Introduction

The emergence and development of Islamic banks was the result of a widespread awareness and concern among scholars that there were increasing numbers of Muslims who, faithful to their religious beliefs, refused to bank with the conventional interest-based commercial banks. These intellectuals came up with a banking system that was in conformity with the Islamic injunctions and the principle of profit and loss sharing.

Historically, Islamic banking could be traced to the time of the Prophet Muhammad, who introduced the system of bait al-maal for the collection and disbursement of revenues among the displaced Muhajirs and the needy Ansars. As such it was more of a welfare agency. Abubakar, the first Caliph, followed the same trend. Umar, however, with the approval of the Majlis al-Shura took a consensus of the community and established a department, in which he registered the names of the pension recipients and also dealt with the social welfare of the citizens. From the early days of the Umayyads, the bait al-maal or Public Treasury started to play the role of an agricultural credit bank and also a commercial bank.1

In another development, during the time of Abu Musa Al-Ash’ari the governor of Kufa, “Ubaid Allah Ibn Umar borrowed money from the public treasury of Basrah, bought goods and sold in the Hijaz and paid to the Public Treasury of Hijaz and paid to the Public Treasury of Hijaz at Medina what he owed to that of Basra.”2 By the 10th century, the institutions of mudaraba (lending money for trade), shirkta’an (partnership in trade), suftajah (draft or letter of credit) and jahabadh (money changing) had evolved and were practised in the Muslim world by the 10th century AD.3

Islamic Banking in the Contemporary Societies

The idea to establish an Islamic bank appeared first in Pakistan in the late 1940s. A decade later a local Islamic bank was “founded... in a rural area of Pakistan which charged no interest on its lending.”4 Another experiment took place in Egypt in the 1960s in which the Mitr Ghams Savings Bank was opened for business. In 1972 a second Islamic bank was opened in Egypt under the name of Nasser Social Bank.5 The success of these experiments encouraged the Dubai merchants to utilize this new form of banking to harness the wealth of those in the Emirates who on religious grounds refused to have dealings with the conventional banks.6 Hence the Dubai Islamic Bank was founded in U.A.E. in 1975. Soon four Islamic banks were established, one each in Egypt, Kuwait, Sudan and the U.A.E. (1977).

With the year 1978 came the establishment of the first Islamic bank in a non-Muslim country, Luxembourg, under the name of Islamic Banking System. The name was later changed to Islamic Finance House Universal Holdings. In the decades of the 1980s about thirty Islamic banks were established in various countries. “Pakistan, Iran and the Sudan in due course declared the adoption of a complete interest-free banking system nationwide.”7

The Islamic Banking System: A Critique

There are many scholars who hold that no banking is possible without interest, for interest is the basis of the contemporary conventional commercial banking system. However, others maintain that interest is avoidable and banks could be established free of interest.
Some Muslim scholars like the late Fazlur Rahman maintained that the Quran prohibits usury, but not legitimate interest. To him, “...it cannot, therefore, be argued that, since the Quran abolished even the milder cases, it must be concluded that the bank interest of today also stands condemned. This is because the bank interest of today is a separate kind of system...”.8 However, the vast majority of Muslim scholars maintain that interest is prohibited.9

There is no doubt that Islamic banks are introducing a new concept of banking. In its wider implications, especially in its social role beyond the narrow traditional concept of banking, is seen by some as interfering in their area of authority. This is clearly manifested in Turkey. Many people and some conventional bankers have criticised the establishment of Islamic banks on the ground that “ they are contrary to the republican and secular constitution”.10 Likewise, “the press has been discussing the applicability of these concepts in secular Turkey”.11 Possibly that is why in Malaysia “doubts have been expressed as to the sincerity of the government’s aim in introduction of such measures, some commentators suggesting that the initiatives are political opportunism, rather than proper commercial ventures”.12

According to Rodney Wilson, how the believer should best treat the Prophet’s message in a modern context or indeed, for the less devout Muslim, whether the message has any relevance at all, at least in the sphere of financial activity, is the central question. He gives the instance of Islamic reservations about hoarding. Does this mean that savings are not in accord with the Islamic principles? In the times of the Prophet “there was little emphasis on savings to finance investment, as there simply was so little investment, and concepts such as capital formation and technical change were certainly not of critical importance, although that does not imply that they were completely absent”.13

Ghulam Ishaq Khan has argued that the economy cannot be Islamized within the framework of a capitalist structure. For a complete transformation, such features of the capitalist system as set it apart from others will have to conform to the value system of Islam. Through current efforts “instead of introducing the Islamic economic system, an attempt is being made to Islamize capitalism,” and he “fears that we may end up replacing capitalism with capitalism”.14 Indeed, one critic concludes that “the Islamic bank is but another bank. It may abolish interest, but, given the capitalist structure of the economy, the bank, like other commercial “banks, will continue to mobilize the savings of the ordinary people for investments that will earn profit, which will almost always benefit in the middle and upper echelons of society... the abolition of interest in capitalistic economy without other fundamental changes can only lead to greater injustices and inequities...”15

The Current Situation

While the Islamic banks were struggling to attain viability and profitability worldwide, the conventional commercial banks due to reasons that are beyond the scope of this paper to explore, are faced with a crisis of another kind - the trend for mergers. The Majority of the top-most banks in the world are merging with one another. Not too long ago the second and the third largest banks in the United States agreed to a merger. Muhammad Anwar based on a report by Grant Thorton has shown that ‘seventeen percent of commercial banks surveyed were expected to be acquired by 1996, while twenty five percent of others were thinking of buying off another institution during this period”.16 Conventional bank mergers and also failures, are not only confined to the United States. The trend is worldwide. In Japan, the Kyowa Bank merged with the Saitama Bank. In Spain the merger-mania reached the point where only three of the seven main banks remained unmerged. In Nigeria, “in 1989, seven banks operated below solvency level,” and now “even the government expects some of these banks to fail”.17

Islamic banks on the other hand, continue in the same period to be successful and profitable. In fact by now they have matured and achieved considerable success in penetrating into the financial markets and are even competing with the well established conventional commercial banks.
This can clearly be seen from the success of the Bahrain Islamic Bank which “has overtaken Standard Chartered, the oldest commercial bank in the Gulf, in terms of deposits with around 18% of total deposits”. In Malaysia, Bank Islam Malaysia Berhad has, on the other hand, overtaken the conventional banks in growth rates, which “for the past five years averaged 39% per annum as against 10% for the latter”.19

The Faisal Islamic Bank of Egypt has also had a fairly impressive record in both deposit growth and profit share, which stood in 1979 at 10.7% and by 1981 rose to l2.03%.20 Kuwait Finance House (KFH) and the Dubai Islamic Bank distributed close to 56% of share profit.21 In Turkey “it is even likely that, the next few years will see an increase in the number of financial institutions operating along Islamic lines”.22 Islamic banks have “done quite well in as far as the mobilization of deposits is concerned” and “they appear to have fared better than many conventional banks”.23
Indeed, Islamic banks continue to succeed, to the extent that Rodney Wilson says that Islamic banks “have really come to stay”.24

Islamic Banks and Conventional Banks

With the viability, success and profitability of Islamic banking many conventional commercial banks have expressed interest in their modes of operation. Niklas Kihlborn, Chairman of the Gothenburg and Western Sweden Chamber of Commerce, for instance, has stated that, “there is great scope for cooperation between Swedish industries and financial institutions and Islamic banks”.25 One reason why Western interest is being aroused in Islamic banking is because Islamic banks and Islamic investment companies are being opened for business in some Western capitals.26 Similarly, Islamic windows are being opened in conventional banks in countries with a dual banking system. Kleinwort Benson has marketed Islamic Unit Trust. Likewise Union Bank of Switzerland has also adopted an Islamic approach in the choice of instruments for its Islamic Investment Fund, and Lauder Bank of Vienna offers a variety of Islamic financial services to their clients.27 In Malaysia, “Bank Simpanan National is expected to introduce Islamic banking system in its nationwide operations soon,” and “the switch is expected to include the bank’s various services and schemes which have already been introduced by the bank”.28

Prospects of Islamic Banking Among Muslim Minority Communities

Before we begin to examine the prospects of Muslim minority communities having the option available of engaging in economic activities of growth, savings and investment from the Islamic viewpoint, we would like briefly to enumerate the unique operational challenges that the establishment of an Islamic bank is likely face. This would give us an idea of the viability of such a venture in non-Muslim communities.

Challenges Unique to Islamic Banks

The initiation of new institutions is bound to encounter new obstacles and problems. In the case of Islamic banks problem number one would be staff and staff development. Islamic banking institutions would require an operating staff which is knowledgeable both in the conventional as well as the Islamic banking operations. Such conditions are hard to meet. There would be, therefore, the need for staff training in shari’ah, economics, accounting, administration, auditing, marketing, purchasing, and supply based on Islamic principles. As of now some Islamic banks are sending their staff for training under the auspices of the International Association of Islamic Banks based in Heliopolis.

Furthermore, the successful operation of an Islamic banking system depends greatly on the integrity, honesty, sacrifice and cooperation, rather than on the pure economic qualifications of the professionals involved. The staff has therefore to be infused with high Islamic idealism and a pioneer-like commitment.

Thirdly, most clients are familiar with an interest-based banking system. When they come to the Islamic bank their psychological bent is the same. They would like to be shown how they can maximize their profits and returns without incurring risks. The idea of an experiment, and an endeavor for a higher cause is not readily comprehended and accepted by the general public. This would require a great deal of patience on the part of the banking staff. Change shall come little by little. They have to be patient and understanding. Further, the political system in many countries may not be conducive to Islamic banking modes of operation. Ahmad El-Naggar fears that, “the existence of Islamic banks in such political context might not be a reality”.29

Social and commercial opposition might arise when the Islamic bank starts to operate and develops its social role. The authorities might see the Islamic banks as interfering in their own area of services and may regard it simply as duplicating their own efforts unnecessarily. Should this reaction result in conflict between the two institutions and lead to government intervention, the social role of the Islamic bank might be affected. Moreover, the proliferation of Islamic banks represents a major challenge to the existing traditional conventional commercial banks. These political, social and commercial interventions, particularly in the non-Muslim countries would emanate from the fact that the Islamic banks would be introducing new concepts of banking which are an expression of deeply held Islamic beliefs and practices.

Legal and regulatory laws as well as other tax laws would pose another problem for the Islamic banks. The Islamic banks operating now even in different Muslim countries are operating under conventional banking laws of the country. If this situation continues it would ultimately threaten the existence and survival of Islamic banks. For, as noted earlier, financial institutions existing nowadays are not in conformity with the Islamic banking modes of operation. They do not provide security for the smooth and successful working of Islamic banks. Laws like banking acts, central banking acts and other ordinances, the companies act, coupled with the other regulatory laws, contradict the operational procedures of the Islamic banks. If Islamic banks follow these regulations they would contravene the Shari’ah. In addition to these laws, there are other laws for the taxes: these include the rent property gain transactions (RPGT), Inland Revenue, foreign investment act, high purchase tax act, etc., that may affect significantly the operation of the Islamic banks. All these acts need to either be amended, or new ones enacted in order to provide protection for the operation of the Islamic banks.

The Problem of Excess Liquidity: Islamic banks would also have to resolve the problem of excess liquidity. Whenever an Islamic bank is established, the tendency for those who are convinced of the necessity and viability of an Islamic mode of operation, would be to entrust most of their savings with the bank. This situation may lead the Islamic banks to experience excess liquidity. They cannot avail themselves of the facilities of conventional money markets which operate on the basis of interest. However, this operation with much higher liquidity has implications for profitability. In Muslim countries with the flourishing of Islamic banks and other Islamic financial institutions the liquidity problem could be solved through the existence of inter-bank relations and other financial markets operating within the Islamic framework. This would not be the case in non-Muslim countries.
Furthermore, at present Islamic banks provide only short term financing, with little medium-term financing. If an Islamic bank goes beyond short-term financing of working capital, it has recourse to not mudaraba or musharaqa, but to hire purchase or leasing contracts. Some scholars have highlighted the problems of long term financing based on mudaraba and musharaqa.29 Others have exposed the dangers of heavy reliance on short term financing.30 To get rid of this problem, the Islamic banks would have to own shares in the industrial companies, to encourage the companies to think in long terms and incorporate and absorb technological expansion and growth. Now this again is something that may not be easy to arrange in a non-Muslim environment. Because of the above factors briefly noted for a study of the prospects of Islamic banking in non-Muslim communities we have selected as a test case the West African country of Nigeria.

The Case Of Nigeria

Nigeria has the dubious distinction of being both a Muslim majority and a Muslim minority country. Majority in terms of its population (although this is disputed by some) and minority in terms of its governmental and control apparatus (which some claim are self imposed in order to maintain law and order and the political unity). In Nigeria the nature of the challenges that are likely to be encountered in the effort to set up an Islamic banking may be enumerated as follows:
Religious and Cultural Problems: Nigeria being a multi-religious and multi-cultural society, with more than two hundred and fifty tribes in the country, each with its own cultural setup and religious beliefs, establishing an Islamic bank at a national level might be a problem. Then non-Muslim citizens, particularly those of the Christian persuasion might oppose it, due to factors that are of historical origin.

The following are among the instances of Christian opposition to the Muslim initiative in Nigeria:
a) on provision of funds by the Shagari administration for the building of a national mosque at Abuja, the new federal capital, Christian leaders alleged that the administration was backing Muslims and attempting to Illumes Nigeria;

b) Christian leaders called upon the federal government to restrict Muslims going to the Hajj due to the high foreign exchange involved.

c) Christian refusal to accept Nigeria’s membership in the Organization of Islamic Conference (OIC) although Nigeria maintains full diplomatic relations with the Vatican.

d) In 1978 and again in 1987 Constitution Assembly Committees, the Christians argued for complete exclusion of shari‘ah courts from the constitutions due to be adopted by the new civilian regimes in 1979 and 1992.

We should, however, realize that almost all Islamic banks established anywhere encounter opposition on various bases. In Turkey, for instance, as noted earlier, the establishment of Islamic banks was opposed on ideological grounds as violating the country’s secular character.32 Whereas in Malaysia, such Islamic initiative received criticism from the Islamic party (PAS).33 Moreover, doubts were raised as to the sincerity of the government’s aim. Some people even suggested that this reflected political opportunism.34

Legal and Regulatory System: Existing regulatory laws like the companies act, banking act, central bank ordinances and central bank’s directives often contradict Islamic banking practices and its modes of operations. These have so far prevented the Islamic Finance House (D.M.I.) from establishing an Islamic bank in Nigeria. The Nigerian law “requires sixty percent of Nigeria’s share holding” and the “D.M.I. insists on controlling fifty one percent of its local subsidiaries”.35
Other regulations that might affect Islamic banking operations in Nigeria include specification of minimum and maximum interest chargeable, since Islamic banks do not give nor charge interest. The prohibition of trade-related operations also contradicts Islamic banking operations. Nigeria’s banking laws therefore, as they stand today have to be amended to accommodate Islamic banking. The government may have to exempt the Islamic banks from some of the provisions of the current laws and enact special regulations so as to facilitate the establishment of Islamic banks.

Government Ideology: The prevailing secular political and economic system in Nigeria is in conflict with the ideology of interest-free banking and might therefore, be extremely reluctant to allow the operation of an autonomous economic institution based on differing ideological principles. It must be noted, however, that Islamic banks have survived in other secularist countries including Turkey, the Philippines, India and Malaysia, so why not in Nigeria?36
Nigeria’s mixed economy model with a high degree of capitalism may be an initial hindrance like it was in some of the countries noted above, but the unutilized resources of those who refused to bank with interest-based banks could be mobilized through Islamic banks. This has been done in other non-Islamic, capitalistic economies with a great degree of success.

However, there is a difference of opinion among Muslim shari‘ah scholars on the issue of an Islamic bank in Nigeria. This is due to the various sects that exist in the country, such as Izalatul Bid‘a wa-Iqamatul al-Sunnah, Qadiriyyah and Tijjaniyyah. Most of these sects are in disagreement with one another. However, Usmanu Danfodiyo university, Sokoto, Nigeria, in collaboration with the Kano Foundation, a potential institution for establishing Islamic banking in Nigeria, has already conducted research in 1988 in order to get the opinion of Muslims with regard to establishment of an Islamic bank in Nigeria. The majority of the respondents agreed enthusiastically. Since both these two institutions are outside the sectarian divide, their support and cooperation could ease very significantly the path to the establishment of at least a model Islamic bank in Nigeria.
If the proposed banks keep away from politicization and operate strictly on economic and commercial lines, introducing new and more equitable concepts and modes of operation, even the religious and sectarian reservations toward the establishment and functioning of such an entity would in due course fade away. The people of Nigeria and not only the Nigerian Muslims, shall be the beneficiaries.

Notes
1  S.M. Imamuddin, “A Historical Background of Modem Islamic Banking”, in Thoughts on Islamic Banking, Dacca: Islamic Economic Research Bureau, 1982, p 177.
2 Ibid, p178.
3 Ibid
4  Rodney Wilson, Banking and Financing in the Arab Middle East, London: Macmillan, 1983, p 75.
5 Ibid, p77.
6 Ibid, p80.
7  Mohammad Anwar, Modelling Interest free Economy: A Study on Macroeconomics and Development: International Institute of Islamic Thought, 1987, pp 10-11.
8  Fazlur Rahman, “Riba and Interest,” in Islamic Studies, Vol.3, 1964, pp 7-8. See also Ata ul Haque, “Objectives and functioning of Islamic Banks, “in Readings in Islamic Banking. op. cit., pp 161-162.
9 Anwar Iqbal Qureshi, “Usury and Interest,” in Islamic Review, July 1957, pp 5-10. Also Ahinad El Naggar, “Islamic Banking in Egypt: Model and the Challenges,” in Readings in Islamic Banking, op. cit., pp 258-270.
10  Rodney Wilson and David Baldwin, “Islamic Finance in Principle and Practice” in Islamic Law and Finance, edited by Chibli Mallat, Graham and Trotman, London: 1988, p184
11 “Turkey’s First Islamic Bank,” in Middle East, February 1985, p. 21.
12 Jane Conners, “Towards a System of Islamic Finance in Malaysia,” in Islamic Law and Finance, op. cit., p 11.
13 Rodney Wilson, Banking and Finance in the Arab Middle East, London: Macmillan 1983, pp 73-74.
14 Mirza Hassan Habib, “Replacing Capitalism by Capitalism,” in Pakistan and Gulf Economist, August 4-10, 1984.
15 Jane Conners, op. cit. p 67.
16 Muhammad Anwar, The Case for an International Islamic Commercial Bank, Malaysia: Kulliyah of Economics and Management, International Islamic University, Kuala Lumpur, Monograph 1991, pp 4-5.
17 Hussaaini Usman Malami, Need and Prospect of Islamic Bank in Nigeria, ibid.
18 Rodney Wilson, “Retail Development and Wholesale Possibilities,” in Islamic Financial Markets, London: Routledge, 1990, pp 8-12.
19 Mohammad Anwar, The Role of Islamic Financial Institutions in the Socio-economic Development in Malaysia, revised and updated, Kuala Lumpur: Kulliyah of Economics and Management, Monograph, op. cit.
20 Ziauddin Ahmad, “The Present State of Islamic Finance Movement,’’ N.Y.C. Conference on Islamic Finance Movement, 1985, p 41.
21 Money and Banking in Islam, Jeddah: Islamic Center for Research in Islamic Economics, 1983.
22 David Baldwin, “Turkey: Islamic Banking in a Secularist Context,” in Islamic Financial Markets, p 38.
23  Ziauddin Ahmad, “Islamic Banking at the Crossroads,” in Mindanao Law Journal, Vol. 2, No 2 March 1985, College of Law, Mindanao State University, Philippines.
24 Rodney Wilson, Islamic Financial Markets, op. cit., p. 3.
25 Chairman of the Gothenbourg and Western Sweden Chamber of Commerce, in Arabia: The Islamic World Review, No. 24, August 1983.
26 “Foot-hold in U.S.,” in Arabia: The Islamic World Review, March 1982, No. 7, p.53.
27  Rodney Wilson, Islamic Financial Markets, op. cit., pp. 8-12.
28  Manan Osman, “B.S.N. to go for Islamic System,” in the New Sunday Times, Malaysia, September 15, 1991.
29 Ahmad El-Naggar, “Islamic Banking in Egypt: Model and Challenges,” in Readings on Islamic Banking, op. cit. pp. 258-270.
30 These include Mohammad Ariff, “Islamic Banking in Malaysia: Framework,, Performance and Lessons,” Journal of Islamic Economics, I.l.U. Malaysia, 1991, p. 76.
31 MA. Chawdhury, “Appraisal of Experience of Islamic Banks and their Future Prospective Role.” Paper presented at the First General Conference of Islamic Banks, Istanbul, October 18-21, 1986, pp. 11.
32 Rodney Wilson and David Baldwin, “Islamic Finance in Principle and Practice,” in Islamic Law and Finance, op. cit., p. 154.
33  Ghazalli Basri, Christian Mission and Islamic Da’wah in Malaysia, Kuala Lumpar, Nurin Enterprise, 1990, p. 27. See also David Baldwin, “Turkey: Islamic Banking in a Secularist Context,” in Islamic Financial Markets, op. cit. p. 38.
34 Jane Conners, Towards a system of Islamic Finance in Malaysia,” in Islamic Law and Finance, op. cit.
35 Traute Whohlers-Scharf: Arabs and Islamic Banks : New Business Partners for Developing Countries, Paris: Development Centre Studies, O.C.D.E. 1983 p. 98.
36 Rodney Wilson, Islamic Financial Markets, op. cit., p. 3.