from N7.5 billion in the previous year, while the Bank’s Total Assets also grew by 54 per cent to N167.27 billion from N108.46 billion. Attesting to the increasing public interest in Islamic finance products, earning per share surged up to 8.30 as against 2.83 kobo in 2018, signifying an increase of 193 per cent.
Commenting on the impressive performance, Usman said: “The major driving force was the deliberate efforts to satisfy our customers, who were evident in the significant growth in the deposit base and risk asset portfolio.”
During the year under review, the bank deepened its support for the MSME sector with targeted intervention to meet the diverse needs of promising small-scale entrepreneurs. The bank also made banking comfortable for its customers by investing in IT infrastructure and improving its E-banking channels.
Islamic banking meets conventional banks
The business potential for a Non-Interest Bank in Nigeria is enormous. Jaiz Bank’s strategic business focus is mainly in retail banking, though it offers corporate and commercial banking services.
The bank’s retail focus enables it to service a large number of Nigerians who don’t want anything to do with Riba (the lending of money at an exorbitant rate of interest) in their daily activities.
Banks usually make a profit from the buying and selling of approved goods and services, so banks and financial institutions trade in sharia-compliant investments with the money deposited by customers, in the end, sharing the risks, and profits between them.
Non-interest/Islamic banks are structured in such a way that they retain a differentiated status between shareholders’ capital and clients’ deposits to make sure profits are shared correctly.
Although they cannot charge interest, the banks can profit from helping customers to purchase a property using an ijara or Murabaha scheme. With an ijara scheme, the bank makes money by charging the customer rent; with a Murabaha scheme, a price is agreed at the outset which is more than the market value. This profit is deemed to be a reward for the risk that is assumed by the bank.
Under the conventional interest-based system, deposits are taken as loan from customers to the bank and a fixed return is guaranteed to depositors regardless of the performance of the institution. Islamic banks, on the other hand, receive deposits to invest them on behalf of depositors and shareholders, and the profit is shared between depositors and shareholders.
Conventional banks give loans at a fixed rate without any risk on their part while under Islamic banking system, the bank shares the profits and losses from investment and bears the risk of investment.
Non-interest or ethical banking as it is called has become so popular that government agencies are now embracing the concept and adapting it to suit their needs. Last week, the Central Bank of Nigeria (CBN) announced that it will integrate Non-interest window in all its intervention programmes, particularly the Anchor Borrowers’ Programme (ABP) and the Targeted Credit Facility (TCF) to support households and Micro, Small and Medium Enterprises (MSMEs) affected by the COVID-19 pandemic.
This Non-interest based intervention of the CBN will start from the Northeast and Northwest before moving to other parts of the country.
Aside from the CBN, some corporate institutions have adopted a sharia-compliant product as a tool for meeting their financial needs. The Debt Management Office (DMO) has raised three tranches of Sukuk bonds for the financing of road infrastructure across the country. The Osun state government some years back raised Sukuk bonds to fund some infrastructure projects in the state.
Some private sector operators have joined the Non-interest bandwagon. These include Sterling bank, Taj banks, Lotus Capital, Noor Takaful, Cornerstone and Leadway Insurance Companies, Tijjara Microfinance bank, Zenith Bank and Stanbic IBTC which recently closed its Islamic banking window.
In insurance, the Nigeria Insurance Commission (NAICOM), the sector regulator has granted operating licenses to two takaful insurance firms, bringing to four the number of insurance firms offering takaful insurance.
In the eight years that Non-interest banking has been in existence in Nigeria, there have been challenges which operators like Jaiz bank have had to grapple with.
One of such challenges is the low awareness of the existence and operation of Non-interest banking and what it is all about. The promoters of non- interest banking, like Jaiz bank plc and others driving non-interest banking window as alternative banking, need to work extra hard to etch it to people’s consciousness.
The low awareness about the opportunities and economic benefits inherent in non-interest finance services deny many Nigerians the opportunity to reap the benefit.
Sharing his hands-on experience as CEO of the first non- interest finance institution in Nigeria, Usman said: “being the only one of a kind within the Nigerian financial service eco-system over the past seven years, it has taught us a lot of lessons. Our experience over the years ranged from the good, the bad and something in between”.
Another area of concern to operators of Non-interest banking Usman lamented is the dearth of manpower sufficiently skilled in Islamic finance, a challenge the bank grappled with right from the onset.
According to him, “to get around the manpower jinx, we started with a mix of experienced conventional bankers and fresh graduates. Some employees had so much passion for Islamic banking that they sacrificed higher pay elsewhere (i.e. took salary cut) to join the bank.”
He added that “some employees came with the wrong notion that the work environment of an Islamic bank should not be performance-driven. Shariah should be lenient (accept mediocrity).”
Jaiz bank, he said, paid the price as “the first mover” through high employee turnover as a result of the entry of new operators into the market”, he said.
Non-interest banking gains mass appeal, converts