Islamic Business & Finance talks to Dr. Bashir Aliyu Umar, Special Adviser to the Governor of the Central Bank of Nigeria , Non Interest Banking about the challenges facing Nigeria's nascent Islamic finance industry Following the debut issuance of Sukuk in Nigeria by Osun State in September, we met with Dr. Bashir Aliyu Umar, Special Adviser to the Governor of the Central Bank of Nigeria , Non-Interest Banking, at the second annual Islamic Banking Summit Africa (IBSA 2013).
Dr. Umar began by outlining the steps the Central Bank of Nigeria has taken to establish a framework for Islamic finance in Nigeria. "There are a number of initiatives and it cuts across the regulatory authorities. The Central Bank has licensed a number of Islamic banks - one full-fledged, one window and another bank has gained approval in principle to operate an Islamic window. The Central Bank is putting a lot of money into training; it is partnering with, among others, the Islamic Research and Training Institute (an affiliate of the Islamic Development Bank Group). It has created a supportive environment by involving the legislators and judiciary in training. The members of the Federal High Court have the sole jurisdiction over banking cases, so it has done a number of training programmes to enlighten them on how non-interest banking operates, so that the judges will be aware of the challenges.
"The Central Bank has a strong initiative for liquidity management instruments and creating an interbank market for Islamic financial institutions. It is also driving the quest for having a sovereign Sukuk issuance in Nigeria in order to create a benchmark for the corporates and the sub sovereigns that are interested in Sukuk issuance, which will deepen the market for Islamic capital market products for the banks to invest in, because they have excess liquidity and very limited money market instruments. In this respect it has brought a technical team and identified a number of national projects which are very viable for Sukuk issuance. It has presented a report to the fiscal authorities for consideration.
"The Central Bank has a view to diversifying Nigeria's source of funding away from the Eurozone to China and to the Islamic Sukuk market. These are part of the initiatives of the Central Bank. At the capital markets level, we've got guidelines for Islamic fund managers and the first Sukuk has been issued [by Osun State]. It's a modest one of about $63 million, but it was locally arranged and the uptake was very good; it was oversubscribed by more than 10 per cent and the originator took it all. Most of the banks, even the conventional banks, invested heavily in it - 50 per cent was taken by the banking sector.
"There are guidelines on Sukuk but only for sub sovereign and corporate. We have guidelines in place for Takaful. Part of the initiative to have sovereign Sukuk issuance is that it's supporting the body that is supporting the debt management office. It is supporting the development of a framework for the issuance of sovereign Sukuk.
"We also have an Islamic index in the Nigerian Stock Exchange which is screening the securities that are Shari'ah-compliant and it has been quite successful and is among the initiatives of the capital market regulators to deepen the market in Nigeria."
What is the public perception of Islamic finance in Nigeria?
"Public perception is divided. There are a lot of misperceptions. There is a divide between Muslims and Christians. There have been issues where there has been mistrust and misgivings between the two communities. Whenever something new is introduced there is a lot of resistance. So there was a perception that Islamic finance wasn't about economics, it was just another religious agenda. But gradually the Central Bank did a lot of interaction with the media to explain the whole project. It is worth noting that this did not start with the present Governor who is a Muslim. Policies regarding non-interest banking in Nigeria date back to 1991. The initial draft for the regulations of Islamic banks was released by the previous Governor [Professor Charles Chukwuma Soludo] who is a Christian.
"A lot of the misperceptions have now gone away, and the Islamic banks have customers from across the [religious] divide. Negative attitudes tremendously slowed down [this process] so it has not been easy but a lot of it was based on ignorance and a lack of a very strong drive from the promoters to correct the misconceptions. The Central Bank cannot take charge of this, because it would be seen as a promoter when it is just a regulator, so there is a limit to what the Central Bank can do. Now with the licensing of the institutions, banks are doing a lot to correct the misperceptions and a lot of the negative attitude has gone away.
"Among Muslims, there is a kind of lukewarm attitude. There is a misunderstanding about the whole thing; they don't realise that it [Islamic finance] is a commercial product; that it has pricing and there was a misunderstanding that it was a free for all. When people heard about a loan without interest, they thought they could just walk into a bank and be given money for free! Because it is a profit-sharing investment, they thought banks would give them free money for their business if they shared the profits. A lot of the product information was wrong.
"There have been a lot of problems. However, since the introduction of Islamic banking about three national conferences have been held on Islamic finance and a lot of training programmes led by independent training institutes have taken place - for both regulators and market players. All these events and programmes have helped to correct the misconceptions."
What are the main challenges aside from education?
"One of the main challenges is the corporate governance system in Nigeria. The macro environment has influenced the institutions; the problem of corruption is there, even in the private sector. This is one of the greatest challenges.
"There is also the challenge of liquidity management. There has not been a strong interbank market because we have too few institutions. Up to now, the handful of Islamic institutions has not started transactions between themselves, even though Islamic banks are trying to communicate some interbank arrangements with the conventional banks they have not worked. The Central Bank cannot alone provide instruments for the Islamic interbank market.
"The Central Bank is very restricted. It cannot engage in commodity trading, so we cannot do commodity Murahaba with the banks so that they can have placements with the Central Bank and the Central Bank can get a return. This is a very serious challenge. The Central Bank has created a product development committee that brings together the relevant department to continue developing liquidity management instruments for the institutions.
"We also have the challenge of Shari'ah compliance. We have identified our regulatory framework - a role for scholars with Shari'ah knowledge to work with the Central Bank to certify the compliance of products to Shari'ah principles. However, some scholars have a tendency to be lenient when they are close to the institution that has developed the product.
"They are also 'incapacitated' because they do not have knowledge of finance and some of them don't even have a working knowledge of the English language, yet the contract documents that they are supposed to look through and give pronouncements on are in English. When they don't have a working knowledge of the subject matter or the language you have a problem, but if you rely on university lecturers with degrees in Islamic studies institutions can be sceptical because they don't have a relationship with them, and they are not the ones they look to for religious guidance. This is another serious challenge. The Central Bank cannot address this kind of issue directly because it is a secular institution that has got no business to do with religion. Even though it (the Central Bank) has constituted an advisory council of scholars (FRACE) to advise on Shari'ah matters, challenges remain."
Financial Regulation Advisory Council of Experts (FRACE
The Central Bank of Nigeria , established the FRACE as part of its framework for the regulation and supervision of institutions offering non-interest (Shari'ah-compliant) financial services in January 2013. The Council's duties may extend beyond advising the Central Bank, offering its expertise to other regulatory agencies in the Nigerian financial sector in regard to Islamic financial services if they choose to refer to it matters falling under the FRACE's area of expertise.
The initial members of the FRACE whose appointment is on a part-time basis are: Sheikh Sheriff Ibrahim Saleh (Chairman); Sheikh Adam Idoko; Dr. Ibrahim Jalo; Dr. Abdulrazaq Alaro; Dr. Bashir Aliyu Umar; Dr. Mohammad Akram Laldin (Executive Director, International Shariah Research Academy of Bank Negara Malaysia); Dr. Ahmad Ali Abdallah (Secretary-General, Shari'ah Supervisory Board of the Central Bank of Sudan).
In a paper published in December 2010, the Central Bank stipulated that all non-interest financial institutions in Nigeria are required to establish a Shari'ah Advisory Committee to be approved by the Central Bank.
Committee members must be individuals, not companies or bodies, and should at a minimum, have an academic qualification or possess necessary knowledge, expertise or experience in Shari'ah with particular specialisation in the field of Islamic transactions/commercial jurisprudence (Fiqh al Mua'amalat). The Central Bank added that it is 'highly desirable' for the committee member to have: