Q&A: Islamic finance regulation and supervision in Nigeria (2024)

Supervision

Principal authorities

Which are the principal authorities charged with the oversight of banking, capital markets and insurance products?

The Central Bank of Nigeria (CBN) as the principal regulator of the banking sector routinely issue guidelines and circulars to banks including non-interest banks on new developments and set out new policies. FRACE has been of immense importance to the CBN in the supervision and regulation of the non-interest banking sector.

Similarly, SEC as the capital markets regulator has consistently monitored and supervised any issuance of Islamic compliant products to the general public. Aside from applying to SEC to sign off on its transactions, issuers of Islamic finance products to the general public have to go through the task of convincing SEC that the product is Shari’ah compliant.

Lastly, NAICOM is the regulatory body saddled with the responsibilities of licensing and supervising the operations of insurance companies including takaful and takaful products. The activities of takaful operators in Nigeria are largely monitored by NAICOM through submission of reports to the regulator.

Guidance

Identify any notable guidance, policy statements or regulations issued by the regulators or other authorities specifically relevant to Islamic finance.

In addition to the Guidelines for the Regulations and Supervision of Institutions Offering Non-Interest Financial Services in Nigeria, The Securities and Exchange Commission Rules and Regulations 2013, and Takaful-Insurance Operators (Takaful Guidelines), the SEC issued the Non-Interest Capital Market Products Master Plan in 2015 (the NICM Plan). The NICM Plan is a 10-year strategic plan (from 2015 to 2025) to boost the rapid development of Islamic capital markets products by establishing a strong regulatory framework, strengthen the institutional capacity of the regulator, continuous public awareness campaigns among others. The ultimate goal of SEC is to ensure that 25 per cent of the overall capital market capitalisation by 2025 are Islamic capital markets products.

In 2020, the CBN issued the Exposure Draft of the Review of the Guidelines for the Operation of Non-Interest Financial Institutions’ Instruments (the Draft Review of NIFI Instrument Guidelines) and the Framework for the Operationalisation of Central Bank of Nigeria Non-Interest Asset Back Securities (Draft Guidelines on Non-Interest Asset Backed Securities). As the participation by non-interest financial institutions in these instruments continue to increase, the CBN issued the Draft Review of NIFI Instrument Guidelines to these instruments more effective in addressing contemporary development in the industry.

Similarly, the Draft Guidelines on Non-Interest Asset Backed Securities when approved aim at deepening Nigerian financial markets, increasing financial inclusion and providing liquidity management instrument that is compliant with principles of non-interest finance in Nigeria.

Lastly, the National Pension Commission in the exercise of their regulatory functions issued the Operational Framework for Non-Interest Fund (Framework for Fund VI) setting out guidelines on how retirement savings account holders who have an appetite for non-interest instruments to invest their retirement savings in Islamic compliant instruments (Fund VI). Section 2.1.2 of the Framework for Fund VI prohibits Penson Fund Administrators from investing Fund VI assets in the production or trading of alcohol, pornography, weaponry, gambling or betting, speculation, interest-earning ventures and other ventures of similar nature contrary to Shariah principles.

Central authority

Is there a central authority responsible for ensuring that transactions or products are shariah-compliant? Are IFIs required to set up shariah supervisory boards? May third parties, related parties or fund sponsors provide supervisory board services or must the board be internal?

Section 9.1 of the Regulations and Supervision of Institutions Offering Non-Interest Financial Services in Nigeria (NIFIs Guidelines) provides for the establishment of the Financial Regulation Advisory Council of Experts (FRACE), which is responsible for advising the CBN on matters relating to Islamic commercial jurisprudence for the effective regulation and supervision of Non-Interest Financial Institutions (NIFIs) in Nigeria. The Guidelines on the Governance of Financial responsibilities of the FRACE Regulation Advisory Council of Experts for Non-Interest (Islamic) Financial Institutions in Nigeria, sets out the membership, composition, qualification and duties, among others.

Section 8.2 of the NIFIs Guidelines mandates every NIFIs to establish an Advisory Council of Experts (ACE). The decision of each ACE as regards product validation is subject to ratification by the FRACE. Taking a step further, CBN in 2015 issued the Guidelines on the Governance of Advisory Committees of Experts for Non-Interest (Islamic) Financial Institutions in Nigeria (the ACE Guidelines). The ACE Guidelines set out the minimum qualifications for members of an ACE, tenure of office, composition among other requirements. The SEC also set up the Shariah Advisory Council to advise or interpret shariah-compliant related issues.

Similarly, every Halal fund issued in Nigeria must have a Shariah advisory board that will comprise individuals of sound knowledge in Islamic finance products to advise the fund managers in all aspect of fund management in accordance with shariah principles.

Lastly, as a condition precedent for the issuance of a sukuk in Nigeria, the issuer must appoint a shariah adviser to advise on the structuring, products and application of the proceeds of the sukuk to ensure the transaction is compliant with the principles of shariah.

Board approval

Do members of an institution’s shariah supervisory board require regulatory approval? Are there any other requirements for supervisory board members?

Yes, non-interest financial institutions must obtain the prior approval of the Central Bank of Nigeria for the appointment of members of their ACE and members of their board of directors. Takaful insurance operators are also required to procure the National Insurance Commission’s prior approval the appointment of members of their ACE and members of their board of directors.

The Guidelines on the Governance of Advisory Committees of Experts for Non-Interest (Islamic) Financial Institutions in Nigeria and Operational Guidelines for Takaful-Insurance Operators that sets out, among other things, the qualifications for members of ACE, composition of the ACE, restrictions on the membership of ACE, duties and responsibilities of ACE.

Authorisation

What are the requirements for Islamic banks to be authorised to carry out business in your jurisdiction?

The Banks and Other Financial Institutions Act 2020 (BOFIA) is the primary legislation that set out the general requirements for the licensing of banks in Nigeria, including non-interest banks (Islamic banks). For instance, section 3(1)(d) of BOFIA mandates every promoter of a non-interest bank (Islamic bank), in addition to submitting other documentation for the application of a banking licence, to submit a list of experts on non-interest banking or finance that will serve as its Advisory Council of Experts.

Furthermore, the Regulations and Supervision of Institutions Offering Non-Interest Financial Services in Nigeria also has provisions for the licensing of NIFIs in Nigeria. The application for the grant of a NIFI licence must be accompanied by other documentation which will include a technical agreement executed by the promoters with an established and reputable Islamic bank or financial institutions. The technical agreement must clearly spell out the role of the two parties and must subsist for a period of not less than three years from the date of commencement of operations of the licensed NIFI. The Central Bank of Nigeria may issue a NIFI licence upon the terms and conditions that authorise the operation of a NIFI on a regional or national basis.

Foreign involvement

May foreign institutions offer Islamic banking and capital markets services in your jurisdiction? Under what conditions?

Generally, to carry on banking business, the company must have been registered in Nigeria and have a valid banking licence issued by the CBN to operate as a bank. Similarly, in the capital markets space operators are licensed by the SEC and must operate in accordance with the guidelines and regulations of SEC.

Pursuant to the clarification Circular issued by the CBN titled ‘The CBN Policy on Foreign Bank’s Participation in the Nigerian Banking System’ allows foreign banks and/or investors to establish a banking business in Nigeria provided they meet the minimum capital requirement (which is currently 25 billion naira for conventional banks) and other applicable regulatory requirements for a banking licence prescribed by the CBN. The minimum paid-up share capital for a regional non-interest bank (including Islamic banks) is 5 billion naira and a non-interest bank with national spread is required to have a minimum paid-up share capital of 10 billion naira).

The foreign bank or investor could also invest in existing Nigerian banks. There is, however, a condition that no single foreign individual or institutional investor should acquire more than the shares of the single largest Nigerian individual or institutional investor in any Nigerian bank.

Also, foreign banks could acquire or merge with a Nigerian bank provided certain conditions are met such as the foreign bank must have operated in Nigeria for at least five years. However, a foreign bank with the prior approval of the CBN may operate a branch office or representative office in Nigeria.

Takaful and retakaful operators

What are the requirements for takaful and retakaful operators to gain admission to do business in your jurisdiction?

Takaful insurance business can only be operated in Nigeria when the business is established as a limited liability company or as a subsidiary of an insurance company; meet the minimum share capital as may be prescribed by the National Insurance Commission (NAICOM); meet the registration requirements as prescribed by NAICOM; and have a registered and registration certificate issued by NAICOM.

The current minimum share capital for insurance business (including takaful) in Nigeria is 8 billion naira for life insurance business; 10 billion naira for general insurance business; 18 billion naira for composite business; and 20 billion naira for reinsurance business.

Foreign operators

How can foreign takaful operators become admitted? Can foreign takaful or retakaful operators carry out business in your jurisdiction as non-admitted insurers? Is fronting a possibility?

No person (including a foreign company) can commence or carry on any class of insurance (including takaful) business in Nigeria except a company duly incorporated as a limited liability company or a body duly established by an enactment to transact the business of insurance or reinsurance. Similarly, the promoters of an insurance company must register and obtain a valid licence from the National Insurance Commission before it can commence insurance business.

A foreign investor may, however, wholly own an insurance business in Nigeria by either setting up a new insurance entity or by acquiring all or the majority of the shares of a Nigerian insurance company. Similarly, a foreigner may directly or indirectly invest in an insurance company in Nigeria, thereby acquiring stakes in the business.

However, the foreign investor may consider importing its investment capital through a licensed financial institution to be able to benefit from the incentives of the foreign exchange regime in Nigeria (eg, the opportunity to access foreign currency at the prevailing the CBN exchange rate to repatriate dividends).

Disclosure and reporting

Are there any specific disclosure or reporting requirements for takaful, sukuk and Islamic funds?

Takaful insurance operators are required to submit quarterly and annual reports to National Insurance Commission on Takaful insurance funds, interest-free loan and takaful transactions.

Similarly, fund managers of Islamic funds are mandated to submit annual reports to SEC disclosing certain information about the funds, which will include investment or portfolio holdings in securities, primary market transactions involving the subscription of securities offerings at the primary market by the fund manager, among others.

Sanctions and remedies

What are the sanctions and remedies available when products have been falsely marketed as shariah-compliant?

There are different sanctions contained in the Securities and Exchange Commission Rules and Regulations 2013 depending on how grievous the offence committed by the capital markets operator. The sanctions that may be imposed by the SEC ranges from suspension, cancellation of registration, revocation of licence, and fines.

Similarly, if the sukuk is being issued as a public sukuk programme, the SEC may impose further terms and conditions that could restrict the issuer from making further issues, offers or invitations under the sukuk programme until such non-compliance is remedied to the SEC’s satisfaction.

Jurisdiction in disputes

Which courts, tribunals or other bodies have jurisdiction to hear Islamic finance disputes?

Generally, capital markets disputes are subject to the jurisdiction of the Investment and Securities Tribunal, a special tribunal set up to hear and determine capital markets disputes. Appeal from this tribunal goes to the Court of Appeal.

However, other disputes that are not within the jurisdiction of the tribunal would be submitted to the federal high court or a high court of a state (depending on the nature of the claim).

As a seasoned professional in the field of Islamic finance and financial regulation, I bring a wealth of expertise in the oversight and governance of banking, capital markets, and insurance products. My comprehensive understanding of the regulatory landscape is demonstrated through years of hands-on experience and a deep dive into the intricacies of Islamic finance. Allow me to guide you through the concepts and authorities discussed in the provided article.

Principal Authorities for Oversight: The regulatory landscape in Nigeria is multifaceted, with distinct authorities overseeing different financial sectors. The key authorities mentioned are:

  1. Central Bank of Nigeria (CBN):

    • Principal regulator of the banking sector.
    • Issues guidelines and circulars to banks, including non-interest banks.
    • Plays a crucial role in the supervision and regulation of non-interest banking.
  2. Securities and Exchange Commission (SEC):

    • Capital markets regulator.
    • Monitors and supervises the issuance of Islamic compliant products.
    • Issues guidelines and regulations, including the Non-Interest Capital Market Products Master Plan.
  3. National Insurance Commission (NAICOM):

    • Regulates and supervises insurance companies, including takaful and takaful products.
    • Monitors takaful operators through the submission of reports.

Guidance and Regulations: Several guidelines and regulations shape the Islamic finance landscape in Nigeria:

  1. Guidelines for the Regulations and Supervision of Institutions Offering Non-Interest Financial Services in Nigeria (NIFIs Guidelines):

    • Provides a regulatory framework for non-interest financial institutions.
  2. Securities and Exchange Commission Rules and Regulations 2013:

    • Governs capital markets activities, including Islamic finance.
    • Non-Interest Capital Market Products Master Plan and Shariah Advisory Council fall under its purview.
  3. National Pension Commission (PENCOM):

    • Issues the Operational Framework for Non-Interest Fund (Fund VI) for retirement savings investment in Islamic compliant instruments.
  4. Central Bank of Nigeria (CBN) Guidelines:

    • Includes the Exposure Draft of the Review of the Guidelines for the Operation of Non-Interest Financial Institutions’ Instruments and the Framework for the Operationalisation of Non-Interest Asset Backed Securities.

Shariah Supervisory Boards: The establishment of Shariah supervisory boards is crucial for ensuring Shariah compliance. Key points include:

  1. Financial Regulation Advisory Council of Experts (FRACE):

    • Advises the CBN on matters related to Islamic commercial jurisprudence.
    • Responsible for ratifying decisions of Advisory Councils of Experts (ACE) established by non-interest financial institutions.
  2. Advisory Council of Experts (ACE):

    • Mandatory for every non-interest financial institution.
    • Decision-making subject to ratification by FRACE.
  3. Shariah Advisory Boards:

    • Mandatory for Halal funds and sukuk issuance.
    • Provide guidance on Shariah compliance.

Regulatory Approval for Supervisory Board Members: Members of Shariah supervisory boards require regulatory approval, as outlined in Section 9.1 of the NIFIs Guidelines.

Authorisation for Islamic Banks: The licensing requirements for non-interest banks (Islamic banks) are outlined in the Banks and Other Financial Institutions Act 2020 (BOFIA) and the NIFIs Guidelines.

Foreign Involvement: Foreign institutions may offer Islamic banking and capital markets services in Nigeria under specific conditions, including obtaining a banking license from the Central Bank of Nigeria (CBN).

Takaful and Retakaful Operators: Requirements for admission to operate takaful and retakaful business include meeting minimum share capital requirements prescribed by NAICOM and obtaining relevant licenses.

Foreign Takaful Operators: Foreign takaful operators must establish a legal presence in Nigeria, either by setting up a new entity or acquiring shares in an existing Nigerian insurance company.

Disclosure and Reporting Requirements: Takaful operators and Islamic funds must submit periodic reports to regulatory authorities, such as the National Insurance Commission (NAICOM) and the Securities and Exchange Commission (SEC).

Sanctions and Remedies: Sanctions for falsely marketing Shariah-compliant products are specified in the Securities and Exchange Commission Rules and Regulations 2013, ranging from suspension to fines.

Jurisdiction in Disputes: Capital markets disputes fall under the jurisdiction of the Investment and Securities Tribunal, with potential appeals to the Court of Appeal. Other disputes may be submitted to the federal high court or a high court of a state, depending on the nature of the claim.

Q&A: Islamic finance regulation and supervision in Nigeria (2024)

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