Islamic banking has crept in under the radar in Nigeria, with an Islamic window opened on the trading floor at the Nigerian Stock Exchange (NSE) this year, following last year’s Central Bank of Nigeria (CBN) approval for “Sharia compliant” equities. Yet there are fears that a deliberate Islamic financial services industry may have unintended consequences on equity transactions, with the new window viewed with suspicion or ignorance by many in Africa’s most populous nation.

It is the first time in the history of the NSE that a faith-based financial window, which offers interest free services, will take part on the trading platform. The objective, according to Hajarat Adeola, the Managing Director of Lotus Capital Ltd, the operator of the index, is to enthrone Islamic financial principles in equity trading, by tracking the performance of Sharia compliant stocks on the exchange floor. Banks, insurance companies and alcohol and tobacco manufacturers have been shut out of the window, as have companies that deal with gambling, “unwholesome entertainment” and sectors of the economy deemed “offensive” by the Shariah Advisory Board. Companies with a high debt profile are also unwanted, shutting out some huge firms such as Dangote Cement Plc and Cadbury Plc.

Fears have been raised that the Islamic window allows religious issues to permeate the market of an otherwise secular state, which has the potential to erode investor confidence, the crucial aspect of the capital market. Many investors are already complaining that the introduction of the index is the brainchild of the  Governor of the Central Bank of Nigeria (CBN), Sanusi Lamido Sanusi, who they allege has not hidden his desire to see through an Islamic window in the capital market. When Jaiz International became the first licensed wholly Islamic bank in Nigeria last year, the governor said the move was part of the institutional framework to kick-start the Islamic financial services industry in Nigeria. Concerns have been raised that the introduction of the index in Africa’s second-biggest economy – following the lead of only Rwanda and Ethiopia and following a court judgement that declared Islamic banking illegal – could lead to poor relationships among investors along religious lines and possibly setting the Muslim north against the predominantly Christian south. Moreover, a bias question has risen given that the capital base of Islamic Banks has been lowered from 25 billion naira ($159 million), which is the figure required of other banks, to 10 billion naira ($63 million).

Yet there are some arguments for Islamic banking. The practice does not recognise money lending as a business and expects lenders to earn returns on their loans by sharing in the risk of investment. All transactions must therefore involve real assets or real economic activity in order to generate income since money alone cannot be an instrument of trade. This requirement for real economic activity ensures the equitable management and distribution of wealth through trade and service provision. This in turn could stimulate employment and overall economic growth. This emphasis on trade and economic activity has seen the phenomenal growth of Islamic banking over the last four decades. Despite the global economy being in a recession, the report of the Annual Middle East Islamic Finance and Investment Conference (MEIFIC) shows that the Islamic finance industry has experienced exceptional growth, crossing the $1 trillion mark in 2011. With an annual growth rate of between 15 – 20 percent and more than 300 institutions in 75 countries, including the UK, US, Luxembourg and South Africa, Islamic finance has become an integral part of the global financial industry.

With the once vibrant Nigerian capital market in a lull following the crash, which resulted from high risk loans and speculative trading, their may be an argument that the more risk-free Islamic form of banking is less likely to result in the same financial disaster witnessed in recent years. It is also a bid to attract more Sharia and ethical investors to boost the recovery of Nigeria’s stock market.

These forms of banking have been defended by Alhaji Umar Muttalab, the chairman and co-founder of Jaiz Bank, who refutes seeming ignorant suggestions that Islamic banking will “Islamitise” Nigeria. “In Britain, there are five Islamic banks,” he says. “I do not think that they have Islamatised Britain. There are Islamic banks in the United States of America (USA), Germany, Switzerland and in many countries of the world. And in all of these countries, the operation of Islamic banks has not given the people reason to fear religious domination. Those who are expressing such fear are only being sentimental and, perhaps, little or no knowledge of how Islamic banking system operates.”