First of all both forms of financing share identical goals of providing credit and financial services to individuals and businesses and operate with the aim of making profit. It is the means of making this profit however that differentiates the two. An example of what an Islamic Bank will seek to do is to co-own an asset with its client and as the client gradually settles its debts through a series of pre-agreed payments, the banks interest in the asset diminishes until the client becomes the sole owner of the asset. At the time of providing the loan for the purchase of the asset, a figure is agreed upon as the profit that will go to the bank. Although this profit would appear similar to charging interest, the difference is that this amount is fixed and does not increase annually or at all throughout the duration of the loan. Thus the client is certain from the onset of the exact figure he is expected to repay to the bank.
Islamic institutions may also share in the risk of the investment to which their loan is put. A conventional lending institution has no real concern for the investments made with the credit it extends to its clients other than for it to be repaid with interest. Should the client’s investment or business fail, the bank suffers no loss and will recover its credit in full along with the interest. It faces only the risk of default by the client. Islamic banks on the other hand share in the risk and rewards of their client’s investment. Any profit or loss is halved at a pre-agreed ratio on a profit-and-loss sharing or a profit-sharing and loss-bearing basis.
Another difference is that Islamic finance is only extended to finance trade, service provision, manufacturing and other tangible economic activity. It cannot be used to finance transactions which Islam considers to be haram such as terrorism, dealing in pork, ammunition, alcohol, pornography and other goods and services which are harmful or unethical. Transactions under Islamic finance must be socially and morally responsible.
There are of course still a number of obstacles on the road to the full operation of Islamic finance in Nigeria, such as the absence of a comprehensive deposit insurance scheme to protect depositors’ funds and the dearth of legal and accounting expertise necessary for its development. Then there is the need for public awareness to disabuse the public of their prejudice of the concept. There is no doubt that many of the banks will certainly take advantage of these regulations, once they are available, and offer the product. It is expected that once its benefits become obvious, non-Muslims, and particularly the small and medium size businesses, will opt for non interest banking as against conventional financing where the interest rates are often prohibitive
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