The Legal Framework of Non-Interest Banking in Nigeria

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THE LEGAL FRAMEWORK OF NON-INTEREST BANKING IN NIGERIA

BY

AISHA, MAHMOUD H.
DEPARTMENT OF ACCOUNTING
AHMADU BELLO UNIVERSITY, ZARIA

AND

OMOLOLA, ADEGBENGA O.
DEPARTMENT OF ACCOUNTING
AHMADU BELLO UNIVERSITY, ZARIA

DECEMBER, 2012

Abstract
A Central Bank (CB) in any economy is regarded as the apex regulatory institution of the Banking Sector and indeed the entire financial system. This is in view of the fact that it is empowered by law to (amongst others functions) license, control, regulate and supervise financial institutions in the economy. Hence, the Central Bank of Nigeria (CBN) is no exception to this unique characteristics and functions. It is in exerting these powers that the CBN decided to institutionalize Non-Interest/Islamic Banking business in Nigeria. Recently, the decision of the CBN to license specialized institutions that engage in non-interest banking business as well as conventional banks to operate non-interest windows in Nigeria has continued to generate mixed reactions from various stakeholders. While some (mainly Muslims) are applauding the initiative, others especially non-Muslims are raising objections; citing the secularity of the Nigerian nation as basis. However, progressives which include Muslims and non-Muslims alike are beginning to look at the peculiarity of the initiative, debating the pros, cons, opportunities, and challenges that can forestall the maximization of the inherent benefits of a successfully developed non-interest/Islamic banking system in Nigeria. Talking about challenges, experts have identified weak legal framework as one of the many challenges facing the development of a successful Non-interest Banking system in any economy. Therefore, it is the focus of this study to appraise the Legal Framework upon which the CBN is exerting its powers concerning Non-interest banking in Nigeria. Also, a cursory attempt is made at benchmarking, by reviewing international legal frameworks, particularly the Malaysian framework where a successful dual financial System is currently in effect. Key Words:Legal Framework, Non-interest Banking System

INTRODUCTION
Before the advent of colonialism, and the subsequent introduction of the conventional system of banking in Nigeria, an ancient form of banking business was already in place. It involves the primitive process of savings where surplus capital (cowry shells and other commodities generally accepted as money) were deposited with trusted parties especially goldsmiths who in turn stock the items in guard shaped clay pots. These pots were buried in ground with marks on the spot, to ensure easy identification for “withdrawal” in future. This method, according to Abikan (2009) was also applied to the coin currency introduced by the colonialists although with the ingenious introduction of spreading yam and flour on each layer of the money to avoid corrosion. Other activities similar to those performed by the present day banks like lending, safe deposit, guaranteeing, and agency function in respect of sales were carried out before the colonialists intervention, but they were not backed by any legislation nor coordinated and regulated as banking business of the present. Adekanye (2010) explained that conventional banking was ushered into Nigeria with the establishment of Bank British West Africa (BBWA) now First Bank of Nigeria Plc in 1894, and the Anglo-Africa Bank which later became Bank of Nigeria in 1899. He further expounded that, the banks were later joined by the Colonial bank, (Barclays Bank DCO) in 1917 and British and French Bank, now United Bank for Africa in 1949. Then, there was neither financing requirement nor regulations to control the establishment and operation of banks, and Adekanye (2010) inferred that, the few indigenous banks operating then were discriminately suffocated out of business. This situation caused some reactions from the nationalists and resulted in the enactment of the first...
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