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CBN Releases Guidelines For Operation Of Islamic MFBs

Bars Them From Forex Trading, e-Funds Transfer
Limits Govt’s Ownership Participation To Five Years

In a bid to further support ongoing poverty eradication efforts and help increase acceleration of financial inclusion in the country, the Central Bank of Nigeria (CBN) has released guidelines for licencing and operation of non-interest (Islamic) Micro Finance Banks in the country.
The guideline is also expected to further financial stability and economic development in line with global best practice, while the NIMFBs would go beyond granting credits to Micro, Small and Medium Enterprises (MSMEs) and promotion of savings culture and generate employment.
In a “Circular on the guidelines for the regulation and supervision of non-interest (Islamic) microfinance banks in Nigeria,” dated April 5, 2017, Kevin Amugo, director, Financial Policy and Regulation Department at the CBN, explained that the guideline developed to provide level playing fields between conventional and the non-interest financial institutions is in line with the CBN’s mandate of promoting a sound financial system in the country.
The minimum standard operating procedures, prudential ratios and other regulatory requirements that operators of NIMFBs are expected to comply with have been specified in the guidelines, which he hopes would “enhance financial inclusion by bringing to the formal sector, individuals, communities and corporations that are not captured by the conventional microfinance banks (MFBs)”
NIMBs, the guideline continued, are to assist economically active poor and low income households, the un-banked and under-served people like physically challenged, youths, micro-entrepreneurs, informal sector operators, subsistence farmers in urban and rural areas that patronize their services to alleviate poverty in a sustainable way. They are also to help reduce vulnerabilities of these categories of persons and groups, improve their earnings capacity and general well-being. NIMFBs are also expected to offer “the public an alternative system of microfinance banking that operates based on the concept of profit and loss sharing, rather than charging of interest,” while engendering broader and healthier competition among MFBs, thereby likely reducing cost of doing business.
Giving a hint as to why the CBN opted to begin licencing of the new category, the the guideline lamented that “despite the increased number of MFBs in Nigeria, a large percentage of Nigerians still lack access to financial services. This could be attributed to high cost of transactions, abhorrence of interest and apathy to unethical investment by a significant part of the populace.”
Consequently, the guidelines forbid NIMBs from engaging in business activities involving granting of interest-based loans; contracts with uncertain or ambiguous subject matter; gambling; speculative activities such as short selling and other derivatives not compliant with the principles underpinning the operations of non-interest financial institutions; and unjust enrichment. Other forbidden activities for NIMBs include: Exploitation/unfair trade practices; dealing in pork, alcohol, intoxicants, arms & ammunition, pornography and other transactions, products and services not compliant with the principles of Islamic commercial jurisprudence.
The NIMFBs must also not accept public sector (government) deposits except for the payment of services such as salary, gratuity, pension for employees of the various tiers of government, disbursement of financial programmes by government agencies, groups and individuals for poverty alleviation on non-recourse basis, provided it is in compliance with the provisions of the principles underpinning the model.
They must also not engage in forex transactions; international commercial papers, international corporate finance, international electronic funds transfer, and clearing house activities except collection of money or proceeds of banking instruments on behalf of their customers including clearing of cheques through correspondent banks; just as they must also not collect third party cheques with the hope of clearing through correspondent banks; or deal in land for speculative purposes.
They are also barred from engaging in “leasing, renting and sales/purchase of any kind with its directors, officers, employees or persons who either individually or in concert with their family members and beneficiaries own five per cent or more of the equity of the NIMFB, without the prior approval in writing of the CBN.”
While state or local government councils are allowed to float NIMBs wholly or in partnership, such stake must be progressively divested within a period of five years, and where it is a partnership, the private sector partner shall have the right of first refusal in the process of divestment.
Also, where it is a partnership, management and governance of the NIMFB shall be private sector led and permissible shareholding ratio for government shall be 60%.
As in the regular MFBs, NIMFBs shall have unit, state and national licenses, with minimum paid-up capital of N20m, N100m and N2bn respectively.
The NIMFBs are allowed to upgrade upon surrendering their previous licenses and meeting minimum capital requirement of the grade they intend to apply for, provided that the state NIMFBs seeking to go national must have at least five branches across the local government in the state of its original operation and have gained experience necessary to manage at the next level.

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