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 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.
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.
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.
‘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.