On Islamic Banking and the Economy

On Islamic Banking and the Economy

Muhideen Adesokan MSc PhD.

Researcher, Novartis Consulting

Leicester

United Kingdom

An editorial Islamic Banking and the Economy appeared in a national daily (10 September 2009) purporting to respond to comments attributed to Central Bank of Nigeria (CBN) governor Sanusi Lamido Sanusi on Non-Interest Banking. More specifically claims were made in reference to Islamic Banking and current macroeconomic policies. I argue that the comments on the former are misguided bordering on disinformation but largely share the newspaper’s views on the latter for reasons that become clear below.

Islamic Banking is restrictively known as ‘Non Interest Banking’ (NIB) in Nigeria due to a ban by military decree on the use of ‘Islamic Bank’, ‘Quran(ic) Bank’, ‘Shariah Bank’ et al by the duo of President Ibrahim Babangida and former CBN governor Alhaji Abdulkadir Ahmed of blessed memory. The industry came into being globally in response to the need of Muslims to bring their financial transactions into conformity with the requirements of the Shariah prohibiting Usury or Riba as it is known in the Quran. Incidentally Judaic and Christian scriptures also prohibit usury. However Jews initially restricted the prohibition to dealings amongst themselves and kept on extracting usury from non Jewish people (gentiles). Christians initially adhered strictly to the scriptural ban on Usury and by analogy ‘Interest’. This kept them away from money lending, banking and finance for centuries. It also explains why Jews have had an unassailable lead in global banking and finance as currently practiced, they created the industry. The negatively extractive impact of Interest on communities left strains on the relationship between European Jews and Christians that has been aptly parodied in Shakespeare’s Merchant of Venice. More recently Christians appear to have redefined Usury to mean ‘exorbitant interest’ as distinct from ‘just interest’. This explains the benign descriptions like ‘time value of money’, ‘compensation for deferred consumption’ accorded Interest in the finance literature. Elegant econometric models and software have been developed with the aim of determining the most optimal rate of interest.

For Muslims, paying or receiving Interest is absolutely prohibited whatever the rate or however apparently equitable it seems. It is such a grave sin that Allah warns offenders of a war from Him and His prophet. Furthermore the prophet likened it to incest with one’s mother at the holy mosque in Makkah. It is usually ranked as the second or third of the greatest sins in Islam. Hence it is clear that the NIB proposal is not simply a “…purely mundane proposal…” with an “…Islamic appellation…” as the Daily would have its readers believe. Rather it is a policy response aimed at enabling practicing Muslim Nigerians live more fully in accordance with the requirements of their faith.

The editorial makes a further claim that profit accruing to both financier and borrower would be dwarfed by persistently high inflation rates causing the projects financed under NIB to fail to deliver any positive return. The vacuity of this claim is immediately obvious to anyone that has undertaken an advanced degree course in finance. One is aghast as to how a daily reputed to be the favorite of intelligentsia came to allow such trivial analysis to be put out in its name. Investment projects are appraised using a nominal expected rate of return (profit in this case). The expected profit rate is itself a sum of the financier’s expected rate and the rate of inflation. Furthermore care is taken to ensure that future cash flows are discounted to their present values for projects extending beyond one year. As such any likely effects of inflation and indeed all other peculiar risk factors of the location like currency exchange rates, risk of kidnapping, power failure et al would have been factored into the expected profit rate. It is only projects that can deliver that expected rate or higher that are financed, others are rejected. This is such an elementary and foundational requirement of advanced degree finance courses that it is usually taught in the first or second week. An NIB financier would obviously be destroying value were s/he to invest in projects that do not pass the appraisal test.

The editorial writers go on to describe Nigeria as a ‘secular country’. This is a myth being surreptitiously foisted on the mindset of the public by the secular elite among whom are atheists, Christians, Muslims and others. The prohibition of the adoption of a State Religion by Section of 10 of the 1999 constitution certainly cannot be equated to the adoption of Secularity. Our National Pledge ends with ‘…so help me God…’, the second stanza of our national anthem opens with ‘…O God of Creation…’ and our national motto is ‘…Unity and Faith, Peace and Progress…’. These are attributes of a nation that recognizes the role of a God of creation but leaves it to citizens to choose how to relate to Him. It will suffice here to repeat Dr. Lateef Adegbite’s challenge to the secular establishment to show us any part of the 1999 constitution or any valid legal interpretation thereof that describes Nigeria as a secular country. Nigeria is indeed for all practical purposes a multi-religious multicultural country. The mainstream of Muslim Nigerians understands and supports this diverse character of our country; put aside the illegal activities of the fringe elements like Boko Haram. That is why we made no complaints when president Obasanjo persistently delivered Sunday sermons at the pulpit early in his presidency. Muslim leaders before him consistently occupied front rows at Eid prayers. Thus we had no problem with president Obasanjo expressing religiosity his own way as long as it did not lead him to deny us our religious rights. One does not recall the Daily or other members of the secular establishment raising their ‘Nigeria is Secular’ objections to president Obasanjo’s Sunday sermons. The Muslim political elite are called upon to safeguard the multi-religious character of the constitution and prevent the insertion of any secularity clause into it under the guise constitutional review.

Among the advantages of having a multi-religious country is that we are able to draw on a diverse and rich source of values to overcome our existential challenges. One is aware of a growing body of work collectively described as Chritainomics that professes to apply Christian principles to solving real world economic challenges. Apparently the work is still confined to academics at catholic-owned universities in the U.S. It is hoped that the Christian Nigerian elite will examine this heritage of theirs for workable solutions to our economic challenges just as Muslim Nigerians look for solutions in Islamic Economics. Even an officially Christian country like the U.K routinely examines other religious traditions for new ideas. Intense effort is being made with the aim of making the UK the leading centre for Islamic Finance outside the Muslim World. In addition to Islamic Bank of Britain, HSBC and Lloyds TSB offer Shariah compliant products to customers. The City of London is expected to raise money by issuing Islamic Bonds or Sukuk in due course. This author and a colleague were invited to present a comment from an Islamic perspective on a paper examining Buddhist Economics at the University of Leicester not too long ago. The infusion of new ideas starts with the intelligentsia but is in time refined and diffused out to policy makers as well as the general public.

One does however share the view of the editorial’s authors that the managers of our economy are not maximizing the full benefits accruable from Crude Oil, as our strategic national asset, for economic growth. Another illustration of this is the value laden ‘Oil income – Exchange rate – Economic growth’ nexus that is still being significantly underexploited. A starting point for a revised approach could be a regulatory directive for buyers of Nigerian Crude Oil to pay for their cargo in ‘Naira’ that must be sourced from the designated participants at the Forex market. This will immediately stimulate international demand for the Naira by spot market participants. In addition international banks servicing these buyers will begin to hold stocks of Naira in reserve to hedge against future fluctuations. The combined effect of these changes will be to reflate the value of the Naira against USD since most of our crude is purchased by U.S buyers. It is hypothesized that this singular decision will lead to >50% rise in the value of the naira within one year of implementation. Econometric analyses can be readily developed to fully demonstrate the flow of causality and other parameters in the proposed model. A further advantage of the suggested directive will be to inject another source of USD to the Forex market. At the present CBN’s activity as the only supplier depletes our national reserves of USD. In addition CBN will be saved the burden of mopping-up excess Naira liquidity from circulation. Buyers will pay NNPC in Naira which will be deposited at CBN accounts. This will save CBN the additional task of issuing treasury bills at high interest costs to the public purse.

Global currency traders will exploit arbitrage opportunities to force a commensurate rise in the value of the Naira against other major currencies that are usually heavily traded against the dollar. With a stronger Naira, it will be more affordable to finance critical infrastructure growth and import machine tools at a sustainable pace. A second necessary directive is for Nigeria’s crude to be primarily traded on commodity exchanges located in Nigeria in the first instance. Resellers may trade on other exchanges as suit their customers. The practice of having Nigerian Crude primarily traded on exchanges located in London or Rotterdam exports vast tax opportunities, high income jobs and various other multiplier benefits to those foreign cities. We require the benefits in Nigeria even if only to satisfy the aspirations of our highly skilled and talented but unemployed graduate population. The suggested nexus will require close cooperation between the ministries responsible for Finance, Petroleum, Coal and the Central Bank. It will also require a very reliable law and order regime that evokes the confidence of local and foreign investors in addition to power, telecommunication and transport infrastructure.

To summarize, I have shown why aspects of the said editorial relating to NIB (Islamic Banking) is patently ill-informed and should be disregarded in addition to exposing the attempt to the secular elite to foist their preference on the rest of us. CBN is called upon to keep up the pace of work to finalize the regulatory framework and launch the system. Muslim Nigerians find it unacceptable that there should be any further delay. Sufficient expertise and goodwill exists to complete other aspects of the system like the Shariah Boards and Liquidity Instruments; CBN needs only to ask and they will be provided. On the other hand CBN in concert with other government departments should accord due attention to the criticisms on foreign currency and macroeconomic management. As pointed out above, so much opportunity is being unnecessarily lost. This should certainly not be the case in a country as blessed as ours that has to contend with such high levels of unemployment and poverty. On this point also, there is a lot of expertise and goodwill; government needs only to ask.