Islamic Microfinance: A Solution to Financial Inclusion in Northern Nigeria 

Nigeria, a country with over 80 million Muslims which constitutes almost 50% of its total population is home to the largest Muslim population in the whole of Sub-Saharan Africa. Most of these Muslim populations reside in the North.​  

According to a study by Onukogu and Onukogu, the smallholder farmers in the northern part of Nigeria lack access to formal financial services such as credit, savings, insurance, and payments. These farmers face several challenges such as low productivity, high post-harvest losses, poor market linkages, and climate change risks. Most of these farmers are affected by one factor or another which limits them from accessing loans from banks. Some of the challenges faced by these northern farmers include high interest rates from commercial banks and some might even prefer to take only Sharia-compliant loans which can only be provided by non-interest banks. 

Non-interest banking also known as Islamic banking has been receiving wide acceptance all around the world with Nigeria not being left behind. 

According to the National Financial Inclusion Strategy 3.0 in 2022, Nigeria is aiming to achieve a 90-95% total inclusion rate across the country, and to meet this target the Islamic banks will have to play a key role in delivering non-interest Sharia-compliant financial products and services to most of the Muslims living in Northern Nigeria.​ ​ 

What Does Islamic Banking in Nigeria Means?

Islamic banking is a form of financial system that operates according to the principles of Islamic law (Sharia). Unlike conventional banking, Islamic banking prohibits the payment and receipt of interest (Riba) and involves profit and loss sharing between the bank and the customer.  

Islamic finance has gradually gained momentum in Nigeria since the early 1900s. The Central Bank of Nigeria (CBN) granted the first license for a fully-fledged Islamic bank, Jaiz Bank, in 2012 and now there have been other licensed Islamic banks in Nigeria like; Lotus Bank, Taj Bank, etc. 

The Nigerian government has shown increasing support for the sector, as it looks to diversify its sources of funding, foster financial inclusion, and tap into the growing demand for Sharia-compliant products and services. The CBN has issued guidelines and regulations for non-interest banking and has established a Financial Regulation Advisory Council of Experts to advise on Sharia compliance issues. The Securities and Exchange Commission (SEC) has also set a target for the non-interest capital market to contribute at least 25% to the overall capital market capitalization by 2025.​

The Islamic finance industry in Nigeria consists of various segments, such as banking, capital markets, insurance, and microfinance. However, the industry still faces some challenges such as regulatory gaps, public awareness, human capital, and infrastructure. 

Islamic microfinance is a subset of Islamic banking that provides small-scale financing to the poor and low-income segments of society, especially those who are excluded from the conventional banking system due to their religious beliefs or lack of collateral. 

How Islamic Banks Can Achieve Maximum Inclusion in Northern Nigeria 

Islamic microfinance has the potential to alleviate poverty and ensure economic peace in northern Nigeria, where most of the population is Muslim and faces various challenges such as low literacy, high unemployment, insecurity, and environmental degradation. Islamic microfinance can offer countless benefits to the poor and farmers in northern Nigeria, such as: 

  • Providing access to interest-free loans that are based on profit-and-loss sharing (PLS) or asset-backed transactions, such as;  
  1. Murabaha: This is also known as cost-plus financing. In a Murabaha contract, the seller and buyer agree to the cost and markup (profit) of an asset, which is then paid in installments. The buyer does not become the true owner until the loan is fully paid. 
  1. Musharaka: Musharaka is a mode of financing in the form of a partnership between the Bank and its client whereby each party contributes to the capital of the partnership in equal or varying degrees either to establish a new project or share in an existing project. 
  1. Mudaraba: The term refers to a form of business contract in which one party brings capital and the other personal effort. The proportionate share in profit is determined by mutual agreement. But the loss, if any, is borne only by the owner of the capital, in which case the entrepreneur gets nothing for his labour. 
  1. Ijara: ijara financing refers to the transfer of the right of use of an asset to another individual or a business entity. This is a form of leasing where the owner of the asset (the bank) receives a rental payment from the lessee for the use of the asset while the bank continues to hold on to ownership rights.  
  1. Salam: Salam Financing is a forward sale contract whereby the seller undertakes to supply some specific goods to the buyer at a definite future date in exchange for an advanced price fully paid on the spot.  

These modes of financing can help the poor and farmers to start or expand their businesses, purchase inputs or equipment, or cope with emergencies without being burdened by debt or exploitation. 

  • Offering zakat (obligatory charity), Sadaqah (voluntary charity), or Qard al-hasan (benevolent loan) to the extremely poor and needy who cannot afford to repay loans. These forms of social finance can help the poor and farmers meet their basic needs, such as food, clothing, health, education, or housing, and improve their living standards. 
  • Enhancing financial literacy and awareness among the poor and farmers about the principles and benefits of Islamic finance, as well as their rights and responsibilities as borrowers or partners. This can help them to make informed financial decisions, avoid fraudulent or unethical practices, and increase their trust and confidence in the Islamic financial system. 
  • Creating social capital and solidarity among the poor and farmers through group lending, peer monitoring, joint liability, or cooperative schemes. This can foster a sense of community, mutual support, accountability, and empowerment among them and reduce the risk of default or moral hazard. 


Islamic microfinance is an emerging and effective way of promoting financial inclusion in northern Nigeria. It offers a Shariah-compliant alternative to conventional microfinance, which involves charging interest and may not address the financial needs of the Northern population. 

Islamic microfinance can help reduce poverty and foster economic stability in northern Nigeria by providing tailored financial services that align with the religion and ethics of the North. This can also support the national goal of achieving financial inclusion for all Nigerians, as the National Financial Inclusion Strategy Committee envisioned. 

Communications and PR Analyst at Leonine Investment Services Limited | + posts

Abdulsamod Balogun leads Communications and Public Relations at Leonine Investment Services Limited. He's excited about new media, technology and public policy. When he's not working, he's catching up on movies and books.

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