Interest-free Banking & Finance- Benefits to be Reaped

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Liliana Perry
6 years ago
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2 - Read the 1 st, 2 nd and 3 rd of the series Interest-free banking by virtue of its mode of operation will enable Islamic religious beliefs to be reflected in financial arrangements and transactions thereby fulfilling the financial needs of Muslims in accordance with their faith. Of course this does not exclude adherents of other faiths ( as the beliefs being reflected in financial transactions exclusion of Interest, Ethical behavior, Justice, Fair play etc,) are not out of sync with that enjoined by other faiths. It is expected that the shift to an equity-oriented financial system will help substantially reduce instability in the financial markets, substantially reduce business failures, and will dampen (rather than accentuate) economic instability. A system of financial intermediation that bans interest encourages greater reliance on equity and profit and loss-sharing, therefore the aggregate level of investment tend to be higher in a profit-sharing system. Since savings and investment are among the crucial determinants of economic growth, the rise in savings and investment resulting from the implementation of Islamic values and institutions is expected to lead to higher economic growth. In an interest-free (Islamic) system of financial intermediation credit is made available only for purchase of real goods and services. This reduces the incidences of financial resources becoming easily available for unproductive, speculative and wasteful spending. Since bank assets are created in response to investment opportunities in the real sector of the economy, the real factors related to the production of goods and services (in contrast to the financial factors) become the prime movers of the rates of return to the financial sector. In other words, the rate of return to financing is determined by productivity in the real sector. 2 / 5

3 Profit-Loss-Sharing according to a fair ratio between the financier and the entrepreneur helps promote a more efficient allocation of resources. Moreover, by getting the financiers more involved in the success of the entrepreneur s business, it is expected that greater expertise will become available to the entrepreneurs, leading to an improvement in the availability of information, skills, efficiency and profitability. Because of the nature of the contracts on the liabilities side of the balance sheet, banks operating on a profit sharing basis are often less vulnerable to external shocks and are less susceptible to insolvency. This is because a wider range of liability holders share in the risks of the banks as compared with the conventional banks. Foreign direct investment, in contrast to debt-creating inflows, is often regarded as providing a safer and more stable way to finance development because it refers to ownership and control of plant, equipment, and infrastructure and therefore funds the growth-creating capacity of an economy. Furthermore, in the event of a crisis, while investors can divest themselves of domestic securities and banks can refuse to roll over loans, owners of physical capital cannot opt out that easily. Financiers will therefore have a greater incentive both to assess risks at the outset and to monitor borrowers after finance had been given. Equity financing will introduce greater health into the economy through a more careful scrutiny of projects and will arrest the incidences of non-performing white-elephant projects. We are all living witnesses to the malaise of debt-burden for a nation, accentuated by increasing interest accrual on outstanding debt balance. The higher the debt-servicing (interest plus amortization) as a percentage of total government expenditure for a nation, the less will be available for development purposes and the more serious will be the socio-economic problems faced by that nation. Nigeria is a living example of how the burden of debt-servicing squeezes available resources. 3 / 5

4 With the benefits to be reaped, no wonder the phenomenon of Interest-free financial services has taken root today, not only in the Muslim World but in the West. It is the world s fastest growing financial sector with assets approaching $1t rillion worldwide and growing at 15% -20% per annum. There are a number of Islamic financial institutions operating alongside conventional financial institutions either autonomously or as window within the conventional set up. In this respect, a number of financial institutions have located at international level both within and outside of the Muslim countries. This is the case with banks such as IBB-Islamic Bank of Britain(UK) Citibank (U.S.A), ANZ (Australia), ABN Amro (Netherlands), Goldman Sachs (USA), HSBC (UK), Deutsche Bank (Germany), Societe-Generale (France), Saudi-American Bank (U.S.A Saudi), Saudi-British Bank (UK-Saudi). to mention but a few. Nigeria should play catch-up and join the World in embracing a Non-Interest alternative Financial system. It can only be for the better. Saidat.A.Otiti has an MSc in Islamic Economics, Banking and Finance from Loughborough University, UK. She had worked in Chartered Bank ( now StanbicIBTC) and left at a Senior Management Level in She is currently the MD/CEO of Baytuzzeenah Ltd. 4 / 5

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This is the 3 rd of 4 series on the topic Islamic Banking Interest-Free Banking. Read the 1 st, 2 nd and 4 th of the series

This is the 3 rd of 4 series on the topic Islamic Banking Interest-Free Banking Read the 1 st, 2 nd and 4 th of the series 1 / 10 The universal functions of all financial systems are the same, differences