Even while Islamic finance is relatively new to the Nigerian banking industry, it is expanding quickly. In recent years, a number of new Islamic financial institutions in Nigeria have been established, including Jaiz Bank, Taj Bank, and Lotus Bank. These institutions have made it possible for authentic Islamic banking principles to become increasingly applicable in the modern Nigerian financial sector.
Content Recap:
What exactly is meant by the terms Islamic Finance and Halaal Finance?
It is essentially the practice of banking, lending, and borrowing in accordance with the fundamental principles of Islamic finance, which forbids charging interest on loans and making a profit off of borrowers.
Since the religion of Islam was first established, its founding fathers have established a set of norms and principles about borrowing money, saving money, and lending money. Ironically, the most important component of traditional banking is charging interest on loans, which is a strictly prohibited behavior. On the other hand, Islamic banking promotes the mapping out of a sharing formula on the proceeds of the business that is done with the loan.
According to the principles of Islamic banking, any form of unethical behavior, no matter how widespread, is considered haram. Usury, which is charging extremely high-interest rates on loans, is considered to be one of the harams. The word “riba,” on the other hand, is thought to roughly translate to “the ill-gotten gain a lender derives from their borrowers’ toil.” The teachings of Islam state that a lender should only benefit from the growth and profit of their borrower and that the borrower should not suffer as a result of the lender’s actions (i.e., lending to them).
In this piece, I will discuss the various Islamic loan products and motivations for Islamic banking. You can also learn how to determine whether or not you are eligible for an Islamic bank loan in Nigeria, as well as the steps that must be taken in order to obtain an Islamic loan from a lender.
Why Use an Islamic Bank?
You might base your decision to use Islamic banking on a variety of considerations. The most extraordinary reason to choose an Islamic bank is the contrast between genuine care for the growth of the business which you are borrowing for and the purpose of the borrowing itself.
Here are other reasons:
- You can borrow with no interest rate (ZERO interest)
- Risks are shared between both parties.
- It promotes Islamic values, e.g., Halaal banking’s zero tolerance for alcohol, betting, prostitution, etc.
- Allows business growth.
Types of Islamic Loans
I will discuss the many kinds of Islamic loans that can be obtained at the Islamic banks in Nigeria that have been chosen, as well as the conventional commercial bank loans that are conventional to these Islamic banks loans.
Murabaha (Cost-plus financing)
In this kind of loan, the Islamic bank, which acts as the lender, simply purchases an asset or resource from a third party based on the information provided by the borrower. The Islamic bank then leases the asset or resource to the borrower at the price that it originally cost the bank, plus a sizeable profit margin.
Musharaka (Joint Venture/JV)
In the context of this transaction, both the borrower and the Islamic Bank, which acts in the capacity of the lender, contribute to the finance of the acquisition of an asset or piece of machinery. After that, once the asset begins to generate revenue, its profit is divided according to the pre-arranged percentiles.
Ijara (Lease finance)
Under the terms of this particular financing plan, the creditor (an Islamic bank) pays the costs associated with the borrower’s acquisition of any home appliance, piece of machinery, plant, vehicle, or other resources that the borrower wants to obtain.
After that, a profit-sharing arrangement that is advantageous to both the lender and the borrower is negotiated between them.
Wakala (Agency Contract)
In this arrangement, the muwakkil (the principal) appoints the wakeel (the agent) to carry out a certain contract on their behalf. The contract employer is known as the muwakkil. After that, the parties to the deal divide the proceeds of the contract equally among themselves.
The sole purpose of this agreement is to ensure that the interests of all of the participating parties are safeguarded. Just consider the phrase “Letter for credit.”
How to qualify for Islamic Bank Loan
If you already have an account at one of Nigeria’s relatively few Islamic banks, you have already accomplished the first step in meeting the requirements to get financing from one of these institutions. However, the following is a list of fundamental items that must be in place to guarantee that your request for financial assistance will not be denied:
- Your business must promote halaal—not haram.
- Your purpose for seeking finance must be certified profitable.
- Your business is registered under the extant law of the land.
How to get finance/loan from an Islamic Bank in Nigeria
When Islamic banks profile the businesses with which they do business, they conduct extensive due diligence, which is among the most stringent in the whole banking industry.
It is easy to comprehend why this would be the case, given that many businesses currently exist solely to attempt to sneakily incorporate Islamic precepts into their operational structures. This is done by the banks so that the shaft can be extracted.
To get the financing request moving, though, you will essentially need the following items:
Your company’s bio
- The request letter
- Evidence of previous jobs done (if required)
- Cash flow projections (12 months)