Islamic Finance Adoption, Financial Performance, and Risk Profile of Nigerian Financial Institutions

Islamic finance, characterised by the prohibition of interest, profit-and-loss sharing arrangements, and asset-backed financing structures, has grown rapidly in Nigeria following the Central Bank of Nigeria's introduction of a non-interest banking framework and the emergence of dedicated institutions offering Sharia-compliant products. This study examines the financial performance and risk profile of Islamic finance institutions in Nigeria relative to their conventional counterparts, using secondary data from the financial statements of two full-fledged non-interest banks and the Islamic banking windows of three conventional banks for the period 2015 to 2022. Financial performance is compared using return on assets, net profit margin, cost-to-income ratio, and asset quality measures. Risk profiles are assessed through capital adequacy ratios, liquidity coverage ratios, and non-performing financing ratios. A matched-sample comparative analysis controls for asset size and market segment to ensure comparability, and panel regression with sector fixed effects is employed. The theoretical framework draws on the comparative financial economics of Islamic and conventional banking, the profit-loss sharing theory of Islamic finance, and the financial stability implications of profit-sharing contracts under macroeconomic stress. The study evaluates whether the capital and liquidity standards established by the Central Bank of Nigeria for non-interest banks are adequate for the specific risk profile of Islamic finance products. Existing literature from Malaysia, the Gulf Cooperation Council, and Pakistan provides the primary comparative benchmarks, as Nigerian-specific evidence on the topic is limited. Findings are expected to inform the Central Bank of Nigeria's non-interest finance regulatory team, the National Deposit Insurance Corporation, and investors in Islamic finance products. Keywords: Islamic finance, non-interest banking, financial performance, Nigeria, Sharia-compliant