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This dissertation looks at legal and institutional framework for Islamic banking in Nigeria with a view to identifying the challenges in the laws regulating Islamic banking as a part of the banking sector in Nigeria. Islamic banking unlike conventional banking derives its inspiration and guidance from the religious edicts of Islam. As such, it has to conduct its operations strictly in accordance with the directives of the Shari’ah. The main problem faced by Islamic banks is that governments often impose the laws governing the practise of conventional banking on Islamic banks. There is also a lack of understanding between the religious advisors and the bankers. This is because religious advisors do not understand the day to day operational needs of bankers and the bankers in turn do not necessarily understand the constraints of the religious principles. The objective of this research is to make analysis of the legal and regulatory framework for Islamic banking in Nigeria with a view to identifying the laws regulating Islamic banking, its limitations, its challenges and proffer solution where possible. In view of the above, the findings in this research reveal inadequacy of existing legal framework regulating Islamic banking in Nigeria. The major problems bedevilling the success of Islamic banking as a sub-sector in the banking industry have been identified. These include among others the fact that the statutory provisions regulating the operation of Islamic banking in Nigeria are inadequate. Consequently, law reforms are highly recommended. These reforms should however not lead to separate laws governing conventional and Islamic banks, but should involve proactive legislative efforts with a more robust supplemental rule addressing the idiosyncratic features of Islamic banking. Similarly, the dearth of skills and know-how for the operation and regulation of Islamic banking in Nigeria is the lack of educational institutions offering full-fledged certificate or degree programmes. In conclusion, progress needs to be made in developing stronger standardised regulations that are in line with international best practices. This would provide a more stable system within which both Islamic banking and conventional banking will flourish.




1.1       Background to the Study

Nigeria’s financial system is dominated by the universal deposit money banking sub-

sector. Generally, it has witnessed significant transformation since banking business started

in the country in the mid-nineteenth century. Before the establishment of the Central Bank of

Nigeria in 1958, the financial system operated largely, under a Laissez faire system and was

characterized by the systemic instability and episodic bank failures.1 The emergence of the

Central Bank of Nigeria (CBN) brought about a measure of systemic stability as supervision

and regulation were enthroned and efforts were made to ensure that only ‘fit and proper’

persons were granted a banking license.2 Similarly, the specialised financial institutions as

well as the insurance and pension fund sub-sectors have remained minor players in the

financial system, even after several reforms.

Historically to the Muslims, banks were looked upon as a “sinful place” meant for the

rich non-Muslims, because it practiced ‘riba’3 which is prohibited in Islam. Their pessimism

and fear was based on the provisions of the Quran, which provides thus;

--- they say that trade is like interest (riba), but God hath permitted

Trade and forbidden interest (riba)4

At that time, no one, not even Muslims, ever thought that there would one day be such

a thing as Islamic banking, Islamic finance and takaful, what more in the next two decades.5

The term takaful comes from the Arabic verb kafal meaning joint guarantee. Takaful is the

1 Bala,M.T, Victor R.U (2013) “An Analysis of the Positive Impact of the Consolidation Exercise on the Banking and Insurance Sector in Nigeria”, The Gwagwalada Law Journal, Nigerian Bar Association, Gwagwalada Branch, Abuja, Vol 1, p.44

2 ibid

3 The word Riba means increase. it covers both usury and interest as an excess over the principal 4 Quran 2:275

5 Mohammed T.A.H (2013)” Development of Islamic Finance and Islamic Law of Mu’amalat in the 21st Century” In: Oseni Z, et al Essays on Islam, Islamic Law and Jurisprudence in Honour of Honourable Justice Mohammed Mustapha Akanbi CFR, PCA (RTD),, Nigerian Islamic Law Journal, (2013) Vol 1, p 16


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