CHAPTER ONE

1.0 INTRODUCTION

1.1 Background of the study

Banking transactions in general can be categorized into individual and corporate

transactions where both have wide-ranging products that satisfy different customer needs

(Bujang, 2010). The status of Islamic bank in relations to its clients is that of partner-investor and

trader, their financial intermediation is based on sharing risks and gains. Whereas, in

conventional banks the relationship is that of creditor or debtor (Tajudeen, 2014).

Islamic banking or non-interest banking as it is alternatively called is a banking system

based on the principle of extending tenets of Islamic religious to the economic activity in a way

that enhances social wellbeing and inclusion (Tajudeen, 2014). Contracts in the Islamic banking

systems are normally grounded on assets-based and it must be in compliance with the Sharia

(Islamic laws), which prohibits elements of riba (usury), gharar (uncertainty), maisir (gambling)

and other haram (prohibited) activities. Such prohibitions are clearly mentioned in the Qur’an

and Hadiths and must be adhered to with strictness (Salisu, 2017).

Islamic banking, despite its name, is not a religious product/service restricted to Muslims

alone but a series of financial products developed to meet the requirements of specific group of

investors (SEC, 2021). The Islamic banking products are recognized based on the contract

instead of the commercial orientation. The current Islamic banking products can be categorized

as follows;

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Individual Category: Wadiah (safekeeping), Mudarabah (profit sharing),

QardHasan(benevolent loan), Tawarruq (Monetization), Bai’Muajjal (Differed payment),

Bai’al’inah(Sale and buy back agreement), MusharakahMutanaqisah (Diminishing partnership),

Murabahah(cost plus markup), etc.

Corporate Category: Trade financing Wakalah (agency), Mudharabah (profit sharing),

Murabahah (cost plus markup), Asset based financing Ijarah (Lease), Istisna’a (Forward

contract), etc.

The Shariah Advisory Council (SAC) of the Central Bank of Nigeria (CBN) for now is

the only Council that examine the validity of application and screening of Islamic financial

products, it also issue Shariah resolutions and decisions relating to both Islamic Capital Market

(ICM) and Islamic Banking in Nigeria. The Council will not approve any instruments and

activities that are contrary to Shariah principles (SEC, 2021).

Financial inclusion seeks to ensure that all households and businesses, regardless of

income level, have access to and can effectively use the appropriate financial services they need

to improve their lives. Currently, there are segment of the people lives and works in the informal

economy. Even though they have little money, they still save and manage day-to-day expenses.

However, without access to a bank, savings account, debit card, or line of credit, for example,

they rely on informal means of managing their money. This includes family and friends, cash-on-

hand, moneylenders, or keeping it under their pillow and mattress. Sometimes these choices are

insufficient, risky, expensive, and unpredictable.

Nigeria is a unique and diverse country that has approved a dual banking system, in

which conventional and Islamic banking system operates. This policy avail customers with the

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advantage or opportunity to enjoy the flexibility of selecting the benefits from both of the

banking systems.

1.2 Statement of the Problem

Islamic banking system offers services, products and instruments based on the strict

compliance with the provisions of Sharia/Islamic law which prohibits the payment or acceptance

of interest charges (riba) for the lending and accepting of money, as well as carrying out trade

and other activities that provide goods or services considered contrary to its principles. Thus, all

Islamic banking products, investments and services are streamline in accordance with the Islamic

jurisprudence (Shariah). This system of banking helps in providing financial access to those

looking for Shariah-compliant financial products, as well as targets the segment of the society

that are excluded from formal financial services which the conventional financial institutions

have failed to provide financial services and opportunities to. These can be attributed to

conventional banks’ bureaucratic processes, unending requirements, and sometimes the

households and firms especially Muslims cannot patronize their services due to interest-led

transactions, which is prohibited according to Islamic law (Ahmed, 2010).

Generally, the quality of banking services in Nigeria has over the years attracted a lot of

controversy, with several criticisms about banking operations and services. Bank customers

would complain about interest being charged by the banks and the time it takes before a loan

application is processed takes longer than necessary. In addition, they complain about nonchalant

attitude of some banks, which causes unnecessary delays in transactions, give preferential

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treatment to rich people or friends and relations. Another problem is the aspect of the Automated

Teller machine (ATM), customers have to queue-up for long period of time, which often triggers

impatience that sometimes results in physical combat among themselves. Most times these

machines are empty, under-cashed, or out of service, which leaves customers stranded.

Furthermore, the cumbersome process involves in obtaining loans also generated a lot of

dissatisfaction. Over the years bank customers and other people benefiting from the services of

the Nigeria banks have been complaining of the ways banks extort money from them cruelly in

the name of interest or service charge, as well as charges on turnovers and overdrafts.

Preliminary interactions with numerous bank customers reveals that Islamic financial products

might alleviate or go a long way in tackling some of the issues, if not all the undesirably

exploitation and unruly policies by the conventional banking system.

Islamic baking products, as an instrument for financial inclusion, would through

providing access to a range of alternative financial services stimulate the independence and self-

development of poor households and micro enterprises. Additionally, providing easy access to

finance is considered as a giant step in connecting the poor section of the society to a larger and

broader world (Imboden, 2005). It is on these premises therefore, that the researcher wish to

assess the effect of Islamic banking product and financial inclusion in Nigeria with the aim of

increasing more awareness of these products for the benefit of the Nigerian populace to take

advantage.

1.3 Research Question

In line with the specific objectives of this research, the following questions have been

outlined to serve as a guide for both the researcher and the readers.

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 1. What are the Islamic banking products available in Nigeria banking system?

2. What are the impacts of Islamic banking products in Nigeria?

3. How does the Islamic banking product stimulate financial inclusion in Nigeria?

4. What are the prospects of Islamic banking products in Nigeria banking system?

1.4 Aim of the Study

The main aim of the study is to assess the effect of Islamic Banking products and

financial inclusion in Nigeria.

1.5 Objectives of the Study

1. To Identify Islamic banking products available in Nigeria.

2. To evaluate Islamic banking products offered by Islamic banks in Nigeria

3. To assess the impact of the Islamic banking products in Nigeria

4. To determine how Islamic banking product stimulate financial inclusion in Nigeria.

1.6 Significance of the Study

The result of this study will be of immense significance to the public, particularly bank

customers, banking authorities and regulatory agencies in Nigeria such as the Central Bank of

Nigeria.

To the public, the result of this research work will serve as an awareness or reminder.

Bank Customers will find the result of this study significantly beneficial because of its relevance

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to individuals’ economies by financial inclusion, which is link to the country’s economic and

social development, and plays a role in reducing poverty.

Banking authorities will benefit from the result of this study because it will indicate that

financial inclusion is not only positively correlated with growth and employment, but it is

generally believed to casually influence growth and assist them in policy making. Regulatory

agencies such as the Central Bank of Nigeria will be able to improve the range, quality and

availability of financial services and products to the unserved, under-served and financially

excluded in the society.

1.7 Basic Assumption of the Study

In this study, the Nigerian banking industry is assumed to have all financial products

fully included in the system, and all Nigerians are aware of non-interest financial institution as

available alternatives for banking.

1.8 Limitation of the Study

This research work is limited to existing customers and staff of Jaiz bank Plc within Kano

Metropolis because they are in the best position to give firsthand information concerning the

variable under study and being the commercial nerve center of Nigeria, has a reasonable

population which assist in providing responses relating to non interest financial institution in

Nigeria (NIFI).