The importance of small and medium enterprises (SMEs) for any country, especially Nigeria, cannot be overstated. It is therefore not surprising that SMEs are one of the foundations of the country’s economic development.
One of the biggest challenges small and medium-sized enterprises (SMEs) face is access to finance. High qualification thresholds, high interest rates, and stringent requirements for collateral, financial history, and other conditions are some of the hurdles faced by SMEs looking to raise funds.
While bank financing will continue to be crucial for the SME sector, there is widespread concern that credit constraints are simply becoming “the new normal” for SMEs and entrepreneurs. It is therefore necessary to widen the range of financing instruments available to SMEs and entrepreneurs, in order to allow them to continue to play their role in investment, growth, innovation and employment.
One of the cheapest financing options for start-ups or small businesses is the interest-free bank facility. Interest-free banking has its roots deep in Nigeria’s financial cycle. Its acceptance melted the initial skepticism, suspicion and religious phobia associated with the concept.
Generally, interest-free financial products have played a vital role in the growth and development of the Nigerian capital market ecosystem.
Interest-free financing, also known as Islamic finance, refers to how businesses and individuals raise capital in accordance with Sharia or Islamic law. Interest-free banking operates on principles such as: the prohibition of interest in debt and foreign exchange contracts; prohibition of uncertainty or speculative behavior in business transactions; prohibition of all forms of gambling. It also prohibits funding of unethical concerns such as alcohol, tobacco, munitions manufacturing and adult entertainment establishments; to only cite a few.
Interest-free banks engage in partnership contracts, commercial contracts, leasing contracts and other financial services in accordance with Islamic commercial jurisprudence. There are three interest free banks operating in the country, Jaiz Bank Plc, Taj Bank and Lotus Bank Limited.
Growing adoption of interest-free financing
Jaiz Bank Plc Managing Director Hassan Usman on the bank’s 10th anniversary allayed fears of an alleged Islamization program, saying Nigerians have finally embraced the interest-free banking model having benefited more of 100,000 micro, small and medium-sized enterprises (MSMEs).
According to Usman, “the claim of Islamization was one of our main challenges when we opened our doors 10 years ago, I think the claim stemmed from the lack of basic information by staff and customers as well as by the critics. But the demonstration of our products helped us to let people know that Islamic banking is about commerce.
“We are setting standards and leading the interest free banking industry especially in Nigeria. When you do business with us, you are free to identify the assets in which you wish to invest in order to benefit from our loan guarantee. Unlike conventional banks where you provide loans or overdrafts to buy the assets, we generally take business risks with clients. And those who understand our fundamental advantages have refused to return to conventional banks.
He said, “We provide equity funds for women to settle; grow their businesses. We also have over 100,000 on Katafu Insurance; all these value-added services have been the strength of the bank over the past 10 years.
“We have mainly had an impact on the delivery of housing to over 30,000 Nigerians, we have invested around 75 billion naira in the agriculture sector, especially rice and other agriculture-related commodities. Our portfolio of small and medium enterprises (SMEs) has grown by over 6 billion naira.
Differences between Islamic and traditional banks
The main difference between traditional finance and Islamic finance is that under Sharia, some of the activities used in conventional finance are strictly prohibited. It should be noted the non-acceptance or payment of interest (called Riba) on the money. The reason is simple; money is seen only as a medium of exchange in Islamic banking, unlike traditional banking where money is seen as an asset.
Interest is thought to contribute to inequality and exploitation, so there are no real “loans” in Islamic banking. This is how loans for Islamic finance work; for the Islamic Bank to realize a return on the money lent, it would have to acquire shares or an equity interest in a non-monetary asset. It also requires the lender(s) to participate in risk sharing.
Access to interest-free loan facility
Jaiz Bank, while giving conditions for access to finance, said the business must have been in existence for at least one year; the company must have a very good cash flow and a good turnover; the company must be registered with the CAC (optional but highly recommended); the company must have an account with the Bank; and the company must have operated the account for at least three months.
Overall, the implementation of interest-free banking in Nigeria is poised to promote healthy competition in the financial market. This could lead to lower interest rates, which would help boost the Nigerian economy and ensure its steady growth.
It was noted that in Nigeria, the future of Islamic finance is very bright. 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 interest-free banking and finance in Nigeria.