Title page i

Approval page ii

Dedication iii

Acknowledgement iv

Table of content vi



Starting the intention of the research.4

Statement of the problems8

research Questions9

Objective of the study9

Significant of the study10

Scope and Limitation of the study11

CHAPTER TWO: Literature review and theoretical frame work


The concept of Riba (interest)13

Basic principle of Islamic Banking16

concept of frame work18

Definition of Islamic Banking18

Empirical Review on Islamic banking20

Problem of Non Interesting Banking27

Problem and Challenges of Islamic Banking31

Islamic Banking theories and Practices40



Population of the study sample size44

Sample Techniques45

Method of Data collection45

CHAPTER FOUR: Data presentation, analysis and interpretation


Presentation and Data Analysis47

Prospects for Islamic Banks54

Discussions and Implications54

Summary of findings57

CHAPTER FIVE: Summary, conclusion and recommendation




References 65

Appendix 72



Islamic banking or interest free banking as it is alternatively called is a banking system based on the principles of profit and loss sharing by all the stake holders. Islamic banking concept owes its origin to the Islamic concept of money. In Islam money does not in itself produce interest or profit, and is viewed as a medium of exchange and not as a commodity. Already Ribah (interest) is prohibited in Islam. The  status of Islamic bank in relations to its clients is that of partner – investor and trader. Whereas, in conventional banks of the West the relationship is that of creditor or debtor.

Islamic banking will be based on the universally recognized principles of Shirakah (partnership). That is, the whole system of banking in which the holders, the depositors, the investors and the borrowers will participate on a partnership basis i.e through the application of the external principle of Mudarabah – labour and capital combine as partner for work.

In their actual operation, Islamic banks use various techniques and method of investment such as Mudarabah contracts, under which a financier provides capital and the Mudarib (labour partner) provides

his technical know – how and skill, and the profit is shared between the partners according to and agreed percentage. Islamic banks are also involved in Mudarabah (cost plus) contracts, under which banks purchase a certain commodity according to its client’s specifications and give delivery on the basis of sharing on an agreed ratio profit.

Islamic banks are also involved in dealing with foreign exchange markets and other banking services operations, such as letters of credit and letters of guarantee. Islamic banks may also provide various non – banking services such as, trust business, real estate and consultancy services. The concept of Islamic banks and their operational techniques will be discussed in detail in the preceding chapters. The first reason why we need Islamic banking is because; Allah has prohibited any form of interest on loans and allowed lawful trade and profit from the business. In the other hand the conventional banks which was introduced to us by Europeans, their mode of operations is principally dependent on interest. They advance loan in which the recipient must refund with and increment. But Allah has prohibited such types of loan. He created us and brought us into this world while we were unconscious of anything. He provides to us the air we breathed, the water we drinks, the food we eat and the clothes we clad our nudity. Whenever we are in hardship or fall sick or are

experiencing a disaster we turn unto him, we seek refuge from Him. At the end we will surely return unto Him. Did He then create us to turn deaf ears to what He has forbidden us? Allah has prohibited such transaction in one of the places where he says:

“O ye who believe fear Allah and give up what remains of your demand for Usury if ye are indeed believers, if ye do it not, take notice of a war from Allah and his messenger” Qur’an chapter 2:278-279.

Certainly, we are in problem if we are to continue transacting with interest without replacing it with Islamic banking. That is an act of disobedience to Allah. The prohibition is not only to those that advance loans with interests, but including those that borrow and refund with interests and all those that assist them. “The curse of Allah is upon who collects interest (Ribah), the person given it, and who write it and witness it. He says those are all the same” 850 (Bulugul – Maran).

Non – interest banking was introduced in the Nigerian financial sector by ex Habib Nigeria bank plc, now known as Keystone bank ltd. The system is alternatively called interest free banking or “Islamic banking” is the wider context comprising of the people of the book who belief in the followings:

I.            Oneness of God

II.            The Holy book revealed to mankind and

III.            All the prophets (peace be upon them) sent by Allah (SWT).

But if the term Islamic is confined to the religion of the followers of prophet Muhammad (peace be upon him) only, then this name does not appear to be proper as it is not only the holy book of Qur’an which prohibits, but also the Christian holy books have also advised followers to shun away from interest.

                        Stating the Intention of the Research

The issue of establishing Islamic banking (bank based on Islamic law (Shari’ah)) in Nigeria is not a new issue in the Nigerian financial system. Various efforts have been made to see it come through by some concerned Nigerian Muslims and non - Muslims but faced all sorts of challenges and oppositions due to differences in culture and religion, and as a result of lack of awareness of the system. With all these challenges and oppositions, a careful consideration of the Nigeria banking law led to the promulgation of Decree No. 46 of 1992 which provides avenue for each community to establish community banking which can operate based on its own customs and tradition. This prompted the establishment of Haraka Islamic Community Bank (H. I. C. B) in Sokoto (Malami, 2009). This bank operated strictly on the basis of Islam but did not record any

successful achievements due to lack of adequate personnel, low capital base, nonchalant attitude of staff and inadequate awareness of the system e. t. c.

However, modern Islamic banking in Nigeria evolved as far back as 1991 with the enactment of the Banks and Other Financial Institution Decrees. Section 23 and 61 of this Decree recognize profit and loss sharing banks. However, there were no significant achievements due to lack of compliance with Central Bank of Nigeria requirements by potential investors. In 1996, Central Bank of Nigeria approved the defunct Habib Bank Plc to open an Islamic banking window which was not successful due to lack of full - fledged Islamic banking in the country. Furthermore, in 2004 Ja’iz International demanded approval for the establishment of full - fledged Islamic bank which was given Approval – in – Principle (AIP) upon meeting the mandatory capital requirement. In line with the struggle to have Islamic banking, in 2005 Financial System Strategy launched a blue print to engineer Nigeria’s transformation into the 20 largest economies in the world by the year 2020. Among its initiatives regarding Money Market is to create Islamic banking in Nigeria. More so, in 2008 the Islamic Finance Working Group was founded and was highly supported by Enhancing Financial Innovation and Access (EFInA), NDIC,

NAICOM, PENCOM, DMO, CBN observer e. t. c. In addition, the CBN joined the Islamic Financial Service Board (IFSB) as a full – council member in 2009, and issue the draft framework for the regulation and supervision of Islamic banking in Nigeria for stakeholders’ comments and suggestions in that same year. In line with the opinions of the stakeholders, the Central Bank of Nigeria released the new banking model which designated Islamic banks among the specialized banks in 2010. The NDIC also released a draft framework for Islamic Deposit Insurance Scheme for comments and suggestion from stakeholders. Despite all the hurdles of establishing Islamic banking in Nigeria, the CBN joined 11 other Central Banks and 2 multilateral organizations to form the International Islamic Liquidity Management Corporation (IILM) to be based in Malaysia. And finally, in 2011 the Central Bank of Nigeria released the framework for the regulation and supervision of Islamic banking in Nigeria and gave Approval – in – Principle (AIP) to some potential investors upon meeting the mandatory requirement of the CBN (Sanusi, 2011).

It has however been discovered from various studies (see for instance Iqbal et al, 1998; Iqbal, 2001, Dusuki and Aboizaid, 2007; Ariss and Sarieddine, 2007; Njamike, 2010; Malik et al, 2011; Sanusi, 2011;

Abduh And Omar 2012; Farahani and Dastan 2013; Hassanudin et al 2013) that the establishment of Islamic banking in any country be it Muslim or Non – Muslim countries faces a number of challenges which Nigeria is not an exception. These challenges could be institutional or operational, but there are not without remedies. It is also accepted that a lot of studies have been conducted in this area of finance in most Muslim and few Non – Muslim countries. This became more pronounce after the recent Global Financial Crisis in which most Islamic banks were not affected (Nijzink, 2009). But to my greatest surprise there are still few studies in the case of Nigeria. Even where they are, they failed to carry every Nigerian along irrespective of religious differences which prompted this study. Since Nigeria is on the line of establishing Islamic banking due to the benefits accruing to it which cut across all aspects of human undertakings, she should bear it in mind that these benefits are not without hurdles. In line with these, this study seeks to achieve the objective of assessing the challenges that the introduction of Islamic banking in Nigeria may face. To do this, this study will give a thoroughly explanation of Islamic banking and its modes of operation, and finally, it will provide solutions to possible challenges of Islamic banking in Nigeria. This study will be an eye opener to the central government of Nigeria, Central Bank of Nigeria, the judiciary,

existing financial institutions, and Nigerians irrespective of religious differences.

                        Statement of the Problem

The failure to provide a stable, monetary and banking framework has been one of the major factors that bring about economic ills all over the world. This led to the poverty of large proportion, economic and social injustices, as well gross income inequalities, instability in inflation rate, and erosion of the real value of monetary assets and other abnormalities.

Though the entry of Islamic banking into the field of local and international financial markets has been well recognized, it has yet to cross many hurdles before it can claim to be an institution capable of handling the needs of the world financial markets. Its initial success may be partly due to the fact that there is a niche market for Islamic funds, and partly to its ethical and intrinsic values. To sustain and develop the system, Islamic banks have to strive to solve all problems, which stand in the way of their growth and survival. Based on the above assertion, this study tends to assess the challenges that Islamic banking in Nigeria may face and provide solutions.

                        Research Questions

Research question are the question that are raised in order to find answers or solve the problem(s) under study for the purpose of this project. The following are the questions that need to be answered:

i.            What are the potentials of Islamic banking system?

ii.            How do Islamic banks operate?

iii.            What are the positions of Islam on interests/Usury?

iv.            What are the difference in products and services of the banks?

                        Objective of the Study

The main objective of this research is to determine the way Islamic banks operate and identify the problems facing their survival. Other objective includes:

·        To identify the potentials of Islamic banking system.

·        To examine the position of Islam on interest/Usury/Riba.

·        To differentiate between Islamic banking system and the conventional banking system.

·        To discuss some of the products/facilities provided by the banks.

                        Significant of the Study

So many writers have wrote about Islamic banking system and also have contributed immensely to the field of Islamic banking system, but not withstanding my own research work will try to build on that and provide solutions to the problems facing Islamic banking in a systematical way.

The significance of this study may be that, the findings will help in the following ways:

1.     The study will provide an extensive explanation of Islamic bank which serve as an alternative to the widely practiced conventional banking system, which is usurious in nature and hamper human income growth in an exploitative nature to Nigerians.

2.     This study will bring Muslims closer to what is seen as divine banking which is free of interest; clearing their doubt and exposing them to the practice that is accepted by their religion.

3.     The study is particularly important to students of banking and finance, and anybody who reads through it as it adds more to the existing knowledge in the field of Islamic economics, Islamic banking and finance and Islamic business transaction.

4.     The non-Muslim who may spare their time to go through this study would understand and gain knowledge on how these banks operate and know that, the bank are not specifically meant for Muslims alone but all benefit from the research work, because they will be exposed to the origin, evolution, survival as well as the problem faced, prospects anticipated and recommended solutions which will clear doubt on the successful operation and existence of the banks.

5.     The existing Islamic banks would also benefit from this work because they would see how other Islamic banks at different countries operate and the problems facing them, how they became immune to the current global financial crisis which they can use as proactive means of handling these problems.

                        Scope and Limitation of the Study

However, in spite of the fact that there are different opinions regarding interest in banks, this work covers the opinion of most scholars that view banks interest as Riba (Usury). It also covers the practice of Non-interest banking or profit and loss sharing banking (PLS) as it is sometimes called in Muslims dominated countries such as Iran, Sudan, Pakistan etc, as well as the practice and operations in countries that are mixed where Muslims and Non-Muslims are fifty-

fifty or even those countries where Muslims are the minorities. These categories include; Germany, the United State, United Kingdom and even Nigeria.

The area of Islamic banking system is very wide. But, this research work is only restricted to issues like Riba, Mudarabah, Ijarah, etc, that forms the basic fundamental services and facilities provided by the Islamic banking system that is not applicable to the conventional banking system, and also emphases on the edge it has over the conventional banking system that gives rise to the present world economic crisis.




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