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How would you explain Islamic finance to an ordinary Nigerian?

To explain to a layman, you have to look at what the background of the premise is and the premise is really one of fundamental economic principle.

Money, as we have come to know it today, is only a means of exchange. What has value is something real; a real asset or a real service and the only way we can make sustainable money and build a sustainable economy is to take something real and convert it into a productive asset.

I can use money, but I can’t eat it. But I can buy rice at a cost and trade it at a premium and make my profit. Or I can build a house, and I can rent or lease it out. The fact that I have N7,000 for a bag of rice, I should not earn money just for having it in cash, as you do in the bank which is what interest is. You get a rate on money and that is what is forbidden in Islam.

However, nobody says you are not allowed to make money and that is another fallacy about Islamic finance. A lot of people feel Islamic finance is free finance. It is not. It is just finance around reality; real trade, real service, real added value.

Difference between profit and interest

It is about the value. There are three ways in which people make money in Islamic finance. The first one is trade. You buy something at a cost, you put your mark up, and sell it at a profit, just like every trader does. And you can even do that in a way that looks like a banking transaction.

A manufacturer comes and says I need to buy a machine for my factory. Normally, if it is N1 million, a bank would give him N1 million. But an Islamic financial institution will buy the machine and sell it to you for N1.1 million and you can pay over one year. Every month you pay in installment.

The difference is that while a bank will give you the N1 million and charge 10 per cent, in this case I bought something, I owned it for a few days, and I sold it and I am allowing you to pay me over time. So, I took the risk of ownership and I am selling you something that I owned. I am not lending you money. Lending money is not a business in Islamic finance.

The second area is leasing, which is not very different from the conventional system except that the financial institution must buy the asset and then lease it to you. You want to buy a car for N1 million, we can’t just give you the money. We will buy the car and then lease it to you. So we own the car. That’s the difference.

The third area is partnership. A person comes with a business idea and says come to partner with me. Bring your money, I bring my money, let’s do this business together. If we make profit, we share it together and if we make a loss, we share it together.

So those are the three core areas of how Islamic finance works and everything else is built around these three models essentially.

How viable is Islamic finance, since exclusion from some sectors curtails your investment outlets?

I want to say that this principle of business not based on reality has been the cause of financial crisis. When you look at what was the reality of the transactions that created these bubble, it is because they were allowed to trade on things that didn’t exist, margin lending, and all that.

If we had stuck with reality, the bubble cannot grow much. You have to have something real to back it up. The question of being curtailed in investment outlet is not entirely true. We don’t invest in banking sector, we don’t invest in breweries, we don’t invest in gambling and people say to us, what else is there to invest in.

But what is the percentage contribution of banking, breweries and gambling to our GDP (gross domestic product) and what else do we do in Nigeria? There are other sectors that we could invest in like oil marketing, agriculture, telecoms, manufacturing, food, beverages, pharmaceuticals, transportation, building materials, real estate, and infrastructure. Islamic finance is very well suited for these kind of financing.

What do you have to say about the new CBN guideline on non-interest banking?

As pioneers in this area, I think we are the only institution today that has the entire requirements that the CBN requires. We are compliant with the guidelines as we have it today.

So you can float a bank?

Well, floating a bank is a business decision that we are not really considering at this time. But in terms of the structure of our organisation and system procedures and committee that we have in place, we are compliant with CBN guidelines. We have a lot of experience under our belt and we have everything that it takes.

The guidelines require institutions to set up a shariah advisory council. What will be their role?

It is so that companies do not misrepresent themselves. When you are doing Islamic finance, part of what you come across is that for many people, it is an emotional decision. Many people are excluded from the banks by personal choice. They don’t go to the conventional banks because they feel it is wrong for them to engage in interest, either receiving it or giving it.

So for them, if a bank comes to them and says we are now a non interest bank and in actual fact they are not, then we have a case of public being deceived and that would be very unfortunate. So what the shariah advisory board does is an extra layer of oversight. They ensure and verify that indeed, you are not engaged in any activity or structures that are not compliant with them. In addition, as you are rolling out new products, they review and certify that these new products are actually compliant and are Islamic finance structures that can pass before you roll out.

They are not in your organisation as spiritual leaders in terms of personal counseling. They have to be well versed in shariah of commerce, called Fiqh al-Muamalat; they have to know commerce, accounting, economics, finance and even Law, because this is all about drafting contract at the end of the day.

They have to be up to date with the latest financial instrument, even in the conventional industry. We have a shariah board and it has been fruitful.

Why do you not invest in banks?

The obvious reason is that one of the tenets of Islamic finance is that we don’t invest in interest and banks make their money from giving and receiving interest.

So does that mean that you monitor the companies you invest in to ensure they do not violate your investment principles?

That’s right. We can’t invest in just any company.

But how far can you monitor to ensure that these companies comply with these principles?

There is an internationally accepted framework where you have limits and you make sure that things are not within certain limits of materiality. So you satisfy yourself to the extent of materiality. You can never be 100 per cent sure. In fact, there is no such thing as 100 per cent purity.

So there are internationally accepted standard of the percentage of purity that would be acceptable for an investment for the simple reason that if you want to be absolutely strict, you would not do anything.

Secondly, there is what we call degrees of separation. If you came to invest with me for example, I have my own responsibilities. I have to make sure that you are asking me to invest in something that is ethical. So you can’t come to me and ask me to invest your capital in a brewery. We would not do that.

I have to ensure that your investment is not in cash. It has to go through the banking system, I have your KYC (know-your-customer), I have your address, I know where you come from, and all other relevant information. There is a level of separation that you have to keep yourself to making sure you have met your own responsibility in terms of Islamic finance and in terms of the expectation from a financial institution. There is only so much that you can know about a person.

Limit yourself so that the interaction between you and the person is correct and anything else the person is doing with his life cannot be too much of your concern.

Do you worry about capacity in this field?

In this field, that is a global problem and the only concern I had with the CBN guideline was the insistence that the shariah council advisers can only work for one institution. I felt that should be reconsidered because if there is less capacity as operators, there is even less capacity of the advisers with the qualities that I mentioned.

Globally, it is a problem and the way they have addressed it is you find many of the same people serve on different banks’ shariah advisory council. They are like consultants and only act when they require it and when they need to come and audit an organisation. It is like asking an accounting firm to work for one company at a time. This is even more specialised than accountants.

I think the capacity crunch is even more crucial, even at that shariah advisory board level. At the operator level, training can take care of it. It will take time, so I don’t think any institution should rush into this business. The guidelines have come out, which is great.

You studied Islamic financing several years ago at a time when it was not popular in Nigeria. Did you see this coming?

I was at a training recently and the gentle man was talking about business planning and he said if you want to succeed in business, ask yourself what problems are people grappling with that they need solutions to. Are there things that people need that nobody is supplying today?

For me, that was why I went into Islamic finance. It started out as a personal need. I didn’t want to buy a house on an interest based mortgage but I aspired to own a house. And I felt strongly about it so I said if I feel like this, there must be others that may feel like this; there could be a market for this. We did our survey, did questionnaires, sampled the country and found there were other people that desired this service. That’s why we went into it five years ago now.

I studied Islamic finance 10 years in anticipation. Yes, it has taken Nigeria 10 years to have a guideline, but we now have a guideline and that’s progress. Nigeria has a real opportunity to put its stamp on the international financial community by establishing a hub for Islamic finance, given our population, given the size of our economy, given the importance of our country in West Africa and even in Africa.

The European countries, particularly United Kingdom, are scrambling to be known as Islamic finance hub because they know the implication. They finance major infrastructure and major real estate in their economy with Islamic finance and they have attracted foreign direct investment. At the end of the day, it is a financial product and with good returns structured in a way that it does not offend anybody.

How well do your products perform compared to the rest of the market?

It is a challenging question to answer because we don’t have a direct benchmark with which to measure our performance. In the UK and US, they have the FTSE Islamic Index and the Dow Jones Islamic Index, and so Islamic finance fund managers measure themselves against these indices.

We are measured against the industry, even though the structure of our funds is very different. What we found, which is very interesting, is that we have a very low correlation with the general market, which is fund portfolio diversification. For example, during the financial crisis, our funds outperformed the conventional market. During times of market bubble when you had margin lending and things shifting, particularly the banking sector, it becomes a challenge because we don’t invest in the banking sector. For us, it is the learning curve.

We have struggled with a lack of certain instruments that we require to build a balanced portfolio. I mean regulatory instruments from the CBN like non interest bonds, non interest treasury bills, which would allow us to build a more robust portfolio. We are beginning to create them on our own and based on that, we are beginning to do very well.

Our own target now is to work with the Nigerian Stock Exchange. We have an Islamic index that we have created in-house and we want to work with the NSE to publish it so that even if somebody wants to create their own Islamic portfolio, they have the kind of stocks that they can benchmark against.