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Islamic finance “IF” has gained wider attention recently and is currently being used as an efficient and effective means of financing development worldwide. In the Nigerian financial market, market operators including banks, insurance companies and asset management entities are fast exploring IF as an alternative financial model to conventional finance.  In a bid to centralize and make IF more beneficial, the regulators in the Nigerian financial industry have developed rules and regulations on IF. The Central Bank of Nigeria “CBN” issued guidelines for the operation of Non-Interest banking in Nigeria on 21 June 2011 that clarify that “Non-interest banking” is not restricted to only Islamic banking but also includes other forms of non-interest banking not based on Islamic principles. The Guidelines expose the legal backing and basis for the operation of Islamic banking in Nigeria, such that, Islamic banking in Nigeria is just like any other banking models such as the microfinance banks, mortgage banks, development banks etc. Jaiz Bank took the initiative in January 2012 and got licensed to operate as a regional interest-free bank in Northern Nigeria and has recently obtained operating license from the CBN to operate as a national bank in Nigeria. Stanbic IBTC Bank and Sterling Bank Plc also obtained licenses to operate a window of Islamic banking in Nigeria.
 

The Nigerian Securities and Exchange Commission “SEC” also made provisions for establishing Islamic Fund so that its consumers can benefit from SEC’s regulatory framework like the consumers of other conventional funds. A fund manager seeking to establish an Islamic Fund in Nigeria is exposed to disclosure rules and is required to have the requisite level of expertise in Islamic and Shari’ah principles which form the basis of IF. The fund manager must ensure that its investment activities are limited to Shari’ah compliant investments.  Where the fund manager is investing in securities traded on recognized stock or commodities exchange, the fund manager shall only invest in securities according to the methodology endorsed by internationally established standards, especially those issued by recognized Shari’ah bodies such as the Accounting Auditing Organizations of Islamic Financial Institutions (AAOIFI) and Organization of Islamic Countries (OIC) Fiqh Academy.  The fund manager must have a Shariah adviser who advises him on Shari’ah principles. The Shari’ah adviser must be well-versed in Islamic fund management and have adequate Shari’ah knowledge on Islamic finance and capital markets.
Some of the Islamic instruments/products practicable in Nigeria are: Musharakah; Mudharabah; Murabahah; Ijarah; Wakalah; Istisna; Hawalah; Musawamah and Sukuk.
 
Sukuk is the major product tradable in most developed markets. These are certificates of equal value representing undivided shares in ownership of tangible assets, usufruct and services, or (in the ownership of) the assets of particular projects. The returns on the certificates are directly linked to the returns generated by the underlying assets. The African Finance Corporation recently issued Sukuk to private investors outside the USA to finance infrastructure projects. The 100% Murabahah Sukuk is for three year tenor to mature in 2020. The Sukuk was awarded an A3 unsecured rating by Moody’s Investors Service and it is a welcome initiative from the Corporation as it will not only offer investors the chance to be involved in high-impact infrastructure projects but will also enhance social and economic developments in Africa.
 
Although Islamic Finance is still evolving in Nigeria, it has potential for rapid growth and the relevant regulators must expand their supervisory and consumer protection frameworks to address its unique risks.
 
 

Edward Ekiyor and Co. is a Nigerian law firm that has developed expertise in the Energy and Natural Resources Sectors, Finance, Corporate and Commercial matters and in resolving disputes.

 

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