ISLAMIC FINANCE AS AN ALTERNATIVE SOURCE OF FINANCING DEVELOPMENT IN NIGERIA

Abstract

Islamic finance (IF henceforth) is a financial system that started developing in the early 1970s with the writings of the likes of Abu Al-A'la Al-Mawdudi (El-Gamal, 2006). Ever since its emergence, IF has attracted a plethora of academic works from various fields of expertise. With such dramatic interest, IF grew exponentially both academically and practically. El-Gamal (2006) has reviewed how IF emerged and evolve over the period of four to five decades. This research also discussed the various forms of Islamic financial contracts and mode of financing that have become the fundamentals of IF. Among the financial products under the Islamic financial system include Murabaha (cost-plus sale), Tawarruq (monetization) financing, Ijara (lease) financing, securitization, Sukuk (Islamic bonds), Islamic mutual funds, Takaful (Islamic insurance) and derivatives, and so on. According to Hussain, Shahmoradi and Turk (2016), IF has been growing to nearly 20 percent annually which points to its resilience and broad appeal. Its resilience owes to the principles that govern its financial activities such as equity, participation, ownership, and the ability to withstand shocks due its inherent emphasis on risk sharing, limit and discouragement to excessive risk taking, and strong connection with real economic activities. It is this ability to withstand shocks that investigated in the context of 2008 global financial crisis. This research argued that IF is competent at playing down the severity and frequency of financial crises with its financial system that is based on risk sharing. This research also discussed Islamic financial system as a new introduction to the international financial system that reduces the potential of global financial crises.  The emergence of IF has made many researchers, scholars and analysts to look at it as the answer to the many challenges faced by conventional global financial system. For instance, Baber (2018) investigated IF resilience during financial crises vis-à-vis conventional finance. This research assessed the actual performance of IF and the conventional during the previous financial crisis. It concluded that the performance of Islamic banks and finance as a whole was found to be supportive of the assertion of resilience and consistency. A similar researchwas also conducted by Al-Zumai and Al-Wasmi (2016) in which they made similar findings revealing that IF provides a viable alternative during financial crises and attributed the 2008 financial crisis to the unethical nature of the conventional global financial system. IF has also been studied as a means of financing social enterprises. This came on the back of the increasing difficulty in accessing traditional financial instruments after the 2008 financial crisis. IF has been gaining increasing global attention as it provides alternative ways of financing particularly for social enterprises. This research argued that IF has the potential to become an alternative for financial social enterprises through its diversified instruments for financing.