The Central Bank of Nigeria (CBN) has moved to regulate the operation of investments in Islamic non-interest securities, with the introduction of protection charges on Non-Interest asset backed securities in the country.
The expectation is that the measure will help to guarantee confidence in the non-interest securities market.
In a circular that we as issued by the central bank, the decision to regulate the market was triggered by the increasing investments in Islamic securities like Sukuk. The CBN’s non-interest asset backed securities (CNI-ABS) tagged the charges as Wakalah, a protection, delegation, or authorization measure by the apex bank.
The circular that was signed by CBN’s director, financial markets department, Angela Ejembi reads, “The increased investments in Sukuk issued by multilateral organisations and the rising participation of non-interest financial institutions at the CBN windows has made it mandatory that the CNI-ABS to be operationalised.”
Wakalah an Islamic finance tool that denotes an agency contract, where one party appoints another to conduct a defined legal action on his behalf, for a specified fee or commission.
From the 2021 if the contents of the draft framework appeals to individuals or institutions interested in the CBN Non-Interest Asset Backed Securities (CNI-ABS), the CBN plans to charge: 10.00 per cent of the underlying return for 1 to 30 days investment; 7.50 per cent for 31 to 90 days; 5.00 per cent for 91 to 180 days; and 2.50 per cent for 181 to 365 days.
Ejembi stated that “the Central Bank of Nigeria developed the CBN Non-Interest Asset Backed Securities (CNI-ABS) to deepen the Nigerian financial markets, increase financial inclusion and provide a liquidity management instrument that is compliant with the principles of non-interest finance in Nigeria.”
The CBN is now asking for “observations and comments” on the exposure draft of the framework for the operationalisation of the Central Bank of Nigeria Non-Interest Asset Backed Securities. These observations and comments are expected to be with the CBN on Friday, 8th January, 2021.
The structure of the CBN non-interest asset backed securities (CNI-ABS) include: Full or partial conversion (into local currency) of the value of CBN investments in Islamic Development Bank (IsDB) and/or International Islamic Liquidity Management Corporation (IILM) sukuk, or any other sukuk from multilateral organisations where Nigeria is a member.
Other structures of the CNI-ABS are: Securitisation of the value of CBN investment based on the maturity profile of the underlying security which shall serve as the issue account, for auction purposes; auction of the securitised assets to eligible institutions; transfer allotment of auction amount to eligible institutions based on their subscription; and transfer of earnings received related to the securitised assets to eligible institutions based on their holdings, less all amounts outstanding. This shall be net of applicable charges as may be approved from time to time.
Others are: the assets shall meet the condition of tradability in sharia; the investor shall enter into a unilateral binding undertaking to sell the nominal to the CBN at maturity; upon exercise of unilateral binding undertaking, the asset becomes exclusively owned by the CBN who reserves the right to hold or reissue it to the market.
The draft framework also stated that “the bid applications shall not carry any rate. All successful bids shall be satisfied at a rate of return corresponding to the earnings on the underlying security. The rate of return shall be based on tenor and amount invested, and shall be subject to applicable (Wakala) charges/fees.
A single exchange rate will apply (based on Wa’d) for issuing, maturity and return of each issue relative to the underlying asset and will be determined at the beginning of each auction.
Another interesting thing investors have been asked to assess is the settlement terms. According to the CBN, “settlement shall be on a T+0 basis. Auction shall take place on any approved business day, while cash settlement and securities allotment shall take place on the next business day.”
On the settlement day, the CBN is expected to: debit the operating accounts of all successful institutions at the auction; credit CBN designated account with the value; debit CNI-ABS issue account and credit the institution’s securities account. The CBN shall be the depository of the securities.
The CNI-ABS will have the following features: It shall be a tradable instrument; its rate shall be determined by the returns on the underlying asset; its maturity shall be on any day of the week and shall be matched with the coupon payment date of the underlying asset; it shall qualify as a liquid asset for the eligible institution’s assets.
Based on the new regulatory instrument, returns received during the period but before maturity of an issue shall be held in trust in an account that does not yield any interest to the CBN; where an issue matures before receipt of coupon by the CBN, the Bank shall pay the accrued return as advance/loan at zero interest rate in anticipation of expected return.
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