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Thursday, July 14, 2011

CBN issues Islamic banking guidelines

ABUJA — The Central Bank of Nigeria, CBN, Wednesday, in Abuja, issued guidelines for the establishment and operation of Islamic banking in the country with a requirement that all funds coming into such banks from abroad must be fully screened to avoid money laundering and terrorism financing in the country.

Islamic banking operates in accordance with principles and rules of Islamic commercial jurisprudence that generally recognizes profit and loss sharing and the prohibition of interest.

According to the CBN,“promoters are required to screen shareholders, customers, counterparts, transactions, products and activities against the proceeds of crime, corruption, financing of terrorism and other illicit activities using legal and moral filters.”

The apex bank added that all funds to be received either from investors or depositors must be approved, not only by the bank but also by security agencies.

The guidelines required that anyone desiring to go into the model of banking must state clearly that it would operate under the Islamic laws.

A non-interest financial institution under this model shall ensure that its Memorandum and Articles of Association (MEMART) state that its business operations will be conducted in accordance with the principles and practices of Islamic commercial jurisprudence,” it said.

Advisory council of experts

The guidelines said the CBN must have in place an advisory council of experts charged with ensuring that financial products offered by such specialised banks meet the minimum requirements of Islamic commercial jurisprudence.

“In relation to non-interest Islamic financial institutions, the CBN will establish an Advisory Council of Experts to advise the CBN on the appropriateness of relevant financial products to be offered by such institutions.

Prohibits discriminations

“Discrimination on any grounds in the participation by individuals or institutions as promoters, depositors or other relevant parties in any transaction regarding a non-interest financial institution, whether based on Islamic or other model, is strictly prohibited,” the CBN also said..

To operate under Islamic commercial jurisprudence, the emphasis was on Non-Interest Financial Institutions operating under the principles of Islamic Commercial Jurisprudence.

The CBN said it would come up with other guidelines in the conduct of banking under the principles of Islamic commercial jurisprudence, e.g., operational, corporate governance, product compliance, risk management and capital adequacy.

Non-permissible transactions include those involving any of the following: certainty or ambiguity relating to the subject matter, terms or conditions; gambling; speculation; unjust enrichment; exploitation/unfair trade practices; dealings in pork, alcohol, arms & ammunition, and pornography.

From the provisions of the guidelines, conventional banks could operate Islamic products through full-fledged Islamic banking subsidiary, branch or window.

Applications for the grant of license shall be accompanied by evidence of a technical agreement executed by the promoters of the proposed institution with an established and reputable Islamic 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 3 years from the date of commencement of operations of the licensed IIFS.

A license to undertake Islamic banking business operations may be issued by the CBN upon such terms and conditions which authorize the operation of a non-interest financial institution on a regional or national basis for banks, or any other basis for other financial institutions.

The Islamic banks have been categorized into Regional and National Islamic banks.

Islamic bank with a regional banking authorization shall be entitled to carry on its banking business operations within a minimum of six (6) and a maximum of twelve (12) contiguous States of the Federation, lying within not more than two (2) Geo-Political Zones, as well as within the Federal Capital Territory (FCT).

“An IIFS with national banking authorization shall be entitled to carry on banking business operations within every State of the Federation including the Federal Capital Territory (FCT), Abuja”, the CBN said.

The CBN said guidelines for other categories of non-interest banking would be issued upon request and would be consistent with international best practice.

Nigeria: CBN issues new guidelines for microfinance banks

IN continuation of its holistic overhaul of the banking sector, the Central Bank of Nigeria (CBN), on Tuesday, released a new set of guidelines for microfinance banks (MFBs) operating in the country.

According to the apex bank, five years after the launch of Microfinance Policy, Supervisory and Regulatory Framework for Nigeria, some issues had emerged in the course of its implementation, necessitating a review of the policy framework.

It added that the review of the policy was in exercise of the powers conferred on it in the Banks and Other Financial Institutions Act (BOFIA), stating that in carrying out the review, the apex bank sent request for inputs to about 900 key stakeholders in the microfinance sub-sector.

Under the new guidelines, microfinance banks would now operate under three categories, which include unit, state and national microfinance banks.

A unit microfinance bank is authorised to operate in one location without branches/cash centres and is required to have a minimum paid up capital of N20 million.

The state microfinance bank is authorised to operate in one state or the Federal Capital Territory (FCT). It is required to have a minimum paid up capital of N100 million and is allowed to open branches within the same state or the FCT, subject to prior written approval by the CBN for each new branch.

The national micro-finance bank is authorised to operate in more than one state, including the FCT. It is required to have a minimum paid up capital of N2 billion and is allowed to open branches in all states of the federation and the FCT, although subject to prior written approval by the CBN.

On ownership, the apex bank said MFB could be established by individuals, groups of individuals, community development associations, private corporate entities, non-governmental organisations or foreign investors, adding that “no individual, group of individuals, their proxies or corporate entities and/or their subsidiaries shall own controlling interest in more than one MFB, except as approved by the CBN.”

Nigeria: Central Bank Issues Additional Guidelines on Non-Interest Banking

The Central Bank of Nigeria (CBN) has said it would re-issue guidelines on non interest banking to accommodate other variants following public outcry against its earlier categorization of that segment of the banking system. In its earlier guideline, the regulator defined non interest banking as only that which is Shariah compliant, prompting antagonism that such was capable of marginalizing other firms that may want to practice non interest banking without compliance to Islamic jurisprudence.

"This revised guideline includes an amendment in the interpretation of non-interest banking to the extent that the previous guideline could have been interpreted as defining non-interest banking as solely Islamic banking," stated a circular signed by Chris Chukwu, acting director, financial policy and regulatory department of the CBN. "The CBN wishes to clarify that Islamic banking is not the only type of non-interest banking contemplated under the new banking model which categorized non-interest banks as part of specialized institutions. The CBN recognizes that Islamic banking is a form of non-interest banking and that there are other forms of non-interest banking than Islamic banking."

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Nigeria: Islamic Banking - Issues and Challenges

The Central Bank of Nigeria (CBN) has gone a long way in laying the groundwork for the commencement of Islamic Banking in Nigeria. At a recent workshop in Bauchi State, the Special Adviser to the CBN governor on non-interest banking, Dr. Bashir Aliyu Umar, highlighted the issues and challenges of the project in his paper.

Excerpts:

Islamic Finance is a financial system that is based on adherence to the Shariah or Islamic law. It offers services, products and instruments based on compliance to this Divine Law. Central to the precepts of the Shariah is that commercial and financial transactions must adhere to these prohibitive principles:

1. Prohibition of Riba, which is usury or interest. The Shariah, just like the teaching of the old testament, and the early position of the Christian Church as contained in the First Ecumenical Council of Nicea in 325 AD and the second and Third Lateran Councils (1139 and 1179 respectively), all prohibit the use of an association with interest...Former President (Olusegun) Obasanjo speaking in 2000 about Nigeria's mounting debt to international creditors said: "All that we have borrowed up to 1985 was around $5b, and we have about $16b. Yet we are still being told that we owe about $28b. That $28b came about because of the injustice in the foreign creditor's interest rates. If you ask me what the worst thing in the world is, I will say it is compound interest. Well, whether simple and compound interest, they are both evil.

2. Gharar is the next most important prohibition in Islamic transactions and contracts. Gharar means lack of certainty. Its prohibition stems from informational asymmetry and refers to any uncertainty created by the lack of information or control in a contract or its conditionality.

This includes want of knowledge over the subject of the contract, or the price to be paid - its nature, amount, or period of payment. It also includes cases where the subject of contracts is something over which neither party has control. Classic examples include transactions involving the sale of birds in flight or fish not yet caught or an unborn calf in the mother's womb, or a runaway animal.

More modern examples include transactions where the subject is not in the possession of one of the parties and there is uncertainty even about its future possession, as is the case with speculative contracts. This prohibition of Gharar is considered to be the prohibition of risk or the prohibition of derivative instruments in today's financial markets, which are designed to transfer risks from one party to the other. (Zamir Iqbal, Abbas Mirakhor: 2007).

3. Prohibition against gambling (maysir). Gambling represents an unproductive exchange of property, and in every transaction involving gambling one side wins and the other side loses. It is a clear case of squandering people's wealth unjustly, and its prohibition is unequivocal in the Qur'an and Sunnah (sayings, actions and approvals of the prophet of Islam, peace be on him), which are the two main sources of the Shariah.

4. Prohibition against the sale or purchase of unlawful goods and services. Examples include pork, alcohol, pornography, tobacco, narcotics and any item that is deemed harmful and unlawful according to the Shariah. This therefore imposes the need to screen all transactions and activities through moral and legal filters based on the Shariah, which is largely equivalent to the western concept of socially responsible or ethical investing. These prohibitions combined form the bed of Islamic finance.

As the alternative to interest-based lending, Islamic finance adopts asset-backed financing. This type of financing uses a number of instruments of finance. Among them are the following:

a. Musharakah which involves partner providing funds for a venture, with profits shared according to their invested capital, and the loss is borne by them in the same way;

b. Mudharabah financing is when one partner gives money and the other party provides his entrepreneurship to invest and manage the project. When a financier contributes money on the basis of the two instruments, the money is converted into assets having intrinsic utility. Profits are generated through the sale of these real assets, and all parties share in the risk and reward, as opposed to what obtains in interest-based financing, where the financier does not bear any risk of the venture or project, but gets his reward come what may;

c. Salam is another mode of financing in Islamic finance. It is a sale where the seller undertakes to supply some specific goods to the buyer at a future date that is specified in exchange of an advanced price fully paid at spot. This mode of financing is used to finance the agriculture sector;

d. Istisna' is another mode of financing where the commodity involved is manufactured to the specifications of the purchaser. This is widely used in the housing finance sector, where the client seeks finance for the construction of a house. The financier may undertake to construct the house on a specified land either belonging to the client or purchased by the financier, on the basis of istisna', with payment fixed in whatever manner the parties may wish.

e. Murabaha, though originally a particular type of sale and not a mode of financing, it is nevertheless used for financing subject to conditions. Murabaha is kind of sale where the seller expressly mentions the cost incurred by him of the commodity offered for sale, and sells it to another purchaser by adding some profit or make-up thereon. The payment can be on the spot or deferred or instalment. Murabaha as a mode of finance is used to finance raw materials, inventory, equipment, asset a mode of finance is used to finance raw materials, inventory, equipment, asset financing, import and export financing, consumer goods financing, even working capital financing. Furthermore, all services that can be sold in the form of a package, like education, medical, tour etc can be financed through Murabaha;

f. Ijarah is the hiring of the services of persons, or the transfer of the usufruct of a property in exchange for a rent. The second type of Ijarah is the one that is used as a mode of finance, though originally not being a mode of finance. It has many features similar to a financial lease. It has also been used as a basis for securitisation helping to create a secondary market for financiers.

All these modes of finance involve the transfer of assets and are not based on making money from money alone as is the case with interest-based transactions. From the Prohibition of dealing in unlawful goods and services and from the other Prohibitions, we can see that Islamic finance is an ethical finance and investments and activities are socially responsible.

Furthermore, Islamic Finance is a socially inclusive finance system, which is another point that makes this topic on Islamic finance very relevant to the theme of their worship, which is about financial inclusion. A primary determinant of soundness of finance system and its stability is the public trust and confidence in its institutions and markets.