Not Halal: New CBN Guidelines on Islamic Finance
Also CBN PAPSS Guidelines & New Merger Portal from the FCCPC
Happy Weekend, everyone!
Shout out to the new readers who have joined the NR community (from Revue too) since the last publication.
Good news! Last week Friday, one of our articles, Bureau De (Can’t) Change won the 3rd best prize, in the Finance & Capital Markets Reporting category at the PwC Media Excellence Award, 2021! Might I add, the only Freelance Substack Journalist nominated across all categories as well? 😎
Don’t worry, I will find a way for us to share the prize money by the end of the year. 😂 And thanks to everyone for your support so far! 🙏🏽 Let’s do more!
To the business, this weekend, we will be discussing these 3 regulatory updates:
CBN Guidelines on Disposal of Non-Permissible Income
CBN Pan African Payments & Settlement System Guidelines
New Merger Portal from the FCCPC
Not Halal: CBN Guidelines on Disposal of Non-Permissible Income
Yes. The CBN recently published a Guideline on the disposal of Non-Permissible income for Islamic Finance and Non-Interest Financial Institution, collectively described as “NIFIs”. Published on 13 October 2021, you can access a copy of the CBN Guidelines here. The guidelines are generally aimed at improving the administration of Islamic finance in Nigeria.
For context, Islamic finance is a unique aspect of Nigeria’s banking and finance sector. It has certain unique features, which of course, call for certain purpose-built regulation. For example, NIFIs are known not to charge interest rates on loans. And we will get to see below, how these unique features are being regulated by the CBN.
What is Non-Permissible Income (NPI)?
The Guidelines define NPI as any income that accrues to an institution in a Sharia, non-compliant manner, such as interest income, penalties for delayed payment of debt obligation, or any other income declared as impermissible according to the Sharia.
How to dispose of the NPI?
The Guidelines provide clearly that NPI is not to be regarded as an object of ownership for NIFIs, and that any type of income earmarked as NPI must be deposited in a separate account, and not mixed with the NIFI’s funds.
Furthermore, NPI may be disposed directly by the NIFI or by an appointed 3rd party for a charitable cause, so long as such disposal does not benefit the NIFI, their shareholders, members, directors, and staff. Also, donating such to a charitable cause will not be considered as part of the NIFI’s Corporate Social Responsibilities activities.
This disposal by the NIFI is to be supervised by the institution’s Advisory Committe of Experts. The Committee is to ensure that there is no inordinate delay in disposing the NPI of its institution, and they are further required to make quarterly reports to the CBN on NPI funds which have been disbursed within the quarter.
Generally, this Guideline affects Islamic Financial institution as they are mostly institutions with such non-interest financing transactions. Companies like Jaiz Bank, Lotus Bank, and TAJ Bank come to mind.
I have been fascinated by Islamic Finance and it is interesting to see regulatory developments in that angle. However, I was curious as to how Islamic institutions - which ordinarily do not charge interests - can come about NPI funds. I am no Islamic Finance expert , but I spoke to someone with some bit of knowledge about it and they confirmed that it is possible to generate NPI as a NIFI. For example, where a transaction financed by the NIFI is deployed into some ‘haram’ activities. As such, when such funds become tainted, they are regarded as NPI. Ultimately, NIFIs will need to update their due diligence on transactions to ensure good money which could end up as profits do not fall into the NPI blackhole.
Looking at the big picture, Islamic Finance is getting really yuuuge in Nigeria, with the influence of Sukuk Bonds, and the creative role Islamic finance plays for value-driven investors. Comparing this recent development in relation to Environmental, Social and Governance (ESG) investing and regulations is another interesting angle. I’m also curious about the role regulators play in creating rules for faith-based activities and how this plays out in Islamic finance. I’m just iterating here for now and may not be able to expand on the concept, until I learn more.
In the meantime, if you are an expert who is fascinated or knowledgeable in Islamic finance, please hmu on my email. I’d like to learn more from you. Thanks!
Trading Rails: CBN PAPSS Guidelines
Exciting times ahead for African retail trade and fintech.
The CBN recently published a Guideline on the Operation of the Pan African Payment and Settlement System (PAPSS). You can access a copy of the Guideline here.
Perhaps, this is not the first time you are hearing of the African Continental Free Trade Agreement (AfCFTA), which effectively became operational, earlier this year. Though there has been some delay on the AfCFTA becoming seamlessly operational, some underground work is being put in place, and the PAPSS is one of the latest interesting development that would impact how retail trade is carried out across the African continent, in the near future.
To give you a picture of what PAPSS in Africa will look like, let’s start with an example from home - NIBSS. The Nigeria Inter-Bank Settlement System, is one of the most important financial infastructure that has powered Nigeria’s banking and payments sector since 1993. Each Naira and kobo you transfer to family, friends, and foes, yes, goes through the NIBSS ‘switch’. So, I call NIBSS the financial railroad network of the financial sector, with our different Banks and Fintech being the locomotive or highspeed trains, respectively (ISWIS)?
Back to PAPSS. It is essentially NIBSS, but for Africa.
As the AfCFTA is aimed at promoting intra-African trade and opening up the cross-border, transfer of retail goods and services, the PAPSS solution is going to be powering the transfer of payments in different African countries. Get it now?
What does the new regulation say?
For now, the Guidelines is meant for operators who will be participating in the pilot program of PAPSS in West Africa. The inter-bank settlement between the different central banks will be in US Dollars and Afreximbank will serve as the settlement agent for transactions between the Central Banks. To put this into context, the way Fintechs in Nigeria settle their payments through Banks under NIBSS, is how Operators (providing payments services for e-commerce companies, and their customers) will settle their transaction payments through respective central banks, operating accounts with Afreximbank. Kind of.
As such, the Guidelines also provide that Central Banks will be responsible for prefunding their Afreximbank accounts with foreign exchange (USD) through which eligible transactions can then be settled.
What would eligible transactions mean?
Each central bank will decide that and you can find a list of the Nigerian non-eligibles here. It’s provided that Commercial Banks can also maintain a USD settlement account with Afreximbank, with a caveat that transactions not valid for Foreign Exchange should not be processed on PAPSS.
Other key provisions in the Guidelines include that all import and export transactions should be compliant with the CBN documentation requirement - see Memorandum 9 and 10 of the Foreign Exchange Manual (2018). Also, goods for which import payments are made must be of African origin. Another key provision is the prevailing exchange rate, which shall be at the Investors and Exporters Forex Window rates and cross-rates conversion will be Naira - USD - Third Currency for outbound payments and Third Currency - USD - Naira for inbound payments. Operators are also required to obtain the CBN approval before engaging payment operations on the PAPSS solution.
I’m geeked out about the possibilities of a full-fledged intra-African payments system. If you have been impressed with the ballooning valuation of local payments companies like Opay and Flutterwave, the pennies from intra-African payments are a validation. Also, the PAPSS development explains why many of Nigeria’s Fintech companies are beginning to expand into other SSA markets.
In the bigger economic context, I’m also looking at the development in light of the CBN’s FX headache. The exchange of USD of trade between Africans under the PAPSS solution will either be a shield or sword and I’m certain the CBN Governor is relieved he will be the one making the swings.
We’d see how things turn out in some years to come. Also, Flutterwave, call me. 😉
New Merger Portal from the FCCPC
On Thursday, the 14th, the Federal Competition and Consumer Protection Commission (FCCPC), announced a new merger notification Portal. You can access the portal here.
What is the merger notification all about?
You may recall that in August, 2021, the FCCPC reviewed its merger notification rules- mostly fees. The merger notification is a standard procedure involved when two companies in Nigeria wish to merge into one entity. It is supervised by the FCCPC which doubles as Nigeria’s competition watchdog and consumer protection agency. The role of the FCCPC is largely to make sure that any kind of merger done by companies is not being anti-competitive (overly dominant in a sector). So, if a Dangote Cement Corp wants to merge with the BUA Cement Corp, the FCCPC will likely step in and stop such - to avoid an overly dominant player in the cement sector, which would largely be to the disadvantage of the customers like you and I and would favour ‘evil capitalist overlords’.
Well, the new merger notification portal is another digitisation gift which would make the process of notifying the FCCPC about proposed mergers, easier. You can now electronically file your merger application through the portal, which would also ease the process of objections as well. Altogether, it looks like a good development. Another good outcome of the Covid outbreak perhaps? Hopefully, it makes the expected difference.
That would be all for this week. I hope you have a great weekend ahead. See you on Monday when we discuss the CBN Revised Regulatory Framework for BVN in Nigeria.
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This is well written and very comprehensive. Kudos sir