By Omoh Gabriel
Islamic Financing will help check corruption, forgery and other vices in governance if the culture is embraced by Nigerians. This was a submission by World Bank Group Head of Islamic Finance, Finance and Global Practice, Mr. Abayomi Alaowode, in an interview with Financial Vanguard in Washington.
Alaowode, a Nigeria, said Islamic Financing if adopted in Nigeria, will use “asset backing where any sum of money you get is assigned to a particular investment from day one and you identify the asset. There is no dispute about what you are financing, this is again why people think Islamic Financing can be used for development because for every dollar or every naira you come up with, you can identify what you are buying with that naira”.
According to him “If you go to an Islamic bank and say I want to buy a car and I need a car loan, they are not going to give you the money and then you go and buy a horse instead. What happens is that the Islamic bank will ask you what kind of car you want and the bank will buy and hand it over to you, you have no room to run away. This asset backing also happens in business as well, where if you need money to expand your factory in terms of machinery, they will identify what you want to buy and be involved in you actually buying those machine.
“There is this asset backing feature which ties Islamic financing to specific assets. If you recall when Osun State issued a Sukuk last year, they had to say specifically what they are going to use the money for and they actually said they are going to build schools and hospitals with this. So that is how Islamic finance functions, it ties the financing to specific assets that are identified. This is the case because you are not looking for interest you are looking for returns generated by your investment. So from day one, you must know exactly what the assets you are purchasing with that money are. This happens also with the government, when governments are issuing Sukuk Islamic bond. They have to identify which assets they want to buy with it. In Sudan, there is a programme of using Sukuk to buy hospital equipment like X-ray machines, MRI machines, every time you issue the Sukuk to raise money. You must specify what you are buying with it. So this asset backing we believe is a strong feature of Islamic finance that makes it more conducive for development because you can actually tie financing to infrastructure.
“A government can say we want to borrow money to build roads, if you use Islamic financing instruments, there is no way they can use that money for something else because the money is tied inextricably to the road construction.
As regards forgeability of money, when you come to the Sharia issue and settling disputes, they are seen strictly as a contractual issue in many countries. If you look at the UK, they have Islamic banks but UK is not a Sharia jurisdiction.
He said further “In Nigeria, the challenges are several and I think the central bank has done a lot of work to put in place a regulatory framework for Islamic banking. But you do have a big problem in terms of perception and awareness. Anytime I talk to fellow Nigerians about Islamic banking, they still see it from a religious point of view, which is why the CBN could not call it Islamic banking, they call it non interest banking, so that sends you the signal that the word Islamic banking is loaded and the CBN took a step of shying away from that and they call it non interest banking. When people now see it from a religious point of view, in a country that historically has had tensions between Muslims and other religions, where today you have an Islamic insurgency in the Northern Nigeria, so it becomes really tricky for you to promote and aggressively develop Islamic banking, until people become aware of it that it is really not for muslims only and is not muslims trying to take over Nigeria or take over the Nigerian financial system.
“These are political, economic issues that you and I cannot solve. These are fundamental issues that we cannot wave our hand and they will go away until the general level of awareness increases and people understand it better and the overall environment improves. It is going to be challenging for these banks to develop, but it is not an issue unique to Nigeria. In Turkey as well, they could not call them Islamic banks because the Turkish constitution says that Turkey is a circular country with no national religion. In Turkey, they call them participation banks. You do have challenges in some of these countries where the political economy is not conducive to aggressively promoting “Islamic banking” because either the constitution forbids it or the current environment is not conducive to aggressively championing a particular form of finance that has got a religion attached to it.
“This is one of the areas where we are working right now. It is not only in Nigeria, even in Muslim countries. Let me pick a country at random, UAE. If you go to UAE, they have a system where for financial transactions; you have to agree before hand, which court you are going to use to settle disputes.
“Because even though they have Sharia, Sharia does not cover all transactions, it is not a fully Sharia economy even in the UAE. Today, if you go to Dubai, they have what we call Dubai international financial centre where you do have Islamic banks, where you have Sukuk. However, the laws they use is the common law of England and everybody agrees to settle any disputes with the common law of England and the contract law applicable in England.
“In Africa, Islamic financing is just starting; Nigeria of course, has the potential because of the population and the size of the economy. Senegal has issued a Sukuk. Gambia as well has used a Sukuk, and there is some interest from Mali, Bokinafaso, but limited extent at this time. Again, lack of awareness is an issue. In addition, many of these countries are wrestling with many other problems that this is not their priority at this time, but for West Africa right now Nigeria, Gambia and Senegal and to some extent Mauritania, if you can count Mauritania as West Africa although it is beginning to switch over to northern Africa. Those are the countries where you can see a strong interest in Islamic finance”.
