A Review of the Guidelines for the Operation of Non-Interest Financial Institutions’ Instruments in Nigeria

INTRODUCTION

Non-interest Financial Products have played a vital role in the growth and development of the Nigerian Capital Market System. Financial Analysts and Economists have held the view that Non-Interest Financial Instruments, assets, and products play crucial roles and are very instrumental to the growth and expansion of leading and developing economies catalyzing this growth rate.

In December 2012, the Central Bank of Nigeria, the Apex financial regulatory body in Nigeria, introduced the Guidelines for three (3) liquidity management instruments which are: 

1. CBN Safe Custody (Wadiah) Account (CSCA)
2. CBN Non-Interest Note (CNIN)
3. CBN Non-interest Asset-Backed Securities (CNI-ABS)

Furthermore, in August 2017, the Bank introduced Guidelines for two Lender of last resort instruments to be accessed at its window by NIFIs, namely:

4. Intra-day Facility (IDF)
5. Funding for Liquidity Facility (FfLF)

In a massive bid to increase the participation of Non-Interest Financial Institutions (NIFIs), a great need arose for the review of the extant guidelines to accommodate the contemporary developments in the Non-Interest Financial Industry[1].

The two instruments previously in place have now been amalgamated into a codified guideline. The instruments are the Liquidity Management and Lender of last resort instruments.

The Central Bank obliged and by virtue of the Guidelines for the Operation of Non-Interest Financial Institutions Instrument made in June 2022, gave birth to a codified guideline regulating the non-interests financial sector.[2]

A REVIEW OF THE GUIDELINES

The Central Bank of Nigeria has succeeded in expanding the scope and diversity of Banking systems in the Nigerian financial system by licensing Non-Interest Financial Institutions to complement the extant conventional Banking Institutions.[3]. The Guidelines for the operation of Non-Interest Financial Institutions Instruments in Nigeria are divided into four (4) parts covering diverse areas of the non-interest financial system.

Part One [4] is an introduction to the rationale and purpose of the guidelines. It also makes a brief analysis of the two previous instruments regulating the non-interest financial system.

Part Two [5] is a more expansive and expository one as it makes provision for the general requirements and terms of operations of the guidelines. For a Non-Interest Bank (NIB), Deposit Money Bank with a non-interest banking window or any other authorized dealer to operate such must be licensed and authorized by the Central Bank to carry out non-interest finance operations in Nigeria.

Guideline 2(i) provides that only licensed Non-Interest Banks (NIBs), Deposit Money Banks with Non-Interest Banking Window, and any other authorized dealer as may be approved by the CBN shall be eligible to participate at the window.

Also, applicants must apply for admission to carry out such financial services. It also makes provision for the two (2) representatives of the institution to initiate and consummate transactions on behalf of such institution.

Guideline 2(iii) provides that:

(a) Two representatives of the authorized institution shall be required to initiate and consummate transactions on behalf of the institution; and

(b) The Institutions shall provide the details of their representatives who have been authorized to initiate and conduct business in the instruments on their behalf. These shall include passport photograph, name, position held in an institution, specimen signature, contact telephone number, and any other information that may be required from time to time by the Bank[6].

Also, the first part makes provision for the mode of submission of transaction deals, operational accounts, and limit of authority. The guidelines view the relationship between the representatives and the institutions as one of agent and principal and the representatives are deemed to be acting under the authority of the institutions and therefore the institutions are liable for the actions of the representatives.  Issues as to charges and fees, announcements, exemptions, alterations in conduct and procedure, suspension, and disqualification from participation makes up Part 2.

A curious provision of the guideline is the power granted the CBN to suspend or disqualify any participant with or without any explanation. “The Bank shall reserve the discretion to suspend or disqualify any participant in the non-interest banking window when in its (the Bank’s) opinion it is desirable to do so with or without any explanation. In like manner, the Bank may readmit a suspended or disqualified participant when in its (the Bank’s) opinion it is desirable to do so with or without any explanation and, may specify certain conditions for compliance before such readmission”[7]. This provision will only lead to abuse of power and Litigation, it is advised that this provision be reviewed.[8]

Part Three of the Guidelines deals with the Central Bank’s Non-Interest Window. It details the Non-Interest Banking Instruments and their features. These instruments include CBN Safe Custody Account (CSCA), CBN Non-interest Note (CNIN), CBN Non-interest Asset-backed Securities (CNI-ABS), Intra-day Facility (IDF), and Funding for liquidity facility (FfLF).

Part Four provides for the governance structure. The structure provides for a market support committee to act as an advisory body in the management of non-interest-bearing instruments.  It makes provision for its membership and the time of the meeting and also provides that the membership of the Market Support Committee shall comprise the Director, Financial Markets Department as the Chair, Heads of all the Offices in the Financial Markets Department, and representatives of the Financial Policy and Regulation Department (FPRD), Banking Supervision Department (BSD), Consumer Protection Department (CPD), Banking Services Department (BKSD), Payment System Management Department (PSMD), Reserve Management Department (RED), Monetary Policy Department (MPD), Risk Management Department (RMD) and Legal Services Department (LSD).[9]

CONCLUSION

Furthermore, a Non-Interest Financial Institution product development committee was established, with the task and mandate to consider invitations and review of Non-Interest bearing instruments and structures for the orderly development and integration of the market segment into the mainstream financial architecture.[10] The Apex Bank intended to create an amalgamated Guideline for the total inclusion and operation of the Non-Interest Institutions Instrument in Nigeria.

FOOTNOTES:

[1]https://investorsking.com/2019/04/16/cbn-introduces-guidelines-for-non-interest-financial-institutions/ last accessed 24^thJune 2022

[2]https://www.nipc.gov.ng/2020/07/24/cbn-launches-new-schemes-for-non-interest-financial-institutions/ last accessed 24^thJune 2022

[3]https://www.cbn.gov.ng/Out/2011/pressrelease/gvd/NonInterest%20Banking%20Guidelines%20June%2020%202011.pdflast accessed 24^th June 2022

[4] Revised Guidelines for the Operation of Non-Interest Financial Institutions Instrument by the Central Bank of Nigeria 2022.

[5] Revised Guidelines for the Operation of Non-Interest Financial Institutions Instrument by the Central Bank of Nigeria 2022.

[6] Guideline 2 (iii) of the Revised Guidelines for the Operation of Non-Interest Financial Institutions Instrument by the Central Bank of Nigeria 2022.

[7] Guideline 2 (xi) of the Revised Guidelines for the Operation of Non-Interest Financial Institutions Instrument by the Central Bank of Nigeria 2022.

[8]https://punchng.com/cbn-introduces-guidelines-for-non-interest-financial-institutions/ last accessed 24^th June 2022

[9] Guideline 4 (ii) of the Revised Guidelines for the Operation of Non-Interest Financial Institutions Instrument by the Central Bank of Nigeria 2022.

[10] Guideline 4 (i) of the Revised Guidelines for the Operation of Non-Interest Financial Institutions Instrument by the Central Bank of Nigeria 2022.