AN EVALUATION OF THE OPERATION OF NON-INTEREST BANKING UNDER THE EXISTING LEGAL FRAMEWORK IN NIGERIA

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CHAPTER ONE
GENERAL INTRODUCTION
1.1 Background to the Study
This work sought to carry out “an evaluation of operation of non-interest banking under the existing legal framework in Nigeria.” This is in the light of the Guidelines issued by Central

Bank of Nigeria (CBN) on banking operation under the Principles of Islamic Commercial Jurisprudence and non-interest window and branch operations of conventional banks and other financial institutions. Further to the release of the Guidelines in 2011, CBN issued a banking license to Jaiz Bank Plc in 2011 to operate under the Principles of Islamic Commercial Jurisprudence, which raised some legal issues relating to the operation of noninterest banking system.

The issues involved the power of CBN under Central Bank of Nigeria Act, 2007 and Banks and Other Financial Institutions Act to issue the license for the operation of Non-interest banking in Nigeria. Some of the issues were raised in the first Nigerian Case on the operation of non-interest bank in Nigeria, Godwin Sunday Ogbaji v. Central Bank of Nigeria & others.3 These also relate to regulatory and supervisory challenges relating to non-interest banking vis-à-vis the provisions of Companies and Allied Matters Act, Investments and Securities
Act, 2007 and Nigerian Deposit Insurance Corporation Act, 2006.
Prior to CBN guidelines on Non-Interest Financial Institutions, banks in Nigeria were based on interest. Black’s Law Dictionary, Eight Edition defines interest as „Payment a borrower pays a lender for the use of the money‟. It is different from usury and this distinction was introduced with the passage of Usury Law in 1545 by the British Parliament. A difference between “interest” and “usury” is that the later means “charging illegal high interest”.

Interest, according to Encyclopedia Britannica, „became legalized from the 13th Century with expansion of trade. Demand for credits increased necessitating a modification of the definition of the term “usury”. In 1545, England fixed a legal maximum interest; any amount in excess of the maximum was usury‟.
Microsoft Encarta Encyclopedia also supports the above in the following words: “Usury, in law is a payment of interest by a borrower to a lender for the use of money, in excess of the amount fixed by statute.”
Interest, in other words, now stands for any charge paid by a borrower for the use of money within the limit allowed by CBN.
In essence, interest could take either one or two forms of interest – simple or compound. Simple interest is interest computed on the principal and principal alone. Compound interest, on the other hand, is capitalization of interest so that interest itself yields interest. In short, it is interest on both principal and accrued interest. The two forms of interest apply to both loan and overdraft. The case of NIDB v. Olalomi Ind. Ltd. illustrates what is compound interest.
The Respondent in that case borrowed total sum of N1.7million from the Appellant as term loan and working capital on 31st December, 1983. Along the line, problem arose between the parties, which led to the Respondent suing the Appellant, claiming damages before the court of first instance. The Appellant then as Defendant counter-claimed inter-alia for total sum of
N290,931,823.08 being the total sum outstanding against the Plaintiff as at 31/3/1996. The Court of Appeal in its considered judgment awarded the claim of the Appellant in spite of the amounts paid by the respondents towards liquidating the debt.

Conventionally, charging interest is legalized depending on the discipline of advocate. Moralists (philosophers concerned with the principles of morality) on the other hand, questioned why interest should be charged with equally very weighty arguments. Therefore, from time immemorial, disputes between banks and their customers revolve around legitimacy to charge interest, at what rate, that is simple or compound and whether the rate could be varied by a bank without the customer‟s consent. Disputes also often arise where terms have not been agreed upon between the parties. This is so because an overdraft could result with or without any formality as decided in the cases of Bank of the North Ltd v.
Bernard andNational Bank Ltd v. Olatunji .

Generally, a banker is entitled to charge interest simple or compound based on an agreement, custom or acquiescence by customer. In the case of Union Bank of Nigeria Plc v. Sax Nig. Ltd. the Court of Appeal held that a banker has the right to charge interest on all overdrafts and that when considering whether interest is payable on overdrafts, Nigerian Courts must have regards to the custom of bankers in Nigeria. Also the Court of A ppeal in the case of Suberu v. Cooperative Bank Ltd. held as follows: “A bank is empowered to charge interest on loans or overdraft on the basis that there is a custom to that effect , or that the customer has impliedly consented where, without protest, he allows his account to be debited.”
The position has crystallized such that the Court observed that: “A bank has power to charge compound interest on loans or other advances granted to a customer even where there was no express agreement on the rate of interest to be charged. This is because the customer is taken to impliedly consent to an interest to be charged to his account.”

Unilateral variation of interest rate as pointed out is one area bank debtors always anchor their cases on. Economists and judges are indeed concerned about this phenomenon.
Adekeye JCA could not hide his feelings and observed as follows:

Variation of interest rate called for my brief comment. The practice of banks charging a varying interest rates…should be revisited in the interest of the nation‟s economy and public interest. A lot of otherwise viable business concerns had fallen victims of such arbitrary practice of the banks and have been prematurely paralyzed or flushed out of business.

However, this issue has since been laid to rest by the Supreme Court in the case of Union Bank of Nigeria Plc v. Albert Ozigi15where Adio, JSC held that: “’It was therefore wrong to import matters such as the requirement that the Appellant must obtain the prior consent of or given prior notice of increase in the rate of interest on the loan to the respondent.” Nowadays, banks always ensure that charging of interest is expressly provided in the contract of loan or the security documentation in realization of the advantages of express terms over implied terms.

Notwithstanding the above, it should be borne in mind that essential of interest simple or compound is in conformity with Central Bank Monetary Guidelines. On this point, the Court of Appeal in First Bank Plc v Odaudu Uwada as follows: “Banks to charge rate of interest on advances, loans credit facilities…must be in line with the stated minimum and maximum rates of interest which were approved.”

Further, it was held: “It is a matter of common knowledge which this Court is entitled to judicial notice that the rates approved in the CBN guidelines vary from time to time.”

No doubt, people would undoubtedly want to transact banking business with non-interest bank in order to avoid severe implications of interest rate chargeable on loans given to them by banks. However, how legally are their deposits protected? Sufficient legislation and legal framework are certainly required to avoid economic challenges.

With regard to the introduction of non-interest banking in Nigeria, this work focused on the operation of non-interest banking and its legal framework in Nigeria and it did not dwell much on religious perspective. However, to succinctly give more light on what is meant by non-interest banking, this work would consider some few areas where the interest chargeable by banks on loans are considered as unjust under the Shariah.
When the Shariah texts concerning interest are read, the stringent warnings against any involvement in interest will certainly be perceived. Islam prohibits a number of immoral acts such as fornication, adultery, homosexuality, consuming intoxicant and murder. However, the variety of discussion and extent of warnings for these acts are not of the same degree with those related to taking interest. This has led Sayyid Qutb to write: “No other issue has been condemned and denounced so strongly in the Quran as usury.”
The Quran, for example, contains the following verses concerning interest: “O you who have believed, do not consume interest, doubled and multiplied, but fear God that you may be successful. And fear the Fire, which has been prepared for the disbelievers.” This strong warning towards the believers warns of a fatal consequence: being thrown into the Hell-fire that has been prepared for the disbelievers.
God Almighty also says in Quran 2:275-276:
Those who consume interest cannot stand [on the Day of Resurrection] except as one stands who is being beaten by Satan into insanity. That is because they say, Trade is [just] like interest.’ But God has permitted trade and has forbidden interest. So whoever has received an admonition from his Lord and desists may have what is past, and his affair rests with God. But whoever returns [to dealing in interest or usury] those are the companions of the Fire; they will abide eternally therein. God destroys interest and gives increase for charities. And God does not like every sinning disbeliever.
These verses have many interesting points. Commenting on the first portion of the verses,
Maudoodi has written, thus:
Just as an insane person, unconstrained by ordinary reason, resorts to all kinds of immoderate acts, so does one who takes interest. He pursues his craze for money as if he is insane. He is heedless of the fact that interest cuts the very roots of human love, brotherhood and fellow-feeling, and undermines the welfare and happiness of human society, and that his enrichment is at the expense of the well-being of many other human beings. This is the state of his
“insanity” in this world: since a man will rise resurrected as a lunatic.
Secondly, the verses make it quite clear that there is a difference between legitimate business transactions and interest. The difference between them is so glaring that the verses do not bother to explain them, which is one of the stylistic aspects of the Quran. Thirdly, these verses clearly state that God “destroys interest and gives increase for charities.” This is one of God’s “laws” which humankind cannot necessarily discover on its own. The ultimate and full negative effects of interest on the individual, community and world as a whole in both this life and the Hereafter are known only to God. However, a glimpse of some of those negative effects, testifying to the truth of these verses has been witnessed during the recent economic recession.
Shortly after the above verses, Allah further says in Quran 2:278-279: O you who believe, fear God and give up what remains [due to you] of interest, if you should be believers. And if you do not, then be informed of
a war [against you] from God and His Messenger. But if you repent, you may
have your principal [thus] you do no wrong [to others], nor are you wronged.
Who in his right sense would expose himself to a declaration of war from God and His Messenger? Undoubtedly, a stronger threat one will rarely find. At the end of the verse, God makes it very clear why interest is forbidden: it is wrongdoing. The Arabic word for such is Zulm, meaning a person has done wrong to, harmed or oppressed another person or his own soul. This verse demonstrates that interest is not forbidden simply due to some ruling of God without any rationale behind that ruling. Interest is definitely harmful and, therefore, it has been forbidden.
In addition to the verses of the Quran, the Prophet Muhammad (peace and blessings of God be upon him) also made many statements concerning interest. For example, the following statement clearly demonstrates the gravity of this action as narrated by Al-Bukari and Mulim: “Avoid the seven destructive sins: associating partners with God, sorcery, killing a soul which God has forbidden- except through due course of the law, devouring interest, devouring the wealth of orphans, fleeing when the armies meet, and slandering chaste, believing, innocent women.”23
In fact, another statement of the Prophet (peace and blessings of Allah be upon him) should be sufficient to keep any God-fearing individual completely away from interest. The Prophet (peace and blessings of Allah be upon him) said: “One coin of interest that is knowingly consumed by a person is worse in God’s sight than thirty-six acts of illegal sexual intercourse.”
In another Hadith narrated by Ahmad and others, the Messenger of Allah (peace and blessings of God be upon him) said, “Allah cursed the one who takes interest, the one who pays interest, the two persons who witnesses the deed [that is, the interest contracts] and the one who writes the contract.”
This is a basic principle in Islam. If something is forbidden and wrong, a Muslim should not participate in it or support it in any way. Thus, since interest is forbidden, it is also forbidden to be a witness to such contracts, to record them and so on. The Prophet’s words also explain that there is no difference between the one who pays interest and the one who receives it. This is because they are both involved in a despicable practice and, hence, they are equally culpable.
The Prophet Muhammad (peace and blessings of Allah be upon him) also said: “If illicit sexual relations and interest openly appear in a town, they have opened themselves to the punishment of God.”

1.2 Statement of Problem
Central Bank of Nigeria is conferred with powers to regulate banking sector in Nigeria as enshrined under Sections 57 and 61 of Banks and Other Financial Institutions Act, and Section 33(1) of Central Bank of Nigeria Act, 2007. However, such powers are to be exercised within the confined provisions of the Acts.28 The Bank could not make rules or regulations without taking into cognizance of the relevant legislations that affect the area of

the new regulations. Therefore, it could not make regulations, pursuant to its powers, that would contradict the provisions of existing legislations. Such legislations include:

(a) Companies and Allied Matters Act- Any financial institution in Nigeria must be registered with Corporate Affairs Commission (CAC). With the issuance of banking license to operate under principle of Islamic Commercial jurisprudence in Nigeria, Memorandum and Articles of Association (MEMART) is required to state that the banking operations will be conducted in accordance with the Shariah principles and practices. However, under Islamic Commercial Jurisprudence, the legal personality of a company is arguable. In this circumstance, banking operations under the Principle of Islamic Commercial Jurisprudence and, at the same time, under CAMA30 needs systematic legal framework.

(b) Banks and Other Financial Institutions Act- Any bank or financial institution that seeks to operate in Nigeria must comply with the provisions of this Act. The law does not permit banks to engage directly in business enterprises by using depositors‟ funds. However, this is the basic asset acquiring method of noninterest bank. Therefore, to allow banking business under the Shariah Law, the business must fall under section 66, which provides as follows:“banking business means the business of receiving deposit on current account, savings account or similar account, paying or collecting cheques, drawn by or paid in by customers; provision of finance or such other business as the Governor may, by order published in the Federal Gazette, designate as banking business.”
In the light of the above legislation, is the operation of non-interest banking under the principles of Islamic Commercial Jurisprudence in line with the existing legislations on
banking business?
(c) Nigerian Deposit Insurance Corporation Act, 2006- The Act established Nigerian Deposit Insurance Corporation (NDIC), which is responsible for insuring all deposit liabilities of licensed banks . Similarly, the introduction of non-interest banking in Nigeria has necessitated the extension of Deposit Insurance coverage to the depositors of such bank in order to provide a level playing field for all deposit-taking financial institutions and ensure that holders of non-interest banking products are adequately protected. NDIC is empowered to make rules and regulations and make different provisions for different circumstances guiding the operations of the Deposit Insurance Scheme. Therefore, how relevant the NDIC rules will be to the products of the Shariah Principles?

(d) Investments and Securities Act, 2007: The current non-interest bank operating in Nigeria,
Jaiz Bank Plc, has the following features:

(i) it operates as a public company;
(ii) it sells its shares by inviting public to subscribe to its shares, and (iii) it issues share certificates to its shareholders.

The above features render non-interest bank to be regulated by Security and Exchange Commission (SEC) in accordance with the provisions of Investments and Securities Act, 2007. SEC is empowered to regulate all offers of securities by public companies and entities and to register securities of public companies. Similarly, pursuant Rule 40 of SEC Rules and Regulations, the investment of non-interest bank must be registered with SEC. In this light, is shareholders‟ investment, which would be operated under Musharakah and Mudarabah subject to SEC rules and regulations other than the principles of Islamic Commercial Jurisprudence? So, a nexus between non-interest banking, the legislation and auxiliary legislation must be provided in order to aid in resolving issues that may come up under the investment.