Islamic banking a veritable option for small and medium scale enterprise(SME) financing.

The Islamic financial system is a unique financial system that is founded on Quranic injunctions that support cooperation, helping one another according to principles of goodness and piety-not to cooperate in evil or malice. The interesting feature of Islamic banking is the non-acceptance or imposition of interest in any form. It involves ethical lending and banking without any form of interest levied on the customer. Islamic banking also abhors the use of loans to run gambling houses and businesses related to pork processing.

The rules of Sharia known as Fiqh al-Muamalat(Islamic rules on transactions) is strictly adhered to in  carrying out the Islamic banking concept, and the principle source of the sharia is the Quran or the recorded sayings and actions of Prophet Muhammad (SAW),which is also known as the Hadith.

The Institute for Islamic banking and insurance says the banking concept is not new, stressing that Islamic banking dates back to the advent of Islam, especially when the prophet Muhammad (SAW) helped his wife out in her trading business. Islamic partnerships were also encouraged at that time by the prophet.

Benefits of lslamic banking to Small and Medium Scale Enterprise(SME) funding.

In this model of banking, the business is not left to bear the loss alone. Money is distributed on profit-loss sharing basis. Islamic banking experts claim that the conventional banking system exploits the poor and the needy by giving loans at a very high rate of interest whereas in the Islamic banking system, the Qard-e-Hasana option is applied. With this option, no interest is charged on loan.

Er. Atif Aziz, an Islamic Banking expert says “Islamic banking is the solution to inflation because it maintains inflation to a reasonable level and people remain satisfied together with financial justice, peace and harmony in the society.”

Here are some Islamic banking services that can boost SME growth in Nigeria.

•• Murabaha: Murabahah or murabaha is a particular kind of sale, compliant with shariah, where the seller expressly mentions the cost he has incurred on the commodities for sale and sells it to another person by adding some profit or mark-up thereon which is known to the buyer.

•• Ijara: It is a rental agreement whereby Financial Institution leases an asset for a specific rent and period to the client. Ijara is an exchange transaction in which a known benefit arising from a specified asset is made available in return for a payment, but where ownership of the asset itself is not transferred.

•• Musharaka: It means a joint enterprise formed conducting some business in which all partners share the profit accordingly.

•• Bai Salam: It is a form of sale contract by Financial Institution which purchases goods for spot payment with deferred delivery.Bai Salam (transliterated as Bai us salam) is a contract in which advance payment is made for goods to be delivered at a future date. The seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advance price fully paid at the time of contract. It is necessary that the quality of the commodity intended to be purchased is fully specified leaving no ambiguity leading to dispute. Bai Salam covers almost everything which is capable of being definitely described as to quality, quantity and workmanship. This service is an ideal for agriculture financing. However, this can also be used to finance the working capital needs to the customer.