Non-interest banking: Prospects, challenges

Institution : Jaiz Bank
03 October, 2019      115



Non-interest banking is deepening its root in Nigeria’s financial cycle. Its acceptance has melted the initial skepticism, suspicion and religious phobia associated with the concept.

Pioneered seven years ago (2012) by Jaiz Bank Plc, the genre of financial service has gained wider acceptance, with more finance institutions opening windows for non-interest banking product to cater for segment of their clients.

Non-interest banking transactions are based on tangible assets and real services. It’s an alternative form of banking based on a principle of non-interest, sharing of risk and rewards; equity, fairness and justice.

Modest growth

Jaiz Bank blazed the trail in Isamic banking concept seven years ago. Functioning on same space with   conventional banking institution, non-interest banking has achieved some mileage within the space of seven years.

Addressing  conference participants recently in Abuja with the  theme: “Sustainable Islamic Finance in Nigeria,” the Managing Director/ Chief Executive Officer, Nigeria Deposit Insurance Corporation (NDIC)  Alhaji Umaru Ibrahim, outlined modest achievements recorded in  non-interest banking since its foray seven years ago into Nigeria’s financial service sector.

He said in terms of assets, total assets of non-interest banks and windows grew modestly from ₦66.96 billion in 2015 to ₦186.46 billion as at June 30, 2019.

However, he added that its share of total assets against the total assets of the banking industry stood at a paltry 0.49 per cent as at June 30, 2019.

Similarly, he said total deposits stood at ₦121.68 billion, or 0.53 per cent of the industry total during the same period while total financing stood at ₦59.81 billion, 0.38 per cent of the industry total as at the end of second quarter, June 30, 2019.

“The impact of such performance is clearly insignificant. According to the EFINA access to financial services in Nigeria survey 2018 data, 36.6 million adults representing 36.8 per cent of 99.6 million adult -population in Nigeria are financially excluded. Of particular concern, 62 per cent of the 23 million adults in the North West and 55 per cent of 12 million adults in the North East are financially excluded,” he said.

Beyond growth in asset base, the genre has recorded more players outside of Jaiz Bank. Some banks and other financial service providers including insurance firms open non-interest finance service windows to cater for their clients.

Some corporate institutions adopted sharia compliant product as a tool for meeting their financial needs. The Federal Government, the Debt Management Office (DMO) raised two tranches of  sukuk bonds for financing of road infrastructure across the country. Osun state government, some years ago, had also raised sukuk bonds to some   infrastructure gap of the state.

More institutions have embraced sharia compliant products. These include Sterling Bank, Taj Banks, Lotus Capital, Noor Takaful, Cornerstone and Leadway insurance companies, Tijjara Microfinance Bank and Stanbic IBTC, which recently closed its islamic banking window.

Obstacles, challenges

Like every institution, non-interest banking has its fair of challenges; obstacles slowing the pace of its growth. As alternative genre of banking of seven years, there is low level of awareness about opportunity, economic benefits inherent in non-interest financial services among substantial segment of Nigerian populace. This has denied a sizable number of citizens the opportunity to reap the benefits.

Quoting a report of  Islamic Financial Services Board (IFSB) IFSB 2019 Stability Report, NDIC boss, Ibrahim, noted that emerging risks facing Islamic banks now, and beyond 2019, appeared to stem from underlying structural economic weaknesses, inflationary trends and depreciating currencies.

He said all aforementioned developments could potentially destabilise liquidity, raise non-performing financing and erode capital.

“Foreign currency risks also remain a significant concern for regulators and Islamic banks alike. Equally, there exist structural challenges around Liquidity management and legal accommodation in terms of existence and mechanisms for dispute resolution.

“To a large extent, issues that impede access to finance include ignorance, lack of education, lack of trust, poverty, security challenges, high levels of informality in the economy and for Islamic banking- lack of awareness,” he said.

Managing Director/CEO of Jaiz Bank Plc, Mallam Hassan Usman, itemised other challenges of non- interest banking to include dearth of man power.

Usman was sharing his hands on experience as CEO of the first non-interest financial institution recently in Abuja with conference participants on Islamic financing, using Jaiz Bank as case study.

He said Jaiz was incorporated in April 2003 as special purpose vehicle (SPA) called Jaiz International Plc, got its operating license on November 1, 2011 and commenced full operations in January 2012. 

“The bank started operations with a regional license and transited to a national bank after three years. Even though it is typical of pioneer Islamic banks in other jurisdictions to take so many years to break-even, Jaiz bank actually broke-even after  about two  years without presence of either sukuk or sharia-compliant treasury Instrument,” he noted.

Narrating the experience in the last seven years, Hassan said that “being the only one of a kind within the Nigerian financial service eco-system over the past seven years, it has taught us a lot of lessons. Our experience over the years ranged from the good, the bad and something in a between.”

Some challenges of non-interest banking pointed out range from dearth of manpower sufficiently skilled in Islamic finance, a challenge, he said, confronted the bank  right from the onset.

To get round manpower jinx, “we started with mixture of experienced conventional bankers and fresh graduates.

“Some employees had so much passion for Islamic banking that they sacrificed higher pay elsewhere (i.e. took salary cut) to join the bank, some employees came with the wrong notion that the work environment of an Islamic bank should not be performance driven. Shariah should be lenient (accept mediocrity).

“Paying the price as “first mover” through high employee turnover as a result of the entry of new operators into the market.”

Another challenge of Islamic banking is what he described  as buse of sale contracts.

“We observed over time that customers were abusing our sale contracts by willfully delaying payment of their installments, knowing that the bank cannot earn more.

“In the absence of sharia-compliant, the bank was compelled to accommodate large-ticket transactions from corporate and commercial banking. With the advent of federal government’s  Sukuk, we are gradually divesting into retail and MSME,” he said.


The  regulatory organs for banking   sector – NDIC and Central Bank of Nigeria (CBN) and regulator for insurance sector, National Insurance Commission (NAICOM) are spearheading policies, endorsement of specific sharia complaint products. 

For instance, NAICOM recently approved two new takaful insurance firms, bringing to four the number of insurance firms offering takaful insurance.

The two firms given approval in principle to operate Islamic window insurance are Cornerstone Takaful Isurance Company and Salam Takaful Insurance Company Limited.

Experts are of opinion that a lot of economic proposals to better the economy of Nigeria have encouraged Islamic banking methods as an instrument to promote the economy of Nigeria as non-interest banking will deepen the financial market.

Last line

The incursion of non-interest banking and related sharia compliant products in insurance circle and micro finance sector to satisfy a segment of clients has broadened the financial service sector scope even though the challenges appear daunting.

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