It’s a bit surprising that you’re just making inroad into Lagos, as a bank?
By accident of history, we started JAIZ as a regional bank and while we have always had a representative office in Lagos. We were not engaged in this part of the world because the licensing or the franchise of the bank was restricted to two geo-political zones of Northwest and Northeast in the first four years of the operations of the bank. So, we were not very engaged with Lagos, we come in and get out, but basically we were not doing much in Lagos with the business community. This has since changed, we are now a national bank and we have been in Lagos. Reasonably looking at our own size, we already have four branches in very strategic locations of Ikoyi, Awolowo Road, Ikeja and Apapa.
What’s unique about your bank?
JAIZ Bank is a non-interest bank, it’s an Islamic bank. The basis of the contract and services that we provide are based on the moral principle derived from the religions, not only Islam, but from all the religions. Islamic religion emphasises more on the avoidance of interest and that’s how it became associated with Islam.
So, basically I’m trying to put a background as to the simple layman understanding to provide clarity on what we do generally and compare it with what so many banks do. Now you know conventional banking is the business of taking money from surplus entities, transforming their maturity and then providing them to those deficit entities using various kind of pricing which is basically the essence of banking.
From there, when you come to the Islamic bank, we also use the same process of transforming maturity. We take current account just like any conventional bank would take, we also take deposit that are for tenures which are not just demand deposit. To that extent we are similar. We take these deposits, we don’t just keep them, we take these deposits to finance. We try to avoid the word loan, instead we say we finance business. We use loans technically; it’s not supposed to be a business in Islamic finance. So, we avoid the word loan and rather use the word finance. We take deposit for current account. Here we have some differences, when we take deposit for current account which is demand deposit, you come and take anytime, we have the same type of contract with a conventional bank.
Conventional banks take all their deposits, whether current or term on the basis of a loan contract. People don’t normally look at what they’re doing with their bank but if you look at the contract, it is a loan you’re giving to the bank and they agree to pay you interest at an agreed rate. Or you give them a loan as a current account, it will be payable on demand without necessarily asking for addition. So these are the two contracts that you have, one is a loan that comes with interest and the other is interest free.
When we take current account, it is the same, one is a loan to the bank which is free of any return. If you want to make a deposit to the Islamic bank to be renumerated, then you have a different contract from when you’re doing it in a conventional bank. What you do now is to expose that deposit to look like an equity, so you have the bank now like an agent to trade with your money, generate profit and share with you. This is where we start to have differences in the balance sheet of the Islamic bank. You have the current account which is similar to the one in conventional account and we have the term deposit, it is renumerated because it is exposed to the commercial risk.
When we go to the other side, that is, when we are doing financing, we don’t have various products because we don’t give loans in the traditional sense, but we finance projects, we finance needs and services of our customers based on either a sales contract with a customer with a deferred payment, or a lease contract with a customer to be paid or we sometimes do sharing contract which means we give capital to the customer and then we share his profit.
How were you able to position Jaiz Bank early to commence business?
This is where I would like you to understand what JAIZ went through four to five years in its operation. Because it is a new business, the infrastructure to provide for treasury management was not provided by the system for the five years of operation. When you look at the conventional bank, all of the money they generate, they don’t sit. The Central Bank will take the reserve ratio, they’ll keep a little, but most of it will be spent on treasury bills and their contracts immediately pending when they screen their customers and give them. An Islamic bank cannot do this; it has to generate different types of debt instruments, which the central bank ought to have provided through the Debt Management Office when we were starting. We had to keep enough money with us to ensure that we had smooth operation. The conventional banks, they are about 20+ so they have counterparts, so you don’t have to always see that you are self-sufficient in liquidity. If your depositors are taking money, you can take money from your counterparts, you’ll buy money from them and you pay, so you’re always square every day. So that’s what your treasury department would be doing on a daily basis, looking at your needs and making sure that you’re square (foreign exchange needs, withdrawal needs). Imagine that within that period, JAIZ had to be self-sufficient in all of this, that means it is always liquid and always ready to meet it’s customer requirements, those who are getting finance, those who are depositing. The depositors will not give you notice, they just issue cheques or go to ATMs and do whatever they want.
So, you have to have enough resources and then also keep spare and also keep liquidity ratio and then everything that a bank is expected. If you don’t have treasury bills that is compliant for you to invest, you don’t have a bond that is compliant for you to invest. So, 40 per cent of all the deposit you have will be sitting and renumerated.
I hope I’m not being too elementary, I know you’re all business correspondents here already enlightened about banking. I just thought that it would be important to start these things and when we go into the presentation we will tell you. So, when we say we are selling, how do we sell. When we say we are leasing, how do we lease. This gives you a full background of how our operations are.
How is your corporate governance structured?
In our corporate governance, we are also like every other bank or company. We have shareholders at the top, we also have Board of Directors and we have other staff. In addition, in order to avoid abuse of the process, we have what we call Sharia Arbitration. We have what we call advisory committee of experts, in Islam we call them Sharia board, it offers an advisory function that is not full time, they’re like auditors to clarify the contracts that you enter so that you’re not doing based on interest on Islamic funds. Internally you have auditors also that review operations in tandem with what we do. This background is to bring you up with how we operate.
In terms of ATMs, clearing, mobile banking, internet banking, they’re all the same in terms of operations. The contracts are different but the impact of what we do are similar. Where we differ is where our customer that is enjoying financing has difficulty, we have slightly different view of what happens there. Conventionally we have a compounding interest that we know you can continue to compound and a figure that the principal and interest will be more. We don’t have that but we have something that is near that which is put in place not because the bank will benefit from it, but because we want to avoid moral hazards.
What happens if your customer fails to meet his part of a contract?
So if we do a facility, for example, to you and you’re supposed to pay one year and you don’t pay your contract from the beginning, or if you don’t pay on time, you’ll be paying the same rate of return that we charged you as charity. So we take this and pay out to charity because it is interest. This is in order not to take advantage of the system because it doesn’t charge. What happens is that if you can show genuine cause why you can’t pay and you defaulted, this will be weighed by management and an appeal will be made. Otherwise we penalise you by making you support something with social responsibility because that is more useful to the organisation.
On the Sharia Advisory Board, since we know that the CBN is the regulator for all banks, is there anything the board can do without CBN’s approval and how is the representation?
The Sharia Board plays an advisory role, it’s like your lawyer advising you on a document. He has to take into consideration the regulation and not only, what the contract says, they also take care of the regulation. Let me tell you the process for approving a product. When you want to do a product, deposit taken side or on the finance side. Any product you want to do, you’ll have to articulate for yourself the features, the base contract, the benefits and all the literature around it and how the accounting will take place. We put it in concept paper, as Management this is what we do.
For example, we want to do a product for people who want to finance their medicals, we call it Medical Facility Finance or you want to do a mortgage, we put the literature, put in the features of the product, put in that this product is going to be a non interest product, then we pass it to our Sharia unit. This unit is part of the product development, they look at it and make sure it supports and aligns with the mission of the bank. This document is then passed to the Sharia board, they go through it and confirm that it does not breach the jurisprudence, that is, it’s not an interest-based transaction and it’s also meant for the right purpose. For example, we do not support a company known for alcohol production, if you are to do that paper, it will be rejected. Even if it conforms with the rudiments, but because the purpose is wrong, it will be rejected.
Once they are okay with the process that it’s a sales contract, or it’s a lease contract and not a loan contract, they are okay with that. One of the things they always look at is that the risk is not borne by the customer alone but also the business. We then package it and send to the Central Bank because the Central Bank is the final approval point of all products, whether conventional or Islamic. They will put it in their process, they also have advisers, Sharia advisers that will look at the product that it conforms and that it is not a loan contract that is put in the guise of non interest product. When this is done, they’ll come back and if they have any issue with any of the areas, they make their observation known, we address and return it, they approve. It’s always Central Bank that gives the final approval, the Sharia board is only advisory and they only meet as the need arises.
Is JAIZ taking advantage of the CBN intervention funds?
I’m happy to say we have also overcome this although not 100 per cent. We’ve been able to do intervention funds with central bank and we have also been informed that all the other intervention will be made to conform to the contract that is complaint, that is, it’s going to be a sales contract or a lease contract. In this we have made some progress, we have actually made some concessions around this with the central bank. We’ve also been able to do something with the Bank of Industry (BoI). What we did was, we had a meeting with top members of the credit committee of Bank of Industry, did a presentation on how we can identify and intervene with them. So, for the SME funding, we have almost six months disbursing on either sales contract or lease contract from the funds we have taken from Bank of Industry, so there is progress but there are still some of the institutions like NEXIM, Bank of Agriculture and DBN that we are yet to work with in this direction.
How much has the bank paid to charity?
The payment to charity, we’ve done significant payment to charity, about N2.3billion