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CBN Boosts Financial Inclusion With Non-Interest Banking



By Kayode Tokede, Lagos –

With huge percentage of the unbanked populace in the country due to religion belief, the Central Bank of Nigeria (CBN) has continued to drive financial inclusion in various ways, by reviewing its guild lines on Islamic Banking (non-interest Banking).

Specifically, the CBN in August set up two new financial instruments namely, “Funding for liquidity Facility (FflF)’’ and ‘’Intra-day Facility (IDF)’’ to provide liquidity management for non-interest banks. The two new financial instruments were also designed to help foster growth in emerging Islamic finance industry.

Nigeria has the largest Muslim population in sub-Saharan Africa, with regulators (CBN and Securities and Exchange Commission (SEC)) aiming to improve on its financial inclusion programs on Islamic Banking, following a global trend. The global Islamic finance industry has been slowing down, recording single-digit growth in 2014, after three consecutive years of double-digit growth.

The global Islamic financial system is projected to reach $6.5 trillion by 2020, according to a report by the International Financial Service Board (IFSB), with Asia in the lead.

In marking Nigerian strong recognition in Islamic finance industry, The Governor of the CBN, Mr. Godwin Emefiele, was elected as the Chairman of the International Islamic Liquidity Management Corporation (IILM) late last year.

The IILM is a global institution established by central banks, monetary authorities and multilateral organisations to create and issue short-term Shariah-compliant financial instruments to facilitate effective cross-border Islamic liquidity management.

By creating more liquid Shariah-compliant financial markets for institutions offering Islamic financial services, the IILM aims to enhance cross-border investment flows, international linkages and financial stability.

In supporting its intentions, the CBN has been working on new regulatory measures for the proliferation, Non-interest Bank, Non-interest Microfinance Bank (NIMBs), Sukuk (Islamic bonds) and takaful (insurance).

Among the banks in Nigeria, only Sterling Bank, Stanbic IBTC and Jaiz Bank offer Islamic services, although Jaiz Bank, the only fully-fledged Islamic lender is listed on the Nigerian Stock Exchange (NSE). LEADERSHIP Newspaper in July had reported that CBN’s granted licensing operation to two NIMBs with the third awaiting final approval.

The two granted NIMBs are Tijarah Microfinance Bank in Bauchi State and I-Care Microfinance Bank Ltd in Kano State.

The first Shariah compliance Microfinance bank, Tijarah MFB Ltd. was granted a full operating licence as a non-interest (Islamic) state microfinance bank by the CBN in 2014 and commenced operations on October, the same year.

Since 2005 when the CBN issued the first Regulatory and Supervisory Framework for MFBs in Nigeria, MFBs have continued to thrive and cater for the economically active poor and many MFBs have been established across all states in Nigeria.

However, despite the increased number of MFBs in Nigeria, a large percentage of Nigerians still lack access to financial services. The lack of access in financial services can be attributable to high cost of transactions, abhorrence of Interest rates and apathy to unethical investment by a significant part of the populace.

The Director, financial policy and regulation Department, Mr. Kevin Amugo had explained that the mandate of introducing non-interest (Islamic) microfinance banks guide lines in Nigeria was to promote a sound financial system.

He explained guidelines were developed to provide a level playing field between the conventional and the non-interest microfinance banks and to address issues underpinning the operation of non-interest   financial institutions (NIFIs)

In compliance with Shari’ah law, Islamic lenders do not charge interest on finance. As a rule, CBN has continued to discourage speculation and risk involved in accessing loan from these non-interest financial institutions.

The CBN had stipulated several conditions for offering Islamic finance in August. Director, Financial Market Department, Dr. Alvan Ikoku said non-interest lenders must have a liquidity problem to be able to access a new discount window – which will offer it at zero interest, though lenders must post collateral.

Ikoku in a circular stated that authorized NIFI must provide eligible securities to the CBN as collateral for the facility.

According to the circular, “the value of collateral to be a minimum of 110 per cent of the value of the facility. For example, if a NIFI wishes to take a FiLF of N10 billion, it would be required to provide eligible security collateral worth N11 billion (that is N10*1.1=N 11 billion).”

Part of the circular stated that transaction would be at a zero per cent interest rate.

However, it is clear that the relationship and directives between the CBN and Islamic Banks has played a very important to the financial system and the economy as a whole.

This is because both are stakeholders, especially the CBN who is assumed as the principal stakeholder has ensured that the Islamic banks is performing to expectation in view of customers access loans without worrying about interest.

It is evidently clear that the roles of the CBN in relation to Islamic Banks in Nigeria with custom on its challenges are often reviewed occasionally for the man on the street to feel its impact.

It could safely be argued that the role of the apex bank in Nigeria is very crucial and of enormous importance to the survival of the financial system, especially the banking industry.

Finance analysts advocated the need for the CBN to collaborate with the Judiciary to have Shari’ah courts for the adjudication of matters on Islamic banking.

They said it will impact strongly positive on the need for the CBN to be more concerned about the strengthening of the legal framework for Islamic banking operation in the country for the purpose of growth and survival of the industry.

Against the background of what has been achieved so far especially with regards to guild line, it may not be out of place to say that with other things appropriately addressed, Islamic banking in Nigeria has prospect for success, under the Emefiele.

Other factors that are likely to increase the prospect include stakeholders’ awareness Campaign; possible patronage by the teaming Muslim population that had hither-to abstain from banking due to interest elements in the conventional banking and acceptance as potential alternative to the conventional banks

Despite the slowdown in the nation’s economy, the prospects of Islamic finance remain positive given its untapped potential in serving the real economy.

The CBN has realized that the role of Islamic banks will be enhanced to further strengthen its intermediary functions and promote risk sharing.

The Emefiele leadership has continued to   provide effective guide lines needed by stakeholders to diversify their businesses and support the Islamic Banking in Nigeria.

Many initiatives have been developed, including the modernization of the regulatory framework for Islamic finance and development of Shariah standards.

Therefore, a real shift from the existing mindset of commercial banking lending and an acceptance of change are major challenges in the industry

In addressing these challenges, the CBN in matter of urgency need to develop talent enrichment program and deployment, and awareness of Islamic finance across the states.