The significance of Small and Medium Enterprises(SMEs) for any country, especially Nigeria, cannot be overemphasised. It is, therefore, not surprising that SMEs constitute one of the bedrocks of economic development in the country.
One of the most significant challenges faced by small and medium-scale enterprises (SMEs) is access to finance. Steep qualification thresholds, high interest rates, and stringent requirements for collateral, financial track records and other conditions are some of the barriers faced by SMEs seeking to raise funds.
While bank financing will continue to be crucial for the SME sector, there is a broad concern that credit constraints will simply become ‘the new normal’ for SMEs and entrepreneurs. It is therefore necessary to broaden the range of financing instruments available to SMEs and entrepreneurs, in order to enable them to continue to play their role in investment, growth, innovation and employment.
One of the cheapest financing options for start-up or small business is through non-interest bank facility. Non-interest banking is deepening its root in Nigeria’s financial cycle. Its acceptance has melted the initial skepticism, suspicion and religious phobia associated with the concept.
Generally, non-interest financial products have played a critical role in the growth and development of the Nigerian capital market ecosystem.
Non-interest finance also known as Islamic finance refers to how businesses and individuals raise capital in accordance with Sharia, or Islamic law. Non-Interest banking operates on defining principles such as: interest prohibition in debt and exchange contracts; the prohibition of uncertainty or speculative behavior in business transactions; the prohibition of any form of gambling. It also prohibits funding of unethical concerns such as, alcohol, tobacco, ammunition manufacturing and adult entertainment institutions; just to mention a few.
Non-Interest Banks engage in partnership contracts, trading contracts, leasing contracts, and other financial services that conform to Islamic commercial jurisprudence. There are three Non-Interest Banks operating in the country, Jaiz Bank Plc, Taj Bank and Lotus Bank Limited.
Growing Adoption Of Non-interest Financing
The managing director of Jaiz Bank Plc, Hassan Usman, at the 10th anniversary of the bank allayed the fears of a purported islamisation agenda, saying, Nigerians have finally embraced the non-interest banking model having benefited over 100,000 micro, small and medium enterprises (MSMEs).
According to Usman, “the islamisation claim was one of our major challenges when we opened our doors for operations 10 years ago, I believe the claim stemmed from the lack of basic information by staff and customers as well as the critics. But the demonstration of our products has helped us to let people know that Islamic banking is about trading.
“We are into setting standards and leading the non-interest banking, especially in Nigeria. When you bank with us, you are free to identify the assets you want to invest in for you to get our loan guarantee. Unlike the conventional banks where you are giving loans or overdrafts to buy the assets, we usually take commercial risks with customers. And those who understand our fundamental advantages have refused to go back to the conventional banks.”
He said: “we provide equity funds for women to establish; expand their businesses. We also have over 100,000 of them on Katafu Insurance; all these value-added services have made the bank strong in the last 10 years.
“We have impacted mostly on housing delivery for over 30,000 Nigerians, we have invested about N75 billion in the agricultural sector, especially rice and other farm-related products. Our Small and Medium Enterprises (SMEs) portfolio has grown more than N6 billion.”
Differences between Islamic and Traditional Banking
The key difference between traditional finance and Islamic finance is that, under Sharia law, some of the activities used in conventional finance are strictly forbidden. Worthy of note is the non-acceptance or payment of interest (known as Riba) on money. The reason for this is simple; money is viewed purely as a medium of exchange in Islamic banking, unlike traditional banking where money is considered an asset.
Interest is believed to contribute to inequality and exploitation, so there are no real ‘loans’ in the Islamic banking system. Here are how loans work for Islamic finance; for the Islamic Bank to make a return on the money lent, it would have to acquire equity or shareholding in a non-monetary asset. This also requires the lender(s) to participate in risk-sharing.
Accessing Non-Interest Loan Facility
Jaiz Bank, while giving conditions for accessing financing, said, the business must be in existence for at least one year; the business must have a very good cash flow and turn over; the business should be registered with CAC (optional but strongly recommended); the business must have an account with the Bank; and the business must have run the account for at least three months.
In all, the implementation of the Non-Interest banking in Nigeria is poised to promote healthy competition in the financial market. This could lead to a reduction in interest rates, which would help to drive the Nigerian economy and ensure its steady growth.
It has been noted that in Nigeria, the future of Islamic finance holds a great deal of promise. However, as more businesses in Nigeria adopt Islamic financial practices, one can only hope that the Central Ban of Nigeria (CBN) will issue consistent policies, rules and guidelines on risk management and transparent financial reporting for non-interest banking and finance in Nigeria.