The Nation (Nigeria)

Empowering businesses with noninteres­t capital


The Central Bank of Nigeria (CBN) has granted non-interest banking licence to Lotus Bank Limited. The new licence provides opportunit­y for Lotus Bank to contribute to over $2.2 trillion global assets in the non-interest banking, which is expected to hit $4 trillion by next year. Lotus Bank's entry into the sector has created opportunit­y for millions of entreprene­urs seeking zero interest capital to fund their businesses while bringing more people into the financial services net, writes COLLINS NWEZE.

WHEN a Muslim cleric, Abubakar Moshood, informed his friend and entreprene­ur, Ahmad Yusuf, that Sharia law forbids paying interest on borrowed funds, it surprised the latter. Yusuf, a cocoa trader, based in Osun State, quickly returned N1 million loan he got from a commercial bank to the lender, and turned to the fast-growing industry of non-interest banking.

Non-interest banking is a market that has doubled in size over the past five years and is worth more than $2.2 trillion, with demand forecast to soar to new heights.

Yusuf returned the loan just one week after he got the cash from his bank. "A cleric told me it is not permissibl­e under Islam to take loans from a non-islamic bank because they charge interest," the entreprene­ur said.

A few days later, he arranged for a loan from an non-interest bank after paying a $100 service charge. Non-interest banking customers, aside being mainly Muslims, are attracted to the finance model by its flexibilit­y, link to real economic activity and its ban on transactio­ns involving speculatio­n or uncertaint­y.

That explains why non-interest banking is gaining ground in Nigeria. Besides Nigeria, global acceptance for the banking model is increasing daily despite initial hitches to its survival. According to Standard & Poor's (S&P), non-interest finance remained a demand-driven market, with scarce supply, still hampered by a limited range of Islamic financial centres and their various regulatory frameworks.

The rating agency said it believed that regulatory efforts to accommodat­e non-interest finance and the establishm­ent of additional industry bodies at national levels is taking center-stage. Interestin­gly, newcomers in the industry such as Oman, Turkey, and Nigeria, for instance have started to trace the footsteps of fast-growing pioneers, such as Malaysia.

"Right behind the newcomers, a long line of countries is aspiring to enter the market, with the continent of Africa in the forefront," it said.

Lotus Bank steps in

The Central Bank of Nigeria (CBN) recently granted a non-interest banking licence to Lotus Bank Limited.

Its Managing Director, Mrs. Kafilat Araoye, said the bank's focus and guiding principle is 'to deliver an alternativ­e option to interestba­sed banking and to cater to the needs of not only the banked but also the underbanke­d and unbanked’’.

She said the bank is creating value and growth for all through digital innovation and best-in-class customer experience for Nigerians. "Our values are deeply rooted in partnershi­p. A critical component of our mission is the provision of innovative solutions that drive ethical prosperity for all stakeholde­rs. We pride ourselves on digital solutions that provide our customers with the convenienc­e of unlimited access to our services and products.

"Non-interest Banking is geared towards supporting the real sector and Lotus Bank aims to improve financial inclusion in the country. In addition, the bank will operate transparen­t pricing models as is the norm in non-interest banking, Mrs Araoye added.

Araoyo has 30 years’experience in banking. She has expertise in virtually all areas of core banking, with emphasis on internatio­nal and domestic operations, payments, general management, business developmen­t, risk management, human resources and strategy.

According to Lotus Bank founder & Chairperso­n Mrs. Hajara Adeola, the bank is starting its operations on a solid foundation of experience­d leadership and a strong Advisory Council of Experts (ACE). Adeola is also the founder and Managing Director of Lotus Capital.

"Our products and service offerings will include non-interest Business Financing, Deposit Products (current, savings and investment accounts) and personal financing. The bank aims to be a socially responsibl­e

organisati­on that will satisfy its customers across all touch-points," Adeola added.

With its flagship branch located at Adetokunbo Ademola Street, Victoria Island, Lagos, the bank will open its doors to customers from this month.

"Lotus Bank is a non-interest Nigerian bank deeply rooted in ethical banking and committed to ethical investing and ethical prosperity. The bank is committed to deepening financial inclusion and broadening the array of non-interest products available to the banked, unbanked, and under-banked population," she said.

According to her, the bank's values are bold, ethical, and birth new ideas. They are a testament to its desire to deliver a differenti­ated customer experience that supports businesses and supplies shareholde­r value.

Prior to founding Lotus Capital where she is the Chief Executive, Adeola worked with Arthur Anderson Consulting (now Accenture). She was also a Director at UBS Warburg, heading their London Islamic Finance Desk.

Adeola explained that Lotus Capital Limited is a full-service ethical investment management company specialisi­ng in asset management, private wealth management, and financial advisory services. "Lotus Capital is a pioneer in non-interest finance in Nigeria and duly registered with the Securities & Exchange Commission (SEC) as Fund Managers," she said.

Before joining UBS, she was a convertibl­e bond research analyst at BNP Paribas, London, where her primary responsibi­lity was to analyse, write, and publish daily and quarterly research on European convertibl­e bonds. At a point, she was with ARM Investment Managers. Adeola is regarded as the top industry expert in Islamic fund management in Nigeria.

Adeola holds a Masters in Finance from Durham University, where she specialise­d in

Islamic Finance. She also holds an MBA in Internatio­nal Management from Exeter University and a Bachelor of Science Degree in Pharmacolo­gy from King's College, London.

She is a Fellow of the Africa Leadership Initiative West Africa and a member of the Aspen Global Leadership Network.

Speaking at the London Stock Exchange on the rising acceptance of non-interest banking, Global Managing Director of Islamic Finance at J.P. Morgan, Hussein Hassan, explained that the main difference between islamic finance and convention­al finance is the prohibitio­n on charging and receiving interest.

The second is the prohibitio­n against excessive speculatio­n.

"The way these two prohibitio­ns play out is mainly in the documentat­ion. What these prohibitio­ns are based on is the concern against having excessive leverage in the system; that is what the prohibitio­n on it interest is based on. The need to stop the creation of financial crisis through speculativ­e behavior is what the second prohibitio­n is based on," he said.

He said financial outcome is the same with convention­al finance, but the form of securing the loans is different.

Hassan added that Islamic finance is based on ethical and religious values, hence investment in tobacco, gambling, pornograph­y are not permitted. He said global assets in Islamic finance stands at $2.2 trillion and is expected to hit $4 trillion by 2022.

Non-interest banking

Non-interest banks, typically, do not give out loans except under an interest-free loan arrangemen­t for social solidarity or very micro businesses. They are basically engaged in partnershi­ps, buying and selling at a markup price, and buying and leasing.

Like other sectors, it is affected by the economic performanc­e of the country. So, the first challenge is that if an non-interest bank has N1 trillion in its books as deposit, it cannot buy T-bills or bonds because they are interest-based.

The bank would also not be able to invest in other interest-bearing securities and deposits except in compliant instrument­s like Sukuk.

Loan opportunit­ies

To boost non-interest banking and make more loans available to farmers, the CBN unveiled the policy guideline that will outline how farmers with bias for alternativ­e finance could apply and benefit from its agricultur­al programmes.

The apex bank funded value chains of nine commoditie­s worth N432 billion in the 2020 wet season. Some of the commoditie­s funded are rice, maize, livestock, fish, oil palm, cowpea and poultry, among others.

CBN Governor, Godwin Emefiele, had directed the Developmen­t Finance Department of the apex bank as well as the NIRSAL Microfinan­ce Bank (NMFB) to fast-track the approval process of loans, which are meant to help restore businesses and livelihood­s.

CBN'S regulation

An essential governance structure and element of regulatory oversight for institutio­ns offering non-interest financial services is the establishm­ent of an advisory body at the level of the Central Bank. The bank is to provide assurance that the strategic direction and conduct of financial transactio­ns of Non-interest (Islamic) Financial Institutio­ns (NIFIS) are in compliance with the rules and principles underpinni­ng their operations.

Also, Section 9.1 of the CBN Guidelines for the Regulation and Supervisio­n of Institutio­ns Offering Non-interest Financial Services in Nigeria provides for the establishm­ent of an advisory body at the CBN on Islamic banking and finance.

Capital base

‘Non-interest banking customers, aside being mainly Muslims, are attracted to the finance model by its flexibilit­y, link to real economic activity and its ban on transactio­ns involving speculatio­n or uncertaint­y.that explains why non-interest banking is gaining ground in Nigeria’

The CBN guidelines on non-interest banking put the minimum capital base of N10 billion for National Islamic Banks and N5 billion for regional Islamic banks. However, the regulator allows deposit money banks to offer non-interest banking products, using existing structure such as the branches, even manpower.

The Debt Management Office (DMO) said the acceptance of the N100 billion debut Sukuk offer by Nigerians was an indication of the viability of the instrument as an investment option as well as a demonstrat­ion of utmost faith in the economy.

Hassan said a Sukuk is an Islamic bond that's set up to generate returns to investors while remaining compliant with Islamic law, which doesn't allow riba or interest. The Sukuk holders each have undivided ownership of the underlying asset.

Managing Director Credit Bureau, Ahmed Popoola said at the 10th Annual Lecture of Muslim Lawyers Associatio­n of Nigeria (MULAN) in Lagos with theme: "Pulling Nigeria out of the economic recession" that bond issuance is key to growth.

He said Sukuk, also called non-interest bond, is an alternativ­e worth exploring to raise funds for public works and to support the private sector access to finance. He stressed that the options that alternativ­e finance offers in funding public infrastruc­ture and empowering small business will help bail the country out of recession.

He explained that worldwide, Sukuk bond is no more peripheral to convention­al finance as it is being operated in 75 countries, including western nations. "People think that the non-interest financial system is based on faith, but it is based on justice for the two parties. Besides, the system does not allow investment­s that harm people or the environmen­t, thereby promoting sustainabl­e finance," he said.

Other analysts believe that many Islamic financial markets had establishe­d their presence in the major financial centres and were playing key roles in deepening the financial markets with products across the globe.

They insist that in the face of the growing interconne­ctedness of the global financial system and its integratio­n, it is unrealisti­c for any existing or aspiring financial centre to be oblivious of this developmen­t.

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• Mrs Adeola
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• Hassan

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