There is a refreshing development in the banking sector that is breathing a new lease of access to fund users who are bugged down by the complexities of conventional banking institutions. By their mode of operation, these Deposit Money Banks (DMBs) rely on the interest they generate from customers’ deposits for their sustenance.
But this is about to change or, at least, an alternative is about to be provided by the Central Bank of Nigeria (CBN) for most who are unable to operate at the current interest rate regime in those conventional banks. The apex bank is putting in place a New Banking Model as authorised by the Banks and Other Financial Institutions Act (BOFIA) 1991 as amended.
They are called Specialised Banks which include non-interest banks, microfinance banks, development banks, mortgage banks and such other banks as may be designated by the CBN from time to time.
However, the guidelines just released by the apex bank place emphasis on Non-Interest Financial Institutions operating under the principles of Islamic Commercial Jurisprudence, one of the categories of Non-Interest Financial Institutions (NIFI). In addition, 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, etc. will be issued in due course.
By CBN’s definition as dictated by BOFIA, NIFI means a bank or Other Financial Institution (OFI) which transacts banking business, engages in trading, investment and commercial activities as well as the provision of financial products and services in accordance with any established non-interest banking principles.
The bank went on to expand this definition by categorising non-interest banking and finance models into two: Those based on non-interest banking and finance as provided for in Islamic commercial jurisprudence; and non-interest banking and finance based on any other established non-interest principle.
It must be understood that Islamic banking as one of the models of non-interest banking, serves the same purpose of providing financial services as do conventional financial institutions except that it operates in accordance with principles and rules of Islamic commercial jurisprudence that generally recognises profit and loss sharing and the prohibition of interest.
Other non- permissible transactions in Islamic financial jurisprudence are uncertainty or ambiguity relating to the subject matter, terms or conditions; gambling; speculation; unjust enrichment; exploitation/unfair trade practices; dealings in pork, alcohol, arms and ammunition, pornography and other transactions, products, goods or services which are not compliant with the rules and principles of Islamic commercial jurisprudence.
These guidelines have become necessary as the CBN gets inundated with requests from persons, banks and other financial institutions desiring to offer non-interest banking products and services based on Islamic commercial jurisprudence in Nigeria. To that extent, therefore, all non-interest financial institutions under this model are required to comply with these and any other guidelines that may be issued by the CBN from time to time.
Specifically, the reference to IIFS for the purpose of these guidelines include: Full-fledged Islamic bank or full-fledged Islamic banking subsidiary of a conventional bank; Full-fledged Islamic merchant bank or full-fledged Islamic banking subsidiary of a conventional merchant bank; Full-fledged Islamic microfinance bank; Islamic branch or window of a conventional bank; Islamic subsidiary, branch or window of a non-bank financial institution and a development bank regulated by the CBN offering Islamic financial services. Others are, a primary mortgage institution licensed by the CBN to offer Islamic financial services either full-fledged or as a subsidiary; and a finance company licensed by the CBN to provide financial services, either full-fledged or as a subsidiary.
The objective of these guidelines as stated by the regulator is to provide minimum standards for the operation of IIFS in Nigeria. To that extent, the guidelines are applicable to IIFS only and do not seek to regulate other non-interest financial institutions which may be established from time to time.
The CBN listed requirements to be met by the promoters of the financial institution. To be authorised to operate, 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 three years from the date of commencement of operations of the licensed IIFS.
Also a license to undertake Islamic banking business operations 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.
According to the regulator, an IIFS with regional banking authorisation shall be entitled to carry on its banking business operations within a minimum of six (6) and a maximum of 12 contiguous States of the Federation, lying within not more than two geo-political zones, as well as within the Federal Capital Territory (FCT).
Furthermore, an IIFS with national banking authorisation shall be entitled to carry on banking business operations within every state of the federation including the Federal Capital Territory (FCT), Abuja. It can obtain detailed licensing requirements directly from the Financial Policy and Regulation Department (FPRD), Central Bank of Nigeria, Abuja or downloaded at CBN website.
It is pertinent to stress that the financing modes and instruments for transacting business must be compliant with the principles under this model and approved by the CBN.
It is also important to note that these non-interest financial institution may charge such commissions or fees as may be necessary in accordance with the principles under this model and the guide to bank charges without being accused of conflict of interest. Funds so received as commissions and fees shall constitute the bank’s income and shall not be shared with depositors.
It is not unlikely that some conventional banks and other financial institutions operating in Nigeria may decide to offer or sell products and services in line with the principles under this model. They may do this through subsidiaries, windows or branches only but must play by the rules guiding the model.
Such a subsidiary of a conventional bank or financial institution shall be established in line with the licensing requirements for the establishment of a full-fledged non-interest financial institution. Similarly, an Islamic window or branch of a conventional bank or financial institution shall be established and operated in line with the guidelines on windows/branches issued by the CBN.
For the purposes of efficient corporate governance, all licensed IIFS shall be subject to guidelines on corporate governance for non-interest financial institutions issued by the CBN; the provisions of the code of corporate governance for banks in Nigeria issued by the CBN and any subsequent amendments thereto; and all relevant provisions of BOFIA 1991 (as amended) and CAMA 1990 (as amended).
All licensed IIFS shall have an internal review mechanism that ensures compliance with the principles under this model.
However, registered or licensed name of an IIFS shall not include the word “Islamic”, except with the consent of the governor of the CBN. IIFS shall be recognised by a uniform symbol designed by the CBN. All the signage and promotional materials of IIFS shall bear this symbol to facilitate recognition by customers and the general public.
An IIFS shall ensure that relevant disclosures are made to Profit Sharing Investment Accounts (PSIA) holders in a timely and effective manner and also ensure the proper implementation of investment contracts. Also, an IIFS shall inform its prospective PSIA client(s) operating under profit-sharing, loss-bearing contracts, in writing that the risk of loss rests with the client(s) and that the institution will not share in the loss unless there is proven negligence or misconduct for which the institution is responsible. IIFS with PSIAs may maintain a Profit Equalisation Reserve (PER) which would serve as an income smoothing mechanism and risk mitigation tool to hedge against volatility of returns to investment account holders. They may also maintain an Investment Risk Reserve (IRR) to cushion against future losses for PSIA holders. The basis for computing the amounts to be appropriated to the PER and IRR should be pre-defined and disclosed.
The guidelines also contain audit, accounting and disclosure requirements, prudential requirements. Risk management procedures, anti-money laundering and combating of the financing of terrorism (AML/CFT).
The CBN, in the guidelines, made it clear that discrimination on grounds of faith or ethnicity or any other grounds in the participation by individuals or institutions as promoters, shareholders, depositors, employees, customers or other relevant parties in any transaction regarding a non-interest financial institution, whether based on Islamic or other model is strictly prohibited.
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