Nigeria wants to establish itself as the African hub for Islamic banking and is working on a regulatory framework to try to emulate the success of the industry in Malaysia, Central Bank Governor Lamido Sanusi said.
Nigeria is home to the largest Muslim population in sub-Saharan Africa, with around half of its 150 million people members of the Islamic faith. It is also home to one of Africa's fastest growing consumer and corporate banking sectors.
Sanusi -- the grandson of a former Emir of Kano, one of Nigeria's most respected Muslim leaders -- said Nigeria was playing an active role on the Islamic Financial Services Board and was studying various regulatory regimes around the world.
"We start from the premise that if we are going to go into Islamic banking, we are not interested in licensing just one bank," Sanusi said in an interview in his Lagos office as part of the Reuters Africa Investment Summit.
"Given the population of Nigeria, we think that Nigerian can be the African hub for Islamic banking," he said.
Islamic finance is estimated to be a $1 trillion global industry, but ratings agency Moody's forecasts that the industry could hit $5 trillion over time.
Asian economies including Malaysia and Indonesia have seen rapid growth in Islamic banking while growth in the Gulf Arab region, birthplace of Islam and cradle of Islamic finance, has steadied, partly due to inconsistent regulation and wrangling over the interpretation of sharia principles, experts say.
Sanusi said Nigeria was looking at the example of Malaysia, where a national sharia council sets rules for Islamic financial institutions, which are standardized under the central bank.
Malaysia's central bank last year introduced rules to tighten sharia compliance at Islamic banks, including raising sharia advisers' accountability and independence, and requiring audits on banks.
"(In Malaysia) the regulatory environment allows for the growth of Islamic banking. The regulator has done a great job in basically standardizing the products across that market," Mohammed Lawal, a Deutsche Bank Vice President and specialist in Islamic derivatives, told Reuters last month.
"That has allowed international players to come into the market," he said on the sidelines of a Deutsche Bank workshop in Lagos, part of which was dedicated to Islamic finance.
Islamic banking products which are sharia compliant do not charge interest on financing. Profits or losses are instead shared with the borrower, meaning they discourage unnecessary speculation and spread the risk.
Sanusi said Nigeria was looking at Islamic finance not just for the opportunities it would offer to banks and investors, but also as a way of diversifying the country's financial system in order to mitigate risk.
"Islamic banking products are tied to the real economy, so they are part of our reform program of getting banks to lend to the real economy," Sanusi said.
"They also discourage excessive speculation and risk taking, which is consistent with some of the new guidelines we are putting in place. So from a financial stability perspective and from a financial deepening perspective, Islamic banking is an important part of our agenda," he said.
Lawal said a lack of regulatory framework meant Islamic finance had so far not followed the same growth path in Africa as in other regions with large Muslim populations.
He said the experience of Malaysia showed that the way Islamic banking products were structured meant they were taken up by non-Muslims attracted by their risk sharing principles.
"Outside Indonesia, (Nigeria's Muslim population) is greater than the Muslim population of most of the countries where Islamic banking is flourishing," Lawal said, adding Nigeria was one of the only countries outside Malaysia looking at creating a separate regulatory framework for Islamic banking.
"That said, the sector will only really have the opportunity to flourish in Nigeria once all the regulatory framework and the regulatory environment that the central bank has been working on is finalized and formalized," he said.