AN APPRAISAL OF THE LEGAL FRAMEWORK OF NON INTEREST BANKING (ISLAMIC BANK) IN NIGERIA INTRODUCTION The ravaging effect of the

global financial crises, the Nigerian Banking Crises and Stock Market Meltdown has drawn considerable attention of Nigerians and the international community to the financial sector. Earlier this year the Central Bank Governor came out with the news of the proposed introduction of the Islamic Banking Model in Nigerian under the Islamic Economic system, varied debates on this discuss have continued to dominate the contents of both print and audio media. Many have argued based on purely religious grounds while others have argued from mixed point of religious, emotional and Legal stand points, whatever the point of view from which one approaches this enigma, the truth remains that the debates rages on and Nigerians awaits for the drama to unfold. But we as scholars of the Law of banking regulations have a duty to approach this topical issue from a strictly legal perspective and to be able to advice whoever cares to hear on the correct legal basis for the introduction of this neo- banking model in our country. Pursuant to the above, I have embarked on this research to make an appraisal of the legal basis if any, for the introduction of this much criticized banking system in Nigeria, and a comparative analysis of the legal framework in Nigeria with other countries and whether or not there is a misconception of existing Nigerian legislation and I strongly believe that at the end of this discourse even though we may not all agree to my conclusions on this issue but I strongly believe that we shall have at our disposal veritable and sufficient material to enable us individually

form our own legal stand point and to be able to give professional legal advice to whoever will care to listen when the need arises. However, I wish to state categorically here that this paper is purely for academic/professional purposes and all my deductions and conclusions are purely based on legal principles as stated in relevant statutory enactments, references to religious books are only as a result of the popular religious genealogy of the noninterest banking model.

HISTORICAL EVOLUTION USURY AS A RELIGIOUS CONCEPT Usury is the practice of charging excessive, unreasonably high, and often illegal interest rates on loans. Originally, when the charging of interest was still banned by Christian churches, Usury simply meant the charging of interest at any rate (as well as charging a fee for the use of money, such as at a bureau de change). In countries where the charging of interest became acceptable, the term came to be used for interest above the rate allowed by law. The term is largely derived from Christian religious principles; Riba is the corresponding Arabic term and ribbit is the Hebrew word. The pivotal change in the English-speaking world seems to have come with the permission to charge interest on lent money particularly the 1545 act "An Acte Agaynst Usurie" (37 H.viii 9) of King Henry VIII of England.1
1. Wayne A.M. Visser and Alastair M A Short Review of the Historical Critique of Usury (Riba)
http://en.wikipedia.org/wiki/Usury downloaded on 25th July, 2011

USURY AND THE HOLY QURAN

Allah has forbidden Usury.Allah will destroy usury2Oh ye who believe be afraid of Allah and give up what remains of Usury, if you are really believers 3 Those who charge usury are in the same position as those controlled by the devil's influence. This is because they claim that usury is the same as commerce. However, God permits commerce, and prohibits usury. Thus, whoever heeds this commandment from his Lord, and refrains from usury, he may keep his past earnings, and his judgment rests with God. As for those who persist in usury, they incur Hell, wherein they abide forever 4 God condemns usury, and blesses charities. God dislikes every disbeliever, guilty. Lo! those who believe and do good works and establish worship and pay the poordue, their reward is with their Lord and there shall no fear come upon them neither shall they grieve. O you who believe, you shall observe God and refrain from all kinds of usury, if you are believers. If you do not, then expect a war from God and His messenger. But if you repent, you may keep your capitals, without inflicting injustice, or incurring injustice. If the debtor is unable to pay, wait for a better time. If you give up the loan as a charity, it would be better for you, if you only knew .5

2. Quran Ch. 2v.275 3. Quran Ch. 2v228 4. Al-Baqarah 2:275 5. Al-Baqarah 2:276-280

O you who believe, you shall not take usury, compounded over and over. Observe forbidden, and for consuming the people's money illicitly. We have prepared for the disbelievers among them painful retribution 6.The usury that is practiced to increase some people's wealth, does not gain anything at God. But if people give to charity, seeking God's pleasure, these are the ones who receive their reward many fold7. USURY AND THE HOLY BIBLE The Old Testament From the King James Version If thou lend money to any of my people that is poor by thee, thou shalt not be to him as an usurer, neither shalt thou lay upon him usury.8 Take thou no usury of him, or increase: but fear thy God; that thy brother may live with thee.9 Thou shalt not give him thy money upon usury, nor lend him thy victuals for increase.10 Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of any thing that is lent upon usury.11 Unto a stranger thou mayest lend upon usury; but unto thy brother thou shalt not lend upon usury: that the LORD thy God may bless thee in all that thou settest thine hand to in the land whither thou goest to possess it.
6. Al-Nisa 4:161 7. Ar-Rum 30:39 8. Exodus 22:25 9. Leviticus 25:36 10. Leviticus 25:37 11. Deuteronomy 23:19

If thou lend money to any of my people, even to the poor with thee, thou shalt not be to him as a creditor; neither shall ye lay upon him interest.12And if thy brother be waxen poor, and his means fail with thee; then thou shalt uphold him: as a stranger and a settler shall he live with thee. Take thou no interest of him or increase; but fear thy God; that thy brother may live with thee. Thou shalt not give him thy money upon interest, nor give him thy victuals for increase.13 Thou shalt not lend upon interest to thy brother: interest of money, interest of victuals, and interest of any thing that is lent upon interest. Unto a foreigner thou mayest lend upon interest; but unto thy brother thou shalt not lend upon interest; that the LORD thy God may bless thee in all that thou puttest thy hand unto, in the land whither thou goest in to possess it.14 Thou shall not lend upon usury to thy Brother, usury of money, usury of victuals, and usury of anything that is lent upon usury.15 He that putteth not out his money to usury, nor taketh reward against the innocent, he that doeth these things shall never be moved 16 Unto a foreigner thou mayest lend upon interest; but unto thy brother thou shalt not lend upon interest; that the LORD thy God may bless thee in all that thou puttest thy hand unto, in the land whither thou goest in to possess it17

12 .Exodus 22:25 13. Leviticus, 25:35-37 14. Deuteronomy, 23:20-21 15. Psalm 15 v. 5 16. Deuteronomy 23:20

New Testament

The New Testament contains references to usury: Finally the master said to him 'Why then didn't you put my money on deposit, so that when I come back, I could have collected it with interest? Thou oughtest therefore to have put my money to the exchangers, and then at my coming I should have received mine own with usury.19 Out of thine own mouth will I judge thee, thou wicked servant. Thou knewest that I was an austere man, taking up what I laid not down, and reaping that I did not sow. Wherefore then gavest not thou my money into the bank, that at my coming I might have required mine own with usury?"20 It is trite from the verses of both Quran and the holy bible recited above that both religion forbids the concept of USURY even though the New Testament appears to be liberal towards the concept of Usury. Thus, it is this supposed acceptance of usury by the New Testament that led to the popular notion that the concept Usury has been accepted by the Christian faith and the general believe that the conventional Banking model is an offshoot of the Judeo-Christian religion, the question that therefore, begs for an answer is whether or not the principles of the new testament bible supersedes that of the old testament.

18. Luke 19:23 19. Matthew 25:27 20. Luke 19:22-23

LEGAL BASIS FOR NON INTEREST FINANCIAL INSTITUTION IN NIGERIA

These guidelines are issued pursuant to the non interest banking regime under Section 33(1) (b) of the Central Bank Act, 2007, Sections 23 (1) of BOFIA 1991, section 55(2) of 1991 now S 57(2) of BOFIA 2004, Section 59(1) (a) of 1991 now 61 (1) (b) of 2004, Section61 of BOFIA 1991 (as amended) now 64 of 2004 and section 4 (1)(c) of the Regulation on the Scope of Banking Activities and Ancillary Matters No.3, 2010. It shall be read together with the provision of other relevant sections of BOFIA 1991 (as amended) the CBN Act, 2007, CAMA 1990 (as amended) and circulars/guidelines issued by the CBN from time to time21 Section 33(1) (b) of the CBN Act22 states that In addition to any of the powers under this Act, the Bank may-issue guidelines to any person and any institution under its supervision. The combined effect of this proviso and the power granted to the CBN by BOFIA23 gives the Central Bank its major power to issue guidelines for the operation of banks generally and most recently the Profit and Loss sharing banks.

21. Guidelines for the Regulation & supervision of Institutions Offering Non-Interest Financial Services in Nigeria dated the 20th June, 2011 dowloaded from http://www.cenbank.org on 16th July, 2011. 22. CAP.C4 Laws of the Federation of Nigeria, 2004. 23. Also Section 1(1) of BOFIA, 2004.

It is whether or not the Islamic Banking model falls within the ambit of persons and institutions as envisaged by the relevant statutory provisions that forms the basis of this work. Reference was first made to Profit and Loss sharing bank in Sections 23(1) of BOFIA. And according to this section, Every bank shall display at its office its lending and deposit interest rates and shall render to the Bank information on such rates as may be specified from time to time, by the Bank: Provided that the provisions of this subsection shall not apply to profit and loss sharing banks. Profit and Loss sharing Bank was excluded from this provision because here the concept of interest is replaced by profit and loss sharing, so it is only logical that this category of banks be excluded since their operation does not include taking or paying of interests on lending and deposits respectively. Also in Section 52 of BOFIA, 1991 reference was further made to it that The Governor may exempt community banks (Now Micro-Finance Banks) or profit and loss sharing banks from the provision of this decree

23. This Section was excluded from the extant CAP B3 of the Laws of the Federation of Nigeria, 2004

By the combined provision of Section 57 (2) of BOFIA, 2004 and Section 61(1) (a) of same, the Bank may without prejudice to the provisions of subsection 1 of

this Section make rules and regulations for the operation and control of all institution under the supervision of the Bank and the Bank shall have power to supervise and regulate the activities of other financial institutions and specialized banks. A combined reading of these provisions and the provisions of Section 33(1) (b) of the CBN Act reveals without any iota of doubt that the Bank has the power to Supervise, regulate specialized banks (non-interest banks inclusive) and to issue guidelines in the process of doing same. In as much as the above sections appeared to be unambiguous, it poses a serious conumdrum when it comes to determining what constitutesfining the scope of Non Interest Bank as inteneded by our legilative draftsmen in relation to the recent introduction of the JAIZ INTERNATIONAL BANK PLC24 (Islamic Bank) to carry out banking business strictly in accordance with Islamic tenets and to even go further to constitute an Islamic Advisory Council to advice the Bank on same. Whether or not the extant CBN Act and the BOFIA under appraisal gives the CBN sufficient power without more to establish the Islamic variant of the Profit and Loss sharing bank is a mystery that we seek to unravel unravel.

24.RC:476637

The proper place to begin is to look at the definition of the concept under the definition Section of the BOFIA25. In this decree, unless the context otherwise requires: Bank means the Central Bank of Nigeria banks means a bank licensed under this decree Banking business means the business of receiving deposits on current accounts, savings account or other similar accounts, paying or collection of cheques, drawn or paid by customers, provision of finance or such other business as the Governor may by order publish in the gazette, designate as banking business. Profit and Loss sharing bank means a bank which transact investment or commercial banking business and maintains a profit and loss sharing accounts It is clear from the definition of Profit and Loss Sharing Banks above that reference was never made to any religion and we believe strongly that the legislative intent was to steer clear of introducing religion into the Nigerian Banking sector in compliance with Section 10 of the 1999 Constitution as amended. But from a practical perspective, can a Profit and Loss Bank be distinguished from Islamic Bank?

25. Section 66 of BOFIA, 2004

The commonest practical approach to Islamic banking have centered around financial equity based approaches, most notably Mudarabah - a joint venture between the bank and a partner with both contributing to the capital of the project and sharing the profit or loss - and Musharakah - in which all the capital for an investment is provided by the bank in return for a predetermined share of the profit or loss of the business undertaking 26. Section 10 of the 1999 Constitution states that The Government of the Federation or of a State shall not adopt any religion as State Religion.The Non Interest Financial Institution Framework
27

stated that: A Non-Interest Financial

Institution (NIFI) means a bank or Other Financial Institution (OFI) under the purview of the Central Bank of Nigeria (CBN), which transacts banking business, engages in trading, investment and commercial activities as well as the provision of financial products and services in accordance with Shariah principles and rules of Islamic commercial jurisprudence. The Glossary of Terms of the CBNs NIFI Framework states that: Shariah Principles refers to the divine guidance as given by the Holy Quran and the Sunnah of the Holy Prophet and embodies all aspects of the Islamic faith, including beliefs and practices.

26. Kahn, M.S.and A. Mirakhor. (1986) The Framework and Practice of Islamic Banking. Finance & Development Journal, Vol. 1, 32-36 27. Draft Framework for the Regulation & Supervision of Non- Interest Banks in Nigeria, http://www.cenbank.org accessed on 16th July, 2011

The only legally valid definition of this concept is the definition of Non Interest Bank as stated in Section 66 of the BOFIA, 2004 above. Profit and Loss Banking has always been the interpretation and understanding of Non-Interest Financial Services in Nigeria. When the CBN granted an Approval-in-Principle Licence to Jaiz International Bank PLC in 2004 while Chief Joseph Sanusi was the CBN Governor, the licence was issued for it to carry on business as a Profit and Loss Sharing Bank. Curiously, the present CBN Governor, Mallam Sanusi Lamido Sanusi, was widely reported in the mass media to have announced on Monday, 20th June, 2011, at a Conference on Islamic Banking in Dakar, Senegal, that the CBN had issued Jaiz International Bank PLC an Approval-in-Principle as the first Islamic Bank in the country. Jaiz Bank was unable to operate as a Profit and Loss Sharing Bank not because there was no Islamic Banking Guideline but simply because it was unable to raise the minimum capital requirement of N25Billion. The CBN has now inexplicably lowered the capital requirement for the Profit and Loss Sharing Bank now christened Islamic Banks to just N10Billion to achieve National Bank status as against the N25Billion it stipulated for Deposit Money Banks. Why the Sanusi Lamido Sanusi-led CBN is unduly eager to make life easier for Jaiz International Bank PLC and other proposed Islamic Banks is left for us to determine28. By constructively and unconstitutionally changing the nomenclature of the NonInterest Banking products to Islamic Bank, the CBN had also unjustly excluded non-Muslim Nigerians from the emerging Non-Interest Banking business

28. E. Eyieyien, A Critical Analysis of Sharia Banking in Nigeria downloaded from http://www.proshareng.com/articles/2209 on 21st July, 2011

sub-sector contrary to the provisions of Chapter 2 of the constitution.28 Section 16 1(d) of the 1999 Constitution as follows: The state shall within the context of the ideals and objectives for which provisions are made in this constitution-without prejudice to the right of any person to participate in areas of the economy within the major sector of the economy, protect the right of every citizen to engage in any economic activities outside the major sectors of the economy. I must state categorically at this juncture that none of the statutory provisions under review classified the said concept into Islamic Banks and others as proposed by the Central Bank, the said enactments mentioned only Non Interest Banks. Another shocking aspect of the NIFI Framework was that it provided for the creation of the CBN Shariah Council. The CBN Shariah Council is a body set up to advice the CBN on Shariah matters for the effective regulation and supervision of NIFIs (Non Interest Banks or the Islamic variants of the profit and loss sharing banks) in Nigeria. Since such a body must necessarily comprise only Muslims, the CBN would be flouting fundamental provisions of the Nigerian Constitution as follows:
i.

Contravening the Federal Character Principles entrenched in Section 14(3) of the Constitution which states that The composition of the Government of the Federation or any of its agencies and the conduct of its affairs shall be carried out in such a manner as to reflect the federal character of Nigeria and

29. The Contitution of the Federal Republic of Nigeria, 1999 ammended.

the need to promote national unity, and also to command national loyalty, thereby ensuring that there shall be no predominance of persons from a few State or from a few ethnic or other sectional groups in that Government or in any of its agencies. ii. Contravening the secularity of Nigeria enshrined in Section 10 of the Constitution of the Federal Republic of Nigeria which states that The Government of the Federation or of a State shall not adopt any religion as State Religion; But unarguably the most significant issue is that fact that the CBN was introducing religion into Nigerian banking contrary to the spirit, letter and intendment of Section 43(1) (a) of BOFIA which states: Except with the written consent of the Governor (a) no bank shall, as from the commencement of this Decree, be registered or incorporated with a name which includes the words Central Federal, Federation, National, Nigeria, Reserve, State, Christian, Islamic, Moslem, Quaranic, Biblical. It is clear from the above provision that the prospect of any Private Liability Bank and non state owned Public Limited Liability Bank being able to obtain the written consent of the CBN Governor to use any of the restricted words in its name is almost non-existent.

30. Oche, PN Banking Law and Practice in Nigeria (Jos: Heirs Great Commission, 2002) P.71

The BOFIA was originally issued in 1991 as a decree and signed into law by the then Military President, Gen. Ibrahim Badamasi Babangida. The Governor of the CBN at the time was Alhaji Abdulkadir Ahmed. Though a committed Muslims, Gen. Babangida and Alhaji Ahmed were obviously sensitive to the religious sensibilities of Nigerians, especially with the crisis the country was thrown into over the issue of Nigerias membership of the Organisation of Islamic Countries (OIC) at that time. The Babangida government saw that it was imperative to include an unambiguous statutory provision in Section 39(1) of the BOFIA,1991 as amended which would ensure that no religious colouration was given in any guise to banking in the country. Obviously, the anticipation and intendment of the law was that the Governor of the Central Bank of Nigeria would not be swayed by religious considerations to grant a waiver to allow the use of those religious appellations even though it invested him with that power, and I strongly argue that the necessary implication of this proviso is for the Bank to steer clear of bringing religion into the Banking Sector and to even go further to grant the said waiver to one religion while leaving the rest religion out can clearly be said to contrary to the spirit and intent of the said proviso. Some have erroneously argued that the present CBN Governor has now exercised that power by introducing Islamic Council to guide the Bank on the operation of the bank! Is this expedient? What was the over-riding and compelling reason for this exercise of the Governors discretion? What has

31. E. Eyieyien op cit at P.3

changed in Nigeria between 1991, when Gen. Babangida signed the BOFIA into law, and 2011 when we are now confronted with even more extreme religious zealotry and fundamental religious terrorism with the advent of Boko Haram? Even more strange is that the CBN NIFI Framework even re-affirmed the statutory provision in Section 39(1) of BOFIA in Section 10.1 of the NIFI Framework under the heading Branding. That section states: In line with the provisions of Section 39 (1) of BOFIA 1991 (as amended), NIFIs shall not include the word Islamic as part of their registered or licensed names. They shall, however, be recognized by a uniform symbol designed by the CBN. All the signages and promotional materials of NIFIs shall bear the symbol to facilitate recognition by customers and the general public. Is this then not superfluous? What is in a name after all, one might argue. Clearly, the law is really not as concerned about names as it is with keeping religion out of Nigerian banking. Already, many non-Muslims have, understandably and expectedly, read religious motives to the issuance of the Framework and the passion with which the CBN is pursuing the establishment of Islamic Banking in Nigeria. This is more so since it is being introduced by the CBN under the purview of its current Governor, Mallam Sanusi Lamido Sanusi, who is known to be an Islamic Scholar with expertise in the Shariah Law having obtained a degree in that regard from the University of Africa, Khartoum, Islamic Republic of Sudan.

Section 4(1) of the Regulation on the scope of Banking Activities and Ancillary Matters No.3, 2010 states thus: From the effective date, the only types of banks that shall be permitted to carry on banking business in Nigeria shall be limited to the following types as contemplated under BOFIA. Commercial banks Merchant banks and,

Specialized banks which include non interest banks, micro-finance banks, development banks, and mortgage banks32.

CURRENT REQUIREMENTS FOR LICENSING OF NON-INTEREST BANKS A non Interest Financial Model shall be licensed in accordance with the requirements issued by the Bank from time to time.33

32. http://www.cenbank.org accessed the on 17th July, 2011

33. See Oche P N , Op cit at 52-78

 An application for Banking license shall be accompanied by evidence of technical agreement executed by the promoters of the proposed institutions with an established and reputable Islamic bank or financial institution. The agreement shall explicitly specify the role of the 2 parties and shall subsist for a period of not less than 3 years from the date of commencement of operations of the licensed Institution offering Islamic Financial System.

A license to undertake Islamic banking business operation may be issued by the CBN upon such terms and conditions which authorize the operation of a non interest financial institution on a regional or national basis for banks, or any other basis for other financial institution 34.

An Institution offering Islamic Financial System with Regional Banking authorization shall be authorized to carry on its banking within a minimum of six (6) and a maximum of twelve (12) contiguous states of the Federation lying within 2 geopolitical zones as well as within the FCT

An Institution offering Islamic Financial System with National Banking

34. Guidelines for the Regulation & supervision of Institutions Offering Non-Interest Financial Services in Nigeria, op cit, p.4

authorisation shall be entitled to carry on banking business operation within every state of the Federation including the FCT, Abuja.

ISLAMIC BANKING LEGISLATION IN OTHER COUNTRIES BANK ISLAM MALAYSIA BERHAD (BIMB) BIMB was established after the enacting of the Islamic Banking Act (IBA) in 1983, the IBA permitted the establishment of the first Islamic Bank in Malaysia. BIMB with a paid up capital of RM 100 million and an authorised capital of RM 500 million is carrying out its activities on an interest free basis. Tengku Razaleigh, the then Finance Minister described the Islamic bank as the first step in the government's efforts to instill Islamic values into the country's economic and financial systems as a replacement for the current Western-base economic system (NST 6 July 1982). The Islamic Bank of Thailand was set up by the Islamic Bank of Thailand Act B.E. 2545 (2002), as a state enterprise under the Ministry of Finance, administered by a board of governors, with an advisory council on Islamic banking. The bank operates in accordance with the rules of Sharia, or the Islamic rules on transactions.

34. http://www.islamic-world.net/islamic-state/malay_islambank.htm accessed on 25th July, 2011 35. http://www.bankthailand.info/Islamic-Bank-of-Thailand.htm accessed on 25th July, 2011

ISLAMIC BANK OF INDONESIA, ACT NO. 21 OF 2008 Act No. 21 Concerning Sharia (Islamic) Banking provides a more comprehensive regulatory framework for Sharia banking in Indonesia.This act covers Islamic Banks and Sharia Business Units (UUS) which are working units of conventional commercial banks conducting business based on the Sharia Principle. The act stipulates that licenses are provided by Bank Indonesia and Sharia Banks are required to be limited liability companies with local ownership requirements.

CONCLUSION: It is trite from the above that the Non-Interest Financial Institutions derives its origin from religion. Both Islam and Christianity prohibit Usury or Ribba and though the New Testament bible appears to be liberal toward this doctrine one cannot clearly states that one supersedes the other. The Banking Legislation steered clear of imputing any form of religion into the Banking sector, this should be applauded and all stakeholders in the banking industry must strive to uphold this ideal. Religion was never mentioned anywhere in these legislations and as such we must adhere strictly to this laws inorder to uphold the secular nature the nation. Both the CBN Act and the BOFIA permits the licensing of Non-Interest Banks in Nigeria but left the CBN with the discretion to determine what constitutes this type of Banks and also to issues guidelines to supervise and regulate same. This discretion must be exercised judiciously in the general interest of the country and the litmus test being overriding public interest .

36. http://www.cgap.org/p/site/c/template.rc/1.1.6058/ downloaded on 25th July, 2011

RECOMMENDATION It is recommended that a bill for an Act to Establish Islamic Banking variants of the Non Interest Bank be presented before the National Assembly as was done in Malaysia, Indonesia and Thailand.

REFERENCE
1.

Oche, P.N. Banking Law and Practice in Nigeria, 2nd Impression (Jos:Jimmy Litho Press, 2004)

2. Banks and Other Financial Institutions Act (BOFIA) LFN, 2004 Cap B3 3. Central Bank of Nigeria Act Cap C4 LFN 2004
4. 5.

The Constitution of the Federal Republic of Nigeria, 1999 as amended Revised Standard Version, Holy Bible.

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