NIGERIA: CBN set for Islamic banking

The Central Bank of Nigeria (CBN) is set to commence the full implementation of Islamic banking.

The CBN Governor, Sanusi Lamido Sanusi, said the apex bank was committed to the realisation of the operational structure for Islamic banking otherwise called non-interest banking.

Sanusi said the framework, which allows Islamic bank owners to operate as regional and national banks based on their ability to meet up with specified conditions, will push Nigeria to the fore-front of Islamic banking regime.

"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," he said.

The Nation’s investigations showed that many conventional banks are already offering Islamic banking products and some are at the point of opening Islamic banking desks in some strategic branches. But many of the banks’ management are waiting to see how easy or rigorous the guidelines set by the apex bank in January will be implemented before fully launching out into that line of business. Such banks, The Nation learnt, are targeting the large Muslim population estimated at over 60 million.

"Islamic banking products are tied to the real economy, so they are part of our reform programme of getting banks to lend to the real economy. 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," Sanusi told Reuters.

Part of the guidelines under consideration was released by the CBN Acting Director, Financial Policy and Regulation Department, Chris Chukwu, which mandated that a non-interest bank with regional banking authorisation is entitled to carry on its banking business within a minimum of six and a maximum of 12 contiguous states of the Federation, lying within not more than two geo-political zones, as well as the Federal Capital Territory (FCT). Besides, non-interest banks with national banking authorisation are entitled to carry on banking operations within every state, including the Federal Capital Territory (FCT), Abuja.

He said it was the increasing number of requests from persons, banks and other financial institutions desiring to offer Shariah-compliant products and services that prompted the development of this framework.

Chukwu said the new framework included guidelines on Shariah Governance for Non-Interest Financial Institutions in Nigeria as well as those on Non-Interest Window and Branch Operations of Conventional Banks and Other Financial Institutions.

By this guideline, Non-Interest Financial Institution (NIFI) is a bank or Other Financial Institution (OFI) under the purview of the CBN, which transacts banking business, engages in trading, investment and commercial activities as well as the provision of financial products and services in accordance with Shariah principles and rules of Islamic commercial jurisprudence.

Here, transactions, instruments and contracts are non-permissible if they involve interest; uncertainty or ambiguity relating to the subject matter, terms or conditions, gambling, speculation and unjust enrichment among others. All NIFIs are required to comply with this and any other guidelines that may be issued by the CBN from time to time. The objective of the framework is to provide minimum standards for the operation of institutions offering non-interest banking and financial services in Nigeria.

Chukwu said a NIFI will ensure that its Memorandum and Articles of Association (MEMART) state that its business operations will be conducted in accordance with Shariah principles and practices. A NIFI shall be licensed in accordance with the requirements issued by the CBN from time to time.

Also, applications for the grant of licence to carry on the business of non-interest financial services shall be accompanied by evidence of a technical agreement executed by the promoters of the NIFI with an established and reputable non-interest bank or financial institution. The agreement shall explicitly specify the role of the two parties and shall subsist for a period of not less than three years from the date of commencement of operations of the licensed NIFI. A licence may be issued by the CBN upon such terms and conditions which authorise the operation of a non-interest financial institution on a regional or national basis for banks, or any other basis for other financial institutions.

Experts said Sanusi’s statement coming few months after the guidelines was unveiled meant that full kick-off of the line of business is around the corner. "We start from the premise that if we are going to go into Islamic banking, we are not interested in licensing just one bank. Given the population of Nigeria, we think Nigeria can be the African hub for Islamic banking," Sanusi said in an interview in his Lagos office as part of the Reuters Africa Investment Summit.

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. Nigeria is therefore looking at the example of Malaysia, where a national Sharia council sets rules for Islamic financial institutions, which are standardised under the central bank.

Traditionally, Islamic banking products which are Shariah-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 to mitigate risk.