- Babalakin & Co.

Report
Presented by
Hajara Pitan
14th July 2011
Islamic banking is a system of banking or banking
activity that is consistent with the principles of Islamic
law.
Islamic law prohibits the charge of interest on loans
(usury called RIBA in Arabic) .
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Considerations:
- Islamic States were governed such that the
political head was also the religious head.
- It therefore meant that the well being of
members of the community rested with him.
- Thus Islamic banks were to act as financial
intermediaries and investment institutions.
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Similar services to those of conventional banks
Offer chequeing accounts and clearing
mechanisms, bank drafts, bills of exchange,
travelers’ cheques.
Also offer various types of customer accounts
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Justice, equality and solidarity
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Forbidden List (Haram)
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Property Rights are key
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Fair distribution of wealth
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Effort and risk sharing precede gain
Key Points

Forbidden Products & Services
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Uncertainty of outcome
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Banking Procedure
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Charge of Interest
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Speculation Discouraged
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Prohibition of predetermined payment above principal
lent
Lender participates in profits or losses of business or use
to which money lent was used.
Making money from money- haram
Prohibition of uncertainty, risk or speculation (Gharar in
Arabic)
No investment in services or products that are not
forbidden or even discouraged by Islam.
BASIC FRAMEWORK:
PROHIBITION OF RIBA
• Islamic scholars differ on what would amount
to Riba or interest
•Prohibition of ALL forms of Riba
•Interest based transactions pass unjust risks to
borrower
•
OBJECTIVES OF ISLAMIC
BANKS:
•Execution of financial dealings in accordance
with principles of Shariah
•To support Muslim communities in utilizing
and properly allocating financial resources.
•To provide an option of financing for Muslims
who want to get same in compliance with
Shariah

Prohibition of Interest

Consumer Lending discouraged

Profit and Loss Shared

Investment in Real Estate encouraged
Current
Accounts
Investment
Account
Savings
Account
Available Deposits
Investment
Financing
Trade
Financing
Lending
Other
Financial
Services
MODES OF FINANCING
Investment
financing
musharaka
(joint
venture)
mudarabha
(passive
partnership)
Mark up leasing
trade
financing
lending
Trade financing
loans with a
service charge
Hire
purchase
no cost
loan
Sell and
buy back
other financial
facilities
Over drafts
Letters of credit
THE STRUCTURE OF A
MUDARABA CONTRACT
Transfer of title
to customer
Transfer of title
to bank
ISLAMIC
BANK
VENDOR
Payment of
purchase price
(P)
CUSTOMER
Payment of marked
up price (P + X)
14
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Bank Buys the asset from the Vendor
The customer buys the asset from the bank at a markup price
Mark up price + X is payable at agreed interval.
Time between purchase from the bank and agreed
interval is period of financing.
The title moves to customer on purchase from the bank
but stays in bank’s custody as collateral until agreed
payment is made.
THE STRUCTURE OF A
MUSHARAKA CONTRACT
ISLAMIC
BANK
PARTNER
(Customer)
60% Ownership
40% Ownership
MUSHARAKA
16
PART II
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Section 33 (1) (b) Central Bank of Nigeria Act (CBN)
Act 2007
Sections 23 (1), 52, 55 (2), 59 (1) (a) and 61 of the Banks
and Other Financial Institutions Act 1991 (as amended)
provides for:
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Commercial banks
Merchant banks
Specialised banks
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Non-interest banks
Microfinance banks
Development banks
Mortgage banks
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Guidelines for the Regulation and Supervision
of Non-Interest Financial Institutions released
13th January 2011
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Amended 21st June 2011
Thrust of the amendment is that non-interest
banking is not limited to Islamic Banking.
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divided into the provision of financial products and
services based on:
 1. principles of Islamic Commercial jurisprudence
 2. any other established rules and principles
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The CBN in order to exercise its oversight
functions is to have in place an advisory
council of experts.
The advisory Council of experts to charged
with the responsibility of:
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ensuring that the financial products offered by the
Islamic Banks meet the minimum requirements of
Islamic Commercial jurisprudence.
Advising the CBN on the appropriateness of the
relevant financial products to be offered by such
institutions.
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PROHIBITION OF DISCRIMINATION: on any
grounds in the participation of any institution
or person as promoters, depositors, or other
party. ?
The CBN is to issue further directives on
corporate governance, product compliance,
risk management, capital adequacy and
operations, based on principles of Islamic
Commercial jurisprudence.
CBN
COMMERCIA
L BANKS
SPECIALIS
ED BANKS
NONINTEREST
FINANCIAL
INSTITUTION
S
ISLAMIC
FINANCIA
L
INSTITUTI
ONS
OTHER
NIFIs
MERCHAN
T BANKS
MICROFINAN
CE BANKS,
DEV. BANKS,
MORT.
INSTITUTION
S
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Non-permissible transactions for IIFS are transactions
relating to:
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Gambling
Speculation
Unjust enrichment
Exploitation/unfair trade practices
Dealings in pork, alcohol, arms & ammunition, pornography
Products, goods or services which are not compliant with
the rules of Islamic commercial jurisprudence; and
Transactions which are uncertain or ambiguous relating to
the subject matter, terms and conditions
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Institutions Offering Islamic Financial Services
are not to have the word “Islamic” in their
names except with the consent of the Governor
of the CBN.
They shall be referred to IIFS on all signage,
adverts and promotional materials to facilitate
recognition by the general public.
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IIFS may be:
 1. full fledged Islamic banks or full fledged Islamic
banking subsidiary of a conventional bank
 Full-fledged Islamic merchant or full fledged Islamic
Banking subsidiary of a conventional merchant
bank
 A development bank offering Islamic Financial
Services
 A primary mortgage institution licensed by the CBN
to offer Islamic Financial Services…
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Technical Agreement executed by the
promoters of the proposed institution with an
established and reputable Islamic Bank or
financial institution.
Technical Agreement must
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specify the role of the parties
must be for a minimum period of 3 years from the
date of commencement of operations.
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Terms of license may allow regional or national
operation
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Regional: must have a presence in at least 6 and
maximum of 12 contiguous states of the Federation
lying within not more than 2 geo-political zones
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National: all the states of the Federation including
the Federal Capital Territory
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Capital Adequacy Ratio (CAR): All IIFS shall
maintain a minimum capital adequacy ratio as
may be prescribed by the CBN
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The minimum capital adequacy ratio shall be
consistent with the minimum CAR for conventional
banks
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Liquidity Management: they must have
appropriate policies, strategies and procedures
which ensure that they maintain adequate
liquidity to fund their operations at all times
 They shall not invest their funds in interest bearing
securities or activities
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IIFS are expected to comply with other
prudential requirements on exposure and
concentration limits as may be prescribed by
the CBN
They are also to comply with standards of best
practices issued by the CBN
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All IIFS are required to screen shareholders,
customers, counterparties, transactions,
products and activities against the proceeds of
crime, corruption and terrorist financing, using
legal and moral filters.
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They must all have effective AML/CFT policies
and procedures and comply with relevant
guidelines and statutes for combating money
laundering and terrorist financing.
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The controversy rages on
Islamic banking has been said to aid the
development of poor economies
The Nigerian framework under which Islamic
banks are to operate is still unfolding
Babalakin & Co. is uniquely positioned to capture
the niche market which this new regime offers

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