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  • Background of the study

The most recent and significant development in the banking industry is the emergence of Islamic Banking System and Interest-Free Banks (IFBs) in both developing countries and developed countries of the world. This is in response to the failure of the conventional interest based banking system to cater for the developmental needs of most countries, particularly the developing economies (Ahmed, 2000).

Within a span of five decades; Islamic Banking has been successfully developing into a viable alternative banking framework all over the world. Of recent, it has been reported that there are approximately 500 Islamic Banks World Wide controlling about one trillion worth of assets and the figure is estimated to reach four trillion dollars by the year 2020 (Aliyu, 2010).

Also, Mamman (2005) states that there are over 75 countries operating Interest-Free Banks (IFBs) with an annual growth rate of 12-15% per annum. However, despite the global upsurge in the development of Islamic Banking and interest –free Banking, its practical operation in Nigeria has been limited due to a number of challenges.

The concept of Islamic Banking and Interest-Free Banking are synonymously used in Islamic Economics literature as an alternative banking framework to the interest-based conventional banking practice. Although in technical terms, there is a difference between an interest-free bank and an Islamic bank but they are sometimes used interchangeably. Ahsan (1988) defined an Islamic bank as “a financial and social institution whose objectives and operations as well as principles and practices must conform to the principles of Shariah and which avoid the use of interest in any of its operations. It stands for an alternative financial system based on Islamic ideals. It is not only a financier but also a partner in productive.

Mannan (1976) states that Islamic banking is an interest-free financing system essentially based on profit and loss sharing. And its operations are in conformity with Shariah. It is therefore, the cornerstone of the Islamic Economic System which is by definition Interest-Free. Siddiqi (1983) conceived an Islamic bank as a financial intermediary mobilizing savings from the public on the basis of Mudaraba (profit and loss sharing contract) and advancing capital to entrepreneurs on the same basis. The bank shares the profits of the enterprise according to a mutually agreed percentage and shares these profits with depositors according to a percentage announced by the bank in advance.

While stating the difference between Islamic Banking and Interest-Free Banking, Gusau (2000) argues that “Islamic banking system is supposed to operate completely within the Shariah in all its activities both in sourcing of funds and disbursement of the funds. It not only avoids interest in all its ramifications but also it avoids all other islamically prohibited activities. Interest-free banking system on the other hand, does not engage in interest but there is no reason to suppose that all its other activities will be done strictly according to Shariah”.

From the above, three things have become clear, namely: Islamic Bank must charge no interest, conform to Shariah principles in all its operation and promote Islamic ideals.

Thus, it can be seen that interest-free operation is a necessary but not a sufficient condition for a bank to qualify as an Islamic Bank. In addition to non-interest charges, the bank must promote Islamic ideals.  Therefore, Interest-Free Banking  can be described as the provision of Interest-Free Banking services by the Islamic banks on the basis of profit and loss sharing (PLS) principles .It is an operational strategy adopted by Islamic banks in which  non-interest-based banking services are operated alongside with conventional banking services, for the purpose of meeting increasing demand from customers, improve mobilizations of savings as well as benefit from the new vista of opportunity offered by Islamic banking system. It should be seen as an integral aspect of financial globalization which entails the integration of Islamic financial system with the Western Financial System to produce global financial system.

The most lucidly prominent among the phenomena in the conventional banking system or economy, is the phenomenon of interest. Although, various theories have been postulated by the economist in the attempt to address the issue of interest but paradoxically to know that, there does not exists a single adequate and universally accepted theory. Modern banking system is whole heartedly based on interest, it is considered un-Islamic because of the equivocal prohibition of Riba by the Qur’an (Hassan Al-Inani).

The idea of Islam is a unique way of life distinct from all other isms and ideologies which naturally extend to the economic life of the Muslim Ummah. A determination to reshape the economy on distinctive Islamic line has been a germane dimension of the Islamic resurgence in many parts of the Islamic world especially in the areas of finances and investments.

Interest-free based financing is attracting today because their establishment is parallel to religious obligation. The system is steadfast growing in developed, developing and under-developed countries of the world. it is acknowledged by the World Bank and the International Monetary Fund(IMF) as a credible idea for faster growth economic growth(Rakiya 2011).

Non-interest banking system is being introduced in the Nigerian economy by few banks for example, Habib Nigeria Bank. The system is alternately called “Islamic Banking. It exists in most cases by side with the conventional (interest based) system of banking.

Moreover, the operation of interest-free banking system is strictly speaking on the religions, that is, all religions prohibits or forbids usurious(interest) transactions. In the light of the teaching of the Holy Qur’an, Allah the exalted says in:

(Q2:278-9)- “O Ye who believer and give up what remains of your demand for usury, if Ye are indeed believers. If Ye do it not, take notice of war from Allah and his Messenger”.

While in the light of the teaching of the Holy Bible:-

(Exodus 22:25)- “If you lend money to any of my people (Israelites) who are poor among you, you should not be like a money lender to him; you shall not charge him interest.

More also, in the light of the teaching of Hadith:-

(Hadith 850- Bulugul Maram)- “The cause of Allah is upon who collect interest/riba, the person giving it, and who writes it, and who witness it. He says(those are all same).

Taking the current situation of our commercial banks or money deposit banks, that are extension of the European- originated banking system, are based on the philosophy of trading in money. Money to them is a commodity to be bought and sold. Thus, they procure the value before money performs it functions. This is the core of usury system and the crux of the imbalance of the money system, since receiving in advance  the cost of the job before completion is to suspends one of the chains in the natural system that enjoins that the cost in return for a job that had been done.


  • Statement of the problem

The experience of business failures and financial scandals around the world brought about the need for non-interest banking system. Bell and Pain (2000) supported this view that the last 20 years have witnessed several bank failures throughout the world. Financial distress in most of the banks were attributed to high incidence of non-performing loans and advances, accumulation of liabilities, non-performing of total assets, that is the value of assets fall short of liabilities to deposition.

Central bank of Nigeria (2005) noted that some of the reasons for the collapse of banks, among others are non-publication of annual accounts that obviates the impact of financial discipline in ensuring the profitability or soundness of the bank in relation to return on equity, pretax profit/loss margin and net interest margin.

Banks are faced with the problem of advancing in equity holdings, inadequacy of the fixed assets, total assets and advances also attributed to high incidence of non-financial performing by bank (Nazir, 2010).

Low consideration of classified loans/gross loans and classified loans/equity also contributed immensely to the failure of banks in terms of their financial dealings (Nazir, 2010).

Interest-free banking system is embedded with numerous problems, part of which is listed above. The question is how can interest free banks solve these and similar problems in order to improve its financial performance.

  • Objectives of the Study:

The aim of this research study is to find out viable solution to the afore-mentioned problems, most especially ones that have direct relationship to the overall financial performance of the system.

The objectives of this research study also include:-

  • To determine the level of liquidity position of the bank financial performance.
  • To examine the capital adequacy of the bank financial performance.
  • Assess the quality of assets of the bank financial
    • Hypothesis of the study:-

Based on the objectives of the study, the following null hypothesis are developed to guide the study:

Ho1: The liquidity position of the bank does not have significant effect on its financial performance.

Ho2:  The capital adequacy of the bank does not have significant effect on its financial performance.

Ho3: The assets quality of the bank does not have significant effect on its financial performance.

  • Significance of the study:-

This research study is significant for a number of reasons and also significant to different people, institution, Nigerian government, Nigerian financial institution and students.

The reasons include the following:-

Bringing people closer to righteousness, goodness, co-operation and almsgiving. No doubt usury is against all these and prohibiting it, is the means of bringing people closer thereto(like the rich and poor).-: “that which Ye gives in usury in order that it may increase on(other) people’s property hath no increase with Allah; but which Ye gives charity, seeking Allah’s countenance, hath increase manifold” (Q30:39).

It is (interest-free system) challenging to Nigerian Government if they may design programs and provision for the system.

This research is significant to the financial institutions through the facts established in this study and will appreciate the need to accord greater sensitivity to the program of Islamic banks.

  • Scope of the study;

The study intends to be conducted on the evaluation of financial performance of interest- free banking system in Nigeria. Therefore, effort is to be made to reveal the nature of finances and degree of the performance of such finances.

The period covered for this research is one (1) Year financial statement of JAIZ INT. PLC, and the analysis also cover same period.

The study is centered around the activities of JAIZ INT. PLC (Kano Branch) and there staff, who have been operating Islamic banking for quite a period of time.

The study also covers the following ratios; profitability ratio, liquidity ratio, assets quality ratio and finally, capital adequacy ratio.

  • Limitation of the study

The major constraints of the study is the period covered which is only financial statement (2012) available and interviewing of one female member of the bank and the resources both material and non material which are absolutely not in abundance for utilization in due course of carrying out this research work. This is largely because the study will be too voluminous.

Furthermore, Interest-free banking is not something that goes way back, it is growing day-by-day, so researcher’s works need to be updated on regular basis in respect to growth.

  • Definition of terms;
  • Interest-free banking?

Interest-free banking is alternately called “Islamic banking”.-it is a system based on the Islamic principles and underlying framework, supporting profit and loss sharing of the factors of production.

  • Riba- (usury or interest)

Riba- literally means increase or addition, that is, a premium that must be paid by the borrower to the lender along with the principal amount, a condition for the loan.

  • Murabaha Sales;

It is a trade related mode of financing which include “trade with mark-up (sales of goods at a price mutually agreed between buyer and the seller”; “trade with mark-down (purchase of bill/marketable security’s at an agreed price lower than the face price belonging to a client”; finally-“trade with buy-back arrangement (bank purchasing good or securities from the client at an agreed price”.

  • Ijara (lease financing)

It is trade related mode of financing. Also, an agreement by which a firm acquires the right to use an asset, without owing it, for a certain period of time by making a series of periodic cash payment to another firms which owns the assets.

  • Musharaka (free partnership)

It is an investment type of mode of financing. In general, It is an agreement between the bank and it clients to participate in a business as temporary partners by providing an agreed amount of funds and sharing profit and loss during a specified period of time.

It involves, “equity participation and purchase of shares (sharing of rewards and risk of ownership)”; “Participation of Term Certificate-PTC(an instrument for medium and long term financing)”; “MUSHARAKAMUTANAGISA-DECREASING PARTNERSHIP(right to supersede in the ownership of one or several stages of investment based on agreed terms).

  • Mudaraba (limited partnership)

A contract between two or more persons, whereby one person invests fund and the other put in managerial /skills to carry on business; profit sharing to be agreed upon before hand, either  half or third e.t.c. it may be for “specific or multiple purpose”.

  • Bai-salam

A trade deal in which the buyer pays the agreed price of a commodity which is delivered to the buyer at a specified future date.

  • Qard Hassan (lending without return)

This is a mode of financing by lending to regular savers and needy persons e.g. students needed financial support to further their education or indigent persons to finance their medical or surgical treatment on compassionate ground. No compulsory date about the return until when the receiver is in the position to repay. The bankss bears the administrative cost involved.

  • Ijara-wal-iqtina

A contract entered between the bank and the client, where the bank finances equipments, building or facilities for the client at an rental payment, together with an undertaking from the client to make payment in an account which will eventually permit  the client to purchase the equipments, building or facilities(Islamic banking interest-free).


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