With non-interest guidelines, CBN widens participation scope of intervention schemes

For years now and especially since the 2008 global financial meltdown, central banks in many developing and emerging economies, began to place renewed emphasis on the promotion of economic development and structural transformation, looking beyond narrow mandates for macroeconomic stability. These developmental policies have included policies directed at financial sector development, the promotion of financial inclusion and aligning the financial system with sustainable development.

The global financial crisis made it clear that central banks also ought to take responsibility for safeguarding financial stability. Since then, many central banks including Central Bank of Nigeria (CBN) have adopted unconventional policies to address problems of debt, stagnation and deflation. It has become active in promoting financial inclusion and in greening the financial system, rendering them important actors in development financing.

According to the CBN, development financing is one of the requirements for sustainable economic growth in any economy. This led it to introducing many development finance initiatives in various sectors of the economy to promote growth in a sustainable and holistic way. The supply of finance to various sectors of the economy it notes, will promote the growth of the economy in a holistic manner and this, will make development, welfare improvement to proceed at a faster rate.

The Central Bank of Nigeria development finance initiatives involve the formulation and implementation of various policies, innovation of appropriate products and creation of enabling environment for financial institutions to deliver services in an effective, efficient and sustainable manner and they are mainly targeted at agricultural sector, rural development and micro, small and medium enterprises. Some of them include Accelerated Agricultural Development Scheme (AADS); Intervention in the Textile Sector; Agri-Business, Small and Medium Enterprises Investment Scheme (AGSMIEIS) for Non-Interest Financial Institutions (NIFIS); Micro, Small and Medium Enterprises Development Fund for Non-Interest Financial Institutions (MSMEDF for NIFIs) and; Non-oil Export Stimulation Facility (ESF).

Others are: Anchor Borrowers’ Programme; Real Sector Support Facility (RSSF) through CRR; Real Sector Support Facility (RSSF) Revised Guidelines (V3); Credit Support for the Healthcare Sector; Creativity Industry Financing Initiative (Non-interest Version) and N50 billion Targeted Credit Facility (TCF).

The initiatives are intended to enhance private sector contribution to the growth process, mobilize savings, fund good business initiatives and facilitate production and trade as well as other commercial activities that boost the economy. As a result, resources are more efficiently allocated, capital accumulation is enhanced along with technological progress. These stimulate real sector development and employment creation thus making growth more inclusive.

However, access to these interventions had been through the conventional banking models. In June 2020, the apex bank unveiled a framework that will integrate a non-interest window in all the intervention programmes aimed at supporting businesses and households that have been impacted negatively by the COVID-19 pandemic and beyond. Non-interest window operation is defined as part of a conventional financial institution (which may be a branch or a dedicated unit) that provides fund management (investment accounts), financing, investment and other banking services that are Sharia compliant. The release of the guidelines became necessary as the CBN gets inundated with requests from persons, banks and other financial institutions desiring to offer non-interest banking products and services based on Islamic commercial jurisprudence. All non-interest financial institutions under the model are therefore, required to comply with these and any other guidelines that may be issued by the CBN from time to time.

In a circular to all non-interest financial institutions dated July 16, 2020 and signed by its Director, Financial Policy and Regulation Department, Kevin Amugo, CBN released non-interest guidelines to the 11 intervention programmes.

Objectives of the guidelines according to the CBN were to provide the minimum standard to be met by NIFIs operating in Nigeria before they could recognise Profit Sharing Investment Account Holders deposits as risk absorbent and deduct same from the computation of Risk Weighted Assets. This would enable them to calculate the Capital Adequacy Ratio as specified in the guidance notes on regulatory of capital for NIFIs in Nigeria issued by the CBN. It noted that the guidelines complement the regulations for NIFIs in Nigeria issued by the CBN such as guidance notes on calculation of capital requirements for NIFIs; Guidelines on income soothing for NIFIs; and guidance notes on disclosure requirements to promote market discipline for NIFIs.

NIFIs it added, mobilise large percentage of their funds using Mudarabah and Wakalah contracts. In Mudarabah, the bank is acting as the Mudarib (entrepreneur) and the fund providers as the Rabb-ul-Mal otherwise called PSIAHs. “In Wakalah, the bank acting as Wakeel (investment agent) for the PSIAHs, earns a Wakalah fee, and an incentive fee in the event of the realised profit exceeding an agreed threshold, and the agreed profit goes to the PSIAHs.

“Mudarabah contract by its nature entails the sharing of profit between the contracting parties based on pre-agreed profit sharing ratio and the bearing of loss by the fund provider except in cases of proven negligence, misconduct or breach of contract by the entrepreneur in which case the entrepreneur would bear such loss. The CBN explained that NIFIs in Nigeria essentially maintained two different types of Mudarabah accounts used for deposit mobilisation “which are Restricted Investment Accounts and Unrestricted Investment Accounts.”

Under the RIA contract, it added, the bank would act strictly based on the investment mandate of the customer, while under URIA contract, the bank was free to invest the funds as it deemed fit.

In practice, NIFIs co-mingle such PSIA deposits with other funds like shareholders’ funds and current account deposits into different pools and invest in profitable ventures. “Being an equity-based contract, the PSIAHs are expected to bear the credit risk of any counterparty the funds are invested with, as well as the market risk of the assets in which the funds were invested,” it stated.

The guidelines for the Operations of the Agri-Business, Small and Medium Enterprises Investment Scheme (AGSMEIS) for Non-Interest Financial Institutions (NIFIs) stipulate that each Non-Interest Deposit Bank (full-fledged or window) is to set aside 5 percent of its profit after tax (PAT) annually as a contribution to the Fund. It added that each Non-Interest Deposit Bank is also to transfer its contribution to the CBN not later than 10 working days after the Annual General Meeting (AGM) of the participating bank.

Eligible activities under the scheme are businesses across the agricultural value chain, covering production, inputs supply, storage, processing, logistics and marketing; MSMEs in the real sector including manufacturing, mining and petrochemicals; MSMEs in the service sector including information and communication technology (ICT) and the creative industry as well as other activities as the Central Bank of Nigeria (CBN) may determine from time to time.

Financing under the scheme will be for start-ups, business expansion or revival of ailing companies and shall be in compliance with provisions of BOFIA (1991) as amended and the principles underpinning operations of NIFIs

The MSMEDF for NIFIs guidelines are aimed to channel low return funds to the MSME sub-sector of the Nigerian economy through participating Financial Institutions (PFIs) to enhance access by MSMEs to financial services.

AADS is aimed at engaging a minimum of 370,000 youths in agricultural production across the country between now and 2023 in order to reduce unemployment among the youths. While the specific objectives of the MSMEDF for NIFIs are to increase the productivity and output of microenterprises, job creation and engender inclusive growth, those of the AADS are to increase agricultural production towards food security, job creation and economic diversification.

AADS is targeted at youth between 18 and 35 years and seeks to promote interaction among state governments, the CBN and other stakeholders in the agricultural value chain in each state to enhance job creation in the agricultural sector, with focus on two crops where States have a comparative advantage, among others.

In the textile sector intervention fund, CBN has put in place a N50 billion special mechanism for restructuring of existing facilities and provision of further facilities for textile companies with genuine need for intervention. The activities to be covered under the Intervention shall include operations in the CTG value chain as follows: cotton ginning (lint production); spinning (yarn production); textile mills and; integrated garment factories (for military, para-military and schools and other uniformed institutions).

Finance under the intervention at 4.5 per cent using any of the CBN approved non-interest financing instruments include: Murabahah (cost plus mark-up sale) for acquisition of plant and machinery; Ijarah (lease-to-own); Istisna’ (manufacture/construction and sale) Diminishing Musharakah (diminishing contractual partnership) for asset acquisition and working capital financing.

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