Legal and Institutional Framework for Islamic Banking in Nigeria : Current School News

Critical Analysis of the Legal and Institutional Framework for Islamic Banking in Nigeria

Filed in Current Projects, Law Project Topics by on March 9, 2022

– Critical Analysis of the Legal and Institutional Framework for Islamic Banking in Nigeria –

ABSTRACT  

This dissertation looks at the legal and institutional framework for Islamic banking in Nigeria with a view to identifying the challenges in the laws regulating Islamic banking as a part of the banking sector in Nigeria. Islamic banking unlike conventional banking derives its inspiration and guidance from the religious edicts of Islam. As such, it has to conduct its operations strictly in accordance with the directives of the Shari’ah.

The main problem faced by Islamic banks is that governments often impose the laws governing the practice of conventional banking on Islamic banks. There is also a lack of understanding between the religious advisors and the bankers. This is because religious advisors do not understand the day-to-day operational needs of bankers and the bankers in turn do not necessarily understand the constraints of the religious principles.

The objective of this research is to make an analysis of the legal and regulatory framework for Islamic banking in Nigeria with a view to identifying the laws regulating Islamic banking, its limitations, its challenges, and proffer solutions where possible. In view of the above, the findings in this research reveal the inadequacy of the existing legal framework regulating Islamic banking in Nigeria.

The major problems bedeviling the success of Islamic banking as a sub-sector in the banking industry have been identified. These include among others the fact that the statutory provisions regulating the operation of Islamic banking in Nigeria are inadequate. Consequently, law reforms are highly recommended. 

TABLE OF CONTENTS

Title Page – – – – – – – – – – i
Declaration – – – – – – – – – – ii
Certification – – – – – – – – – – iii
Dedication – – – – – – – – – – iv
Acknowledgement – – – – – – – – – v
Table of Contents – – – – – – – – – vi
Table of Cases- – – – – – – – – – xi
Table of Statutes – – – – – – – – – xii
List of Abbreviations – – – – – – – – – xiii
Abstract – – – – – – – – – – xv

CHAPTER ONE
GENERAL INTRODUCTION
1.1 Background to the Study – – – – – – – 1
1.2 Statement of the Research Problem – – – – – – 4
1.3 Aim and Objectives of the Research – – – – – – 5
1.4 Scope and limitation of the Research – – – – – – 5
1.5 Research Methodology – – – – – – – 6
1.6 Justification for the Research – – – – – – – 6
1.7 Literature Review – – – – – – – – 6
1.8 Organisational Layout- – – – – – – – 22

CHAPTER TWO
CLARIFICATION OF KEY TERMS AND NATURE OF ISLAMIC BANKING
2.1 Introduction – – – – – – – – – 23
2.1.1 Banking – – – – – – – – – 23
2.1.2 Islamic Banking – – – – – – – – 25
2.1.3 Riba – – – – – – – – – – 26
2.1.4 Gharar – – – – – – – – – – 27
2.1.5 Maysir – – – – – – – – – – 28
2.1.6 Mudarabah – – – – – – – – – 28
2.1.7 Murabahah – – – – – – – – – 29
2.1.8 Musharakah – – – – – – – – – 30
2.1.9 Ijara – – – – – – – – – – 31
2.1.10 Ba,al-Mu’ajjal – – – – – – – – – 31
2.2 Types of Banks – – – – – – – – 31
2.2.1 Central Bank – – – – – – – – – 31
2.2.2 Commercial Banks – – – – – – – – 32
2.2.3 Merchant Banks – – – – – – – – 33
2.2.4 Specialized Banks – – – – – – – – 34
2.3 Nature of Islamic Banking – – – – – – – 35
2.3.1 Sources and Principles of Islamic Banking – – – – – 37
2.3.2 Sources of Islamic Banking – – – – – – – 37
2.3.2.1 Primary Sources – – – – – – – – 38
2.3.2.2 Secondary Sources – – – – – – – – 40
2.3.3 Principles of Islamic Banking- – – – – – – 41
2.3.3.1 Prohibition of Receipt and/or Payment of Interest – – – – 42
2.3.3.2 Prohibition of Speculation/Gambling – – – – – – 42
2.3.3.3 Avoidance of Uncertainty – – – – – – – 43
2.3.3.4 Sanctity of Contracts – – – – – – – – 43
2.3.3.5 Promotion of Socio-economic Justice – – – – – 44
2.3.3.6 Compliance with Moral Ethical Values – – – – – 44
2.3.3.7 Sound Corporate Governance – – – – – – – 45
2.4 Prohibited Elements in Islamic Finance – – – – – 47
2.4.1 Riba – – – – – – – – – – 47
2.4.2 Maysir – – – – – – – – – – 51
2.4.3 Gharar – – – – – – – – – – 51
2.5 Contracts in Islamic Banking – – – – – – – 52
2.5.1 Mudarabah – – – – – – – – – 52
2.5.1.1 Elements and Conditions of Mudarabah – – – – – 53
2.5.1.2 Characteristics of Mudarabah – – – – – – – 53
2.5.1.3 Execution of Mudarabah – – – – – – – 54
2.5.1.4 Associated risks of Mudarabah – – – – – – 54
2.5.2 Murabahah – – – – – – – – – 55
2.5.2.1 Conditions for Murabahah – – – – – – – 55
2.5.2.2 Characteristics of Murabahah – – – – – – 57
2.5.2.3 Execution of Murabahah – – – – – – – 57
2.5.2.4 Types of Murabahah – – – – – – – – 57
2.5.2.5 Associated risks of Murabahah – – – – – – 58
2.5.3 Musharaka – – – – – – – – – 58
2.5.3.1 Types of Musharaka – – – – – – – – 59
2.5.3.2 Characteristics of Musharaka – – – – – – – 59
2.5.3.3 Execution of Musharaka – – – – – – – 59
2.5.3.4 Associated Risks of Musharaka – – – – – – 59
2.5.4 Istisna’a – – – – – – – – – – 60
2.5.4.1 Parallel Istisna’a – – – – – – – – 60
2.5.4.2 Issues of Istisna’a – – – – – – – – 61
2.5.4.3 Execution of Istisna’a – – – – – – – – 61
2.5.4.4 Associated Risks of Istisna’a – – – – – – – 61
2.5.5 Salam – – – – – – – – – – 62
2.5.5.1 Parallel Salam – – – – – – – – – 62
2.5.5.2 Issues of Al Salam – – – – – – – – 62
2.5.5.3 Characteristics of Al Salam – – – – – – – 63
2.5.5.4 Execution of Al Salam – – – – – – – 63
2.5.5.5 Associated Risks of Al Salam- – – – – – – 63
2.5.6 Ijara – – – – – – – – – – 63
2.5.6.1 Ijara Muntahia Bittamleek – – – – – – – 64
2.5.6.2 Issues of Ijara – – – – – – – – – 64
2.5.6.3 Execution of Ijara – – – – – – – – 65
2.5.6.4 Associated Risks of Ijara – – – – – – – 65

CHAPTER THREE
THE LEGAL & INSTITUTIONAL FRAMEWORK FOR ISLAMIC BANKING IN
NIGERIA
3.1 Introduction – – – – – – – – – 67
3.2 The 1999 Constitution of the Federal Republic of Nigeria – – – 68
3.3 Companies and Allied Matters Act – – – – – – 68
3.4 Central Bank of Nigeria (CBN) Act – – – – – – 76
3.4.1 Non-Interest Financial Institutions (NIFI) Framework – – – 81
3.5 Banks and Other Financial Institutions Act – – – – – 84
3.6 Nigeria Deposit Insurance Corporation Act – – – – – 88
3.7 Shari’ah Corporate Governance – – – – – – 91
3.7.1 Functions of Shari’ah Governance – – – – – – 94
3.8 Shari’ah Supervisory Board in Nigeria – – – – – 95
3.8.1 Role of Shari’ah Board (FRACE and ACE) – – – – – 99
3.9 International Standard-Setting Organisations- – – – – 104
3.9.1 The Islamic Financial Services Board (IFSB) – – – – 105
3.9.1.1 Objectives of IFSB – – – – – – – – 106
3.9.2 The Accounting and Auditing Organization for Islamic Financial Institutions
(AAOIFI) – – – – – – – – – 107
3.9.2.1 Objectives of AAOIFI- – – – – – – – 107
3.9.3 The Role of Shari’ah Standard-Setting Organisations – – – 109

CHAPTER FOUR
PROSPECTS AND CHALLENGES OF ISLAMIC BANKING IN NIGERIA
4.1 Introduction – – – – – – – – – 113
4.2 Prospects of Islamic Banking in Nigeria – – – – – 113
4.3 Challenges of Islamic Banking in Nigeria – – – – – 118

CHAPTER FIVE
SUMMARY AND CONCLUSION
5.1 Summary – – – – – – – – – 128
5.2 Findings – – – – – – – – – 134
5.3 Recommendations – – – – – – – – 137
Glossary – – – – – – – – – 141
Bibliography – – – – – – – – – 143

INTRODUCTION 

Nigeria’s financial system is dominated by the universal deposit money banking subsector. Generally, it has witnessed significant transformation since the banking business started in the country in the mid-nineteenth century.

Before the establishment of the Central Bank of Nigeria in 1958, the financial system operated largely, under a Laissez-faire system and was characterized by systemic instability and episodic bank failures. 

The emergence of the Central Bank of Nigeria (CBN) brought about a measure of systemic stability as supervision and regulation were enthroned and efforts were made to ensure that only ‘fit and proper persons were granted a banking license.

Similarly, the specialized financial institutions, as well as the insurance and pension fund sub-sectors, have remained minor players in the financial system, even after several reforms. 

Historically to the Muslims, banks were looked upon as a “sinful place” meant for the rich non-Muslims, because it practiced ‘riba’ which is prohibited in Islam.

Their pessimism and fear were based on the provisions of the Quran, which provides thus; — they say that trade is like interest (riba), but God hath permitted trade and forbidden interest (riba).  

At that time, no one, not even Muslims, ever thought that there would one day be such a thing as Islamic banking, Islamic finance, and takaful, what more in the next two decades.5 The term takaful comes from the Arabic verb kafal meaning joint guarantee. Takaful is the 1 Bala, M.T, Victor R.U (2013) “An Analysis of the Positive Impact of the Consolidation Exercise on the Banking and Insurance Sector in Nigeria”. 

BIBLIOGRAPHY

BOOKS

Abdul Gafoor A.L.M.,(1995) Interest Free Commercial Banking, Apptec Publication
Grorumgen, pp. 62 – 63
Abdul O. Y (2013) “Corporate Governance and Islamic banking in Nigeria” In: K.I. Dandago
et al (eds.), Essentials of Islamic Banking in Nigeria, Benchmark Publishers Limited
Kano, p151
Abdul O. Y (2013) Corporate Governance and Islamic banking in Nigeria In: K.I. Dandago et
al (eds.), Essentials of Islamic Banking in Nigeria, Benchmark Publishers Limited
Kano, p. 162
Abikan A. I (2013) “Legal Framework for Islamic Banking in Nigeria” In: K.I. Dandago et al
(eds.), Essentials of Islamic Banking in Nigeria, Benchmark Publishers Limited Kano,
(2013) p 106
Agene C. E (2000) The Principles of Modern Banking, Gene Publications, Abuja. p 2
Ahmad N. A, Idris M (2 015) Principles and Practice of Islamic Banking, Benchmark
Publishers Limited, Kano p. 29
Al-Sarakhsi, Shams A. M (1993)al-Mabsut Beirut:Dar al-Makhrifa
Ayub, M (2007) Understanding Islamic Finance, England, John Willey and Sons Ltd p.440
Bambale Y. Y (2007) Islamic: Law of Commercial and Industrial Transactions, Malthouse
Press Ltd Zaria. pp 158-159
Banks and Other Financial Institutions Act Cap B20 LFN, 2004
Central Bank of Nigeria Act CAP. C4 L.F.N. 2004
Clay J.J and Wheble B. (1976) Modern Merchant Banking, Cambridge, p. 8
Companies and Allied Matters Act Cap. C20 Laws of the Federation of Nigeria (L.F.N) 2004
Danjuma N. (1993) The Banker’s Liability Heinemann Educational Books (NIG.) Plc p 20
Deji M.S. (2013) “Feasibility of Introducing Islamic Banking In Nigeria”, In: K.I. Dandago et
al (eds.), Essentials of Islamic Banking in Nigeria, Benchmark Publishers Limited
Kano, p59

 

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