IMPACT OF SHARIAH GOVERNMENT ON CBN GUIDELINES ON NON INTEREST BANKING SYSTEM
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IMPACT OF SHARIAH GOVERNMENT ON CBN GUIDELINES ON NON INTEREST BANKING SYSTEM
BACKGROUND OF THE STUDY
The creation of the Islamic Banking System and Interest-Free Banks (IFBs) in Nigeria as a result of the CBN’s non-interest banking guidelines is the most recent and major development in the banking sector.
This is a reaction to the conventional interest-based banking system’s failure to meet the needs of the country’s development, which also hold true for other growing countries (Ahmed, 2000).
According to Adebayo (2010), many Muslims would have preferred a banking system that operated within the Sharia governance framework rather than the traditional interest-based banking system because it goes against the essence of their religion.
They are, however, prevented from acting because they are afraid of running the risk of having their money stolen if they decide to keep it at home, or because their wages will be paid to them through banks,
or because they must engage in other unavoidable transactions with these conventional banks that do not operate in accordance with Allah’s will.
Due to the percolating aspect of interest in this product among clients, those who chose current accounts with these institutions still run the danger of interacting with usurious transactions.
With the exception that she (Nigeria) chose non-interest banking, similar to Turkey, which refers to it as “Special Finance House” and it is within the framework of Sharia governance, she (Nigeria) recently joined other nations such as Turkey, Jordan, and Malaysia to come up with specific guidelines and regulations for the establishment of Islamic banks.
The 1991 Banks and other Financial Institutions Decree (BOFID), which provided the necessary framework for the establishment of Profit and Loss Bank in Nigeria, replaced the Nigerian Banking Law (Banking Act of 1962), which provides a sign of relief to the Muslims who were dissatisfied with the transactions of the conventional banks.
Another draught of the framework for regulating and overseeing non-interest banks (NIBs) in Nigeria was made public on March 4, 2009. The Sharia governance framework’s goal is to provide minimal requirements for Nigerian non-interest banking operations.
The following topics are covered in the guidelines: – Definition of a non-interest bank – Licencing requirements – Non-interest banking models – Non-interest financial instruments – Corporate Governance – CBN Shariah Council – Conduct of Business Standards – Profit Sharing Investment Accounts (PSIA)
An effective Shariah governance framework can be aided by the supervisory board’s independence in its oversight role and the consistency of Shariah law.
The presence of an effective Shariah governance system will increase stakeholders’ confidence in the output of Islamic financial institutions in general and the Islamic bank in particular. (Hamza, 2013).
In Islamic Economics literature, the terms “Islamic Banking” and “Interest-Free Banking” are interchangeable to refer to a banking framework other than the standard interest-based banking practise. An interest-free bank and an Islamic bank are different in technical terms, yet they are occasionally used interchangeably.
An Islamic bank is described as “a financial and social institution that avoids the use of interest in any of its operations and whose objectives, operations, principles, and practises must conform to the principles of Shariah” by Ahsan (1988). It represents a different financial structure based on Islamic principles. It is a partner in productive economic development as well as a funder.
Gusau (2000) contends that “Islamic banking system is supposed to operate completely within the Shariah in all of its activities, both in terms of sourcing funds and disbursement of the funds,” when comparing it to interest-free banking. In addition to avoiding all of its implications,
it also stays away from everything else that the Islamic law forbids. On the other hand, interest-free banking systems do not charge interest, but there is no reason to believe that all of their other operations will be conducted strictly in accordance with Shariah.
Three conclusions can be drawn from the foregoing, namely: 1) Islamic banks must not impose interest fees.
2) Adhere to Shariah guidelines in all aspects of operation
Promote Islamic principles.
Thus, it is clear that operating interest-free is a required but not sufficient requirement for a bank to be considered an Islamic Bank. In addition to non-interest fees, the bank is required to advance Islamic principles.
The provision of Interest-Free Banking services by traditional banks on the basis of profit and loss sharing (PLS) principles is hence what is meant by Interest-Free Banking Window.In order to meet rising customer demand, improve savings mobilisations,
and take advantage of the new window of opportunity provided by the Islamic banking system, conventional banks have adopted an operational strategy in which interest-based banking services are operated alongside Islamic banking services within the same banking hall.
It should be viewed as a crucial component of financial globalisation, which calls for the fusion of the Western Financial System and the Islamic Financial System to create a single, integrated global financial system.
The former Jaiz International Plc, which was established in 2003/2004 as a special purpose vehicle (SPV) to build Nigeria’s first fully-Pledged Non-Interest Bank, was destroyed, and Jaiz Bank PLC was born. Over 3000 stockholders from each of Nigeria’s six geographical zones control this unquoted public business.
STATEMENT OF THE PROBLEM
Islamic banking is a form of interest-free finance that is primarily based on profit-and-loss sharing, according to Mannan (1976). Additionally, it operates according to Shariah law. As a result, it serves as the basis for the Islamic Economic System, which is by nature interest-free.
An Islamic bank was envisioned by Siddiqi (1983) as a financial intermediary that raised savings from the general public on the basis of Mudaraba (a profit-and-loss sharing agreement) and provided capital to business owners on the same premise.
The percentage of earnings shared by the bank and the enterprise are mutually agreed upon, and the percentage of profits shared with the depositors is published in advance.
To determine how well the CBN’s non-interest banking guidelines adhere to those of Islamic financial institutions, the researcher is evaluating them. Some issues with the way the interest-free banking system operates will be shown by contrasting the guidelines with Islamic beliefs, which should also be taken into account.
1.3 OBJECTIVES OF THE STUDY
The goals of this study are as follows:
To investigate how Sharia governance has affected CBN regulations regarding the non-interest banking industry.
To evaluate the advantages of Nigeria’s non-interest banking system.
Identification of Islamic banking’s difficulties under the Sharia governance framework
1.4 RESEARCH QUESTIONS
What effect does Sharia governance have on CBN regulations regarding the non-interest banking system?
What are the advantages of Nigeria’s no-interest banking system?
What are the difficulties faced by Islamic banking within the context of Sharia governance?
1.5 HYPOTHESIS
HO: The CBN’s non-interest banking system guidelines are unaffected by sharia governance.
HO: The CBN’s non-interest banking system guidelines are unaffected by sharia governance.
1.6 SIGNIFICANCE OF THE STUDY
The following are the implications of this study:
The general public will be made aware of the CBN guidelines for the Sharia-compliant non-interest banking system through this study. Additionally, it will educate the public and stakeholders on the advantages of the non-interest banking system.
This study will also act as a starting point for other academics and researchers who might be interested in conducting additional research in this area. If used, it could even go so far as to offer a fresh explanation for the subject.
1.7.2 SCOPE AND LIMITATIONS OF THE STUDY
The overview of the CBN guidelines for non-interest banking, Sharia governance, and the salient features of Islamic banking will all be covered in this study on the influence of Islamic law on CBN guidelines.
LIMITATIONS OF THE STUDY
Financial restraint: A researcher’s ability to collect data (through the internet, a questionnaire, and interviews) and locate relevant materials, literature, or information is often hindered by a lack of funding.
Time restraint: The researcher will do this investigation together with other academic activities at the same time. As a result, less time will be spent on the research project.
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