In response to the increasing number of investors, banks and other financial
institutions desiring to offer Non-interest products and services, the CBN has
developed the attached draft framework for the regulation and supervision of
Non-interest banks in Nigeria.
The document is being issued as an exposure draft for comments, suggestions or
inputs by stakeholders.
All responses should be forwarded to the Director of Banking Supervision within
two weeks from the date of this publication.
D.A.N. Eke
Ag. Director of Banking Supervision.
2
DRAFT
THE FRAMEWORK FOR THE REGULATION AND SUPERVISION
OF NON-INTEREST BANKS (NIBs) IN NIGERIA
1.0 INTRODUCTION
A non-interest bank means a bank which transacts banking business, engages in trading, investments and commercial activities, as well as the provision of financial products and services in accordance with the principles and rules of Islamic commercial jurisprudence. Transactions and contracts under this type of banking are non-permissible if they involve: Ô°ê interest; Ô°ê uncertainty or ambiguity relating to the subject matter, terms or conditions;Ô°ê gambling; Ô°ê speculation; Ô°ê unjust enrichment; or Ô°ê exploitation/unfair trade practices. Given the increasing number of banks and other financial institutions desiring to offer Islamic compliant products and services in Nigeria, the Central Bank of Nigeria has developed the following guidelines on non interest banking.
2.0 OBJECTIVES
The objective of the framework is to provide minimum standards for the operation of non-interest banking in Nigeria.

LEGAL FRAMEWORK 3.1 Legal Basis
The guidelines are issued pursuant to Section 28 (1)(b) of the CBN Act 2007 and the following provisions of BOFIA 1991 (as amended): Sections 55(2); 52; 59(1)(a); 32(1); 61; 23(1). The Guidelines shall be read together with the BOFIA 1991 (as amended), the CBN Act 2007, CAMA (1990) and circulars/guidelines issued by the CBN from time to time. 3.2 Corporate Powers
A non-interest bank must ensure that its Memorandum and Articles of Association state that its business operations will be conducted in accordance with the principles and practices applicable to non-interest banking.
4.0 LICENSING REQUIREMENTS
Non-interest banks shall be licensed in accordance with the requirements for new banking license issued by the CBN from time to time. The extant requirements are summarized hereunder: 4.1 Preliminary Requirements for Grant of Approval-In-Principle 4.1.1 A formal application for the grant of a licence to carry on the business of non-interest banking in Nigeria shall be made and addressed to the
Director of Banking Supervision, Central Bank of Nigeria, P. M. B.
4 0187, Garki, Abuja. 4.1.2 All applications must be submitted with the required documents including a Non-refundable application fee of N500,000.00 and deposit of minimum capital of N25 billion with the Central Bank of Nigeria. 4.2 Requirements for Grant of Final Licence 4.2.1 Not later than six (6) months after the grant of A.I.P, the promoters of a proposed bank must submit application for the grant of a final banking license to the Director of Banking Supervision with a Non-refundable licensing fee of N5,000,000.00 in bank draft payable to the CBN and other required documents.
4.3 The detailed requirements for new banking license can be obtained directly from the Banking Supervision Department, Central Bank of Nigeria, Abuja or downloaded at www.cenbank.org.
4.0 MODELS OF NON-INTEREST BANKING
All licensed banks or promoters wishing to offer non-interest banking products and services may operate using any of the following models: i. Full-fledged non-interest bank or subsidiary.
This shall be licensed in accordance with the current guidelines for licensing of banks issued by the CBN. ii. Non-interest banking branch of a conventional bank. Non-interest banking branches shall be established in line with extant CBN regulation on bank branch expansion. iii. Non-interest banking window of a conventional bank.
Non-interest banking windows shall be established in line with CBN guidelines on the introduction of new products and other applicable regulations.
5.0 NON-INTEREST FINANCIAL INSTRUMENTS
Non-interest banks may transact business using any of the following instruments
or financing modes:
1. Murabaha 2. Mudarabah 3. Musharakah 4. Ijarah 5. Salam and Parallel Salam 6. Istisna 7. Sukuk
8. Any other financing mode or structure that is Shariah compliant and approved by the CBN.
5.2 Commissions and Fees (a) A financial institution carrying on non-interest banking business may charge such commissions or fees as may be necessary and shall be guided by the Guide to Bank Charges issued by the Bankers’ Committee. (b) The funds received as commissions and fees shall constitute the bank’s income and shall not be divided among the depositors.
6.0 WINDOW OPERATIONS (“WINDOWS”) OF CONVENTIONAL
BANKS
The following guidelines shall apply to the non-interest window operations or branches of conventional banks: 6.1 Cross-Selling of Products/Services Conventional banks operating in Nigeria may offer Sharia-compliant products and services through their non-interest banking branches or windows. However, such branches or windows cannot offer conventional banking or interest based products and services. 6.2 Execution of Service Level Agreements (SLAs) in Respect of Shared Services
Conventional banks with non-interest banking windows shall be required to execute Service Level Agreements (SLA) in respect of shared services between the window and other departments or units of the bank. 6.3 Separation of Records A conventional bank shall not co-mingle its funds with that from its non-interest banking window operations. Consequently, separate accounting books and
records must be maintained. 6.4 Conversion of Windows to Subsidiaries Upon written application and subject to the prior approval of the CBN, a bank may convert its non-interest banking window operations to a full fledged subsidiary. An application for conversion to a subsidiary shall be deemed to be a
request for new banking license. Consequently, the minimum conditions for licensing of new banks in Nigeria shall apply. 7.0 CORPORATE GOVERNANCE All licensed non-interest banks shall be subject to the provisions of the Code of Corporate Governance for Banks in Nigeria issued by the CBN and any subsequent amendments thereto, and all relevant provisions on Corporate Governance contained in Companies and Allied Matters Act (CAMA) and Banks and Other Financial Institutions Act (BOFIA) 1991 (as amended). All licensed banks offering Shariah-compliant financial products or services shall have a Shariah compliance review mechanism and a Bank Shariah Advisory Committee (SAC) as part of their governance structure. The detailed guidelines for the appointment, operations, qualification, duties and responsibilities of the (SAC) are contained in a separate guideline.
8.0 Disclosure Requirements All non-interest banks must ensure that the disclosures required by AAOIFI FAS 18 are made to all clients. This requirement also applies to the non-interest “windows” or “branches” of conventional banks. 9.0 CBN SHARIAH COUNCIL
There shall be an advisory committee on non-interest banking within the CBN to be called the CBN Shariah Council (CSC), which will be outsourced. The CSC shall advise the CBN on Islamic laws and principles for the purposes of regulating noninterest banking business. 10.0 CONDUCT OF BUSINESS STANDARDS10.1 Branding
In line with the provisions of Section 39 (1) of BOFIA 1991 (as amended), banks offering non-interest banking products and services shall not include the words “Islamic” as part of their registered or licensed name. They shall however, be recognized by a uniform logo to be designed and approved by
the CBN. The CBN shall require all the banks’ signages and promotional materials to carry the logo to facilitate recognition by consumers. 10.2 Product Literature Before a bank communicates any marketing material to a person, it must ensure that, the material states which Shari’a Committee has reviewed the products or services to which the material relates (i.e in addition to the disclosure requirements in AAOIFI FAS 18).
11.0 PROFIT SHARING INVESTMENT ACCOUNTS (PSIA) a. Where a transaction will involve a client becoming a Profit Sharing Investment Account holder, a bank must warn the client, in writing, that
the risk of loss rests with the client and that the bank will not share in the losses, unless there is negligence or misconduct for which it is responsible. b. A bank must ensure that a client agreement provided to a client contains the following information: (a) how the monies of the client will be managed and invested including details of its policy on diversification of the portfolio; (b) the basis for the allocation of profit between the bank and the client; (c) A clause stating that losses arising from assets funded by the PSIA shall be borne by the client or depositor unless there is negligence on the part of the bank; (d) confirmation of the investment objectives of the PSIA investment account holder, including details of any restrictions requested by the client. c. A bank must ensure that a periodic statement provided to a client contains the following information: i. details of the performance of the client’s investment; and ii. the allocation of profit between the bank and the client.
12.0 AUDIT AND ACCOUNTING REQUIREMENTS
a. All NIBs must comply with the requirements of section 29 of BOFIA 1991 and applicable guidelines/directives issued by the CBN as well as CAMA 1990 (as amended) regarding the appointment, re-appointment, resignation, rotation, change and removal of auditors of banks.
b. Non-interest banks must comply with the Generally Accepted Accounting Principles (GAAP) codified in local standards issued by the Nigerian Accounting Standards Board (NASB) and the International Financial Reporting Standards (IFRS) / International Accounting Standards (IAS).
For transactions, products and activities not covered by these standards, the relevant provisions of the Financial Accounting Standards (FAS) issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) shall apply. 13.0 PRUDENTIAL REQUIREMENTS
13.1 Minimum Capital Ratio Requirement a. All non-interest banks are required to maintain a minimum Risk Weighted Asset Ratio (“RWAR”) of 10.0% or as may be determined by the CBN from
time to time. b. For the purpose of calculating its Capital Adequacy Ratio (CAR), the risk weighted assets of a non-interest bank shall consist of the sum of the risk weighted assets financed by the non-interest bank’s own capital and liabilities, plus 50% of the risk-weighted assets financed by the noninterest bank’s PSIA, in line with the Statement on the Purpose and Calculation of the Capital Adequacy Ratio for Islamic Banks issued by Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI). This applies to both unrestricted PSIA that are accounted for on
the non-interest bank’s balance sheet and restricted PSIA that are accounted for off the balance sheet.
13.2 Liquidity Management
Non-interest banks are required to establish appropriate policies, strategies and procedures which ensure that they maintain adequate liquidity at all times to fund their operations. All banks are currently required to maintain, at the minimum, 30% of their deposit liabilities in the form of liquid assets. Unless otherwise determined by the CBN, liquid assets must be held in line with the provision of section 15 of BOFIA 1991 (as amended). Non-interest banks shall not invest their funds in interest bearing securities or activities. They may invest their funds in the following Sharia-compliant instruments which shall be eligible as liquid assets for the purpose of meeting the CBN prescribed minimum liquidity ratio: Ô°ê Commodity Murabaha Certificates issued by the London Metal Exchange (proposal to be worked out)
Ô°ê CBN Islamic Treasury Bill (to be developed) Ô°ê DMO Islamic Bond (to be developed)
Ô°ê Any other eligible instrument that may be introduced by the CBN
14.0 RISK MANAGEMENT
All NIBs are required to develop appropriate policies, systems and procedures to identify, measure, monitor and control their risk exposures. In addition, they are required to put in place, a risk management system that recognizes the unique risks faced by Islamic banks, such as displaced commercial risk (DCR), fiduciary Risk, transparency risk, sharia risk, reputational risk, mark-up risk etc. Further details and guidance are provided in the following documents issued by the CBN
and international standard setting bodies:
12 1. Generic Risk Management Guidelines 2. Guidelines for the Development of Risk Management Frameworks for Individual Risk Elements 3. Prudential Guidelines 4. Basel Committee Risk Management Guidelines 5. IFSB Standards for Risk Management 14.1 Profit Equalization Reserve (PER) a. All NIBs with PSIAs may maintain a Profit Equalization Reserve which would serve as an income smoothing mechanism and risk mitigation tool to hedge against volatility of returns to investment account holders. b. The reserve shall be funded by setting aside a portion of gross income before deducting the bank’s own share (as agent) c. The basis for computing the amounts to be appropriated should be predefined and disclosed.
15.0 ANTI-MONEY LAUNDERING AND COMBATTING OF THE
FINANCING OF TERRORISM (AML/CFT)
15.1 General a. In view of the ethical character of their business, all non-interest banks are required to screen their promoters, shareholders, customers, counter parties, transactions, products and activities against the proceeds of crime, corruption, terrorist financing and other illicit activities using
legal and moral filters. b. All non-interest banks are required to have effective anti-money laundering (‘AML’) policies and procedures, in addition to measures for combating the financing of terrorism (‘CFT’).n c. All non-interest banks are required to comply with all relevant laws and guidelines for combating money laundering and the financing of terrorism issued by the CBN and other relevant regulatory agencies.