West Africa looks to interest-free banking

As interest-free (Islamic) banking has emerged and evolved as a viable and competitive component of the overall financial system to drive growth and development, West Africa is now promoting its principles for people of the sub-region to have broad understanding of its operations so as to embrace it.

Islamic banking or interest-free banking is a banking model which is based on profit and loss sharing system.  In this dispensation, the customer and the bank share the risk of any investment on agreed terms, and divide any profits that accrue from there. 

In cognizant of the fact that there has been significant growth in Islamic financial services in recent years and experts forecast that this growth will continue at a rapid pace, the West African Institute for Financial and Economic Management (WAIFEM), on Monday started a weeklong training on rudiments of interest free (Islamic) banking at Paradise Suites Hotel in Kololi.

The training brought together participants from different countries in the sub-region including Gambia, Ghana, and Nigeria.  It was organized to provide participants with a broad understanding on rudiments of Islamic banking as well as provide clarity on ‘Shariah’ (principles of Islamic law) requirements and the avoidance of interest in modern day banking business.

“Islamic banking as a variant of interest-free banking is a system of banking that is bound by Islamic law and prohibits the taking or payment of interest,” said the Governor of Central Bank of The Gambia.  According to him, there has been tremendous development in interest-free banking and “there are very strong indication that this growth will continue at a rapid pace” because there is a expanding demand for products of Islamic financial services, and a closely associated desire on the part of banks, including non-Islamic banks, to provide Islamic financial services.

Growth of Islamic banks outmarch conventional banks

Governor Colley explained that over the years, the growth of Islamic banks in terms of assets is more that of conventional banks.

He said: “From 2007 through 2009, Islamic banks’ assets grew, on average, faster than conventional banks’ assets in major markets.  This relatively higher rate of growth, along with the tendency to avoid excessive leverage and risk-taking have given some consumers, even non-Muslims, a new appreciation of the sector.

“Currently, there are about 400 – 500 Islamic banks worldwide and together they manage close to $1 trillion worth of assets.  This figure is estimated to rise to $4 trillion by 2020.

“The beginning of the millennium brought about fast development in Islamic financial products.  Professional bankers and ‘Shariah’ experts have been breathlessly racing to invent new Islamic financial products that mimic or replace every single interest-based contract that comes in conventional market.”

Commonality of Islamic banks and conventional banks

Although there are some fundamental differences between the Islamic banks and conventional banks in terms of modus operandi, CBG Governor pointed out that there are some fundamentals principles that apply equally to both.

These, he said, include strong corporate governance, rigorous risk management and sound capital adequacy requirements which are essential ingredients to ensure the safety and soundness of any financial system. 

The Middle East and the Asia pacific regions, with well developed Islamic financial systems, have enjoyed remarkable economic growth, due mainly to the Islamic finance activities.  A case in point is Malaysia where Islamic banking contributed positively towards its economic growth.

“Islamic banking is expected to give depositors another choice of where to invest their wealth,” said Prof.  Akhan H Ekpo, director general of WAIFEM. 

He continues:  “In our conventional banking environment, it is a fact that the borrowers are at times rendered miserable and frustrated leading to failure as a result of overbearing interest rates.  The irony is that while lending rates are always in an upward trajectory, deposits rates are pitiably low. A case for non-interest or Islamic banking would therefore bridge this gap between the deposit and lending rate; more so, the non-interest (Islamic) banker sees the business of his client as his own, and does anything legally to ensure his client succeeds.  Such conditions are unthinkable in the extant conventional banking.  Here, the banker is a complete stranger, most times having a disposition that he is doing his client a world of good by lending to him.”

Islamic banking to check greed, selfishness, corruption in banking industry

Prof Ekpo said if the non-interest banking regime is gradually built into the financial space, the issue of greed, highhandedness, selfishness and corruption would slowly be checked.  “The process of change may be slow and tough, but it would certainly be worth the trouble.”

Broad themes to be covered during the weeklong training includes: operations of Islamic banking, development and challenges in Islamic banking, risk management in Islamic finance, Islamic banking versus conventional banking, and Islamic finance in a secular environment – opportunities and challenges.