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CBN Moves To Regulate Non-interest Securities

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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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PROCEDURE FOR FINANCE COMPANY LICENSE IN NIGERIA

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INTRODUCTION

The Central Bank of Nigeria according to the powers conferred on it by Section 28 of the Central Bank of Nigeria Act and Section 56-61 of the Bank and Other Financial Institutions Act, issued revised guidelines to regulate the establishment, operations, and other activities of Finance Companies in 2014.

FINANCE COMPANY

A finance company, unless otherwise stated, means a person or company licensed to carry on finance company business. Finance Company Business means the business of providing financial services for consumers and to industrial, commercial, or agricultural enterprises. Such services include:

1.      Funds management;

2.      Equipment leasing;

3.      Hire-purchase;

4.      Debts factoring and securitization;

5.      Project financing or consultancy;

6.      Debt administration;

7.      LPO financing;

8.      Project financing;

9.      Export financing;

10.     Financial consultancy; and

11.     Issuing of vouchers, coupons, credit cards, and token stamps and such other businesses as the CBN may, from time to time, designate.

PROCEDURE FOR APPLICATION FOR LICENCE

Any person seeking a licence for a finance company business in Nigeria shall apply in writing to the Governor of the Central Bank of Nigeria. Such application shall be accompanied by the following:

1.      A non-refundable application fee of N10,000.00 [ten thousand Naira only] in bank draft, payable to the Central Bank of Nigeria.

2.      Deposit of the minimum capital of N20 million (Twenty million naira only) in bank draft made payable to the CBN. The capital thus deposited together with the accrued interest will be released to the promoters on the grant of the final licence.

3.      Satisfactory, verifiable, and acceptable evidence of payment by the proposed shareholders of the minimum capital of N20 million.

4.      A copy of a detailed feasibility report disclosing information that will include:

i.       The objectives and aims of the proposed finance company.

ii.      The need for the services of the finance company.

iii.     The special services that the finance company intends to provide.

iv.      The branch expansion programme [if any] within the first five years.

v.      The proposed training programme for staff and management succession.

vi.      A five-year financial projection for the operation of the finance company, indicating its expected growth and profitability.

vii.     Details of the assumptions upon which the financial projection has been made.

viii.    The organizational structure of the finance company, setting out in detail, the functions and responsibilities of the top management team.

ix.      The composition of the Board of Directors and the curriculum vitae of each member including other directorships held [if any].

x.      The conclusions based on the assumptions made in the feasibility report.

5.      A copy of the draft Memorandum and Articles of Association.

6.      A letter of intent to subscribe to the finance company, signed by each subscriber.

7.      A copy of the list of proposed shareholders in tabular form, showing their business and residential addresses [not post office addresses], and the names and addresses of their bankers.

8.      Names and curriculum vitae (CV) of the proposed members of the Board of directors. The Cvs must be personally signed and dated. The documents/items under paragraph (d) above.

9.      No proposed finance company shall incorporate/register its name with the Corporate Affairs Commission until written approval has been communicated to the promoters by the CBN, a copy of which shall be presented to the Corporate Affairs Commission.

10.     In considering an application for a licence, the Bank shall require to be satisfied as to the following;

  • The Minimum paid-up capital of N20 million is acceptable and the source is verifiable, satisfactory, and acceptable.
  • The quality of the management of the proposed company. The promoters would be required to submit the names and curriculum vita (cv) of the proposed top management team. The CVs must be personally signed and dated.
  • The earnings prospect of the company.
  • The objects of the company as disclosed in its Memorandum and Articles of Association which should agree with the services listed in the provisions of Section 1 of these Revised Guidelines.

11.     Thereafter, the Governor may grant a licence to a finance company.

12.     The CBN may at any time vary or revoke any conditions of a licence or impose additional conditions.

13.     Where a licence is granted subject to conditions, the finance company shall comply with those conditions to the satisfaction of the CBN within such a period as the CBN may deem appropriate in the circumstances.

REQUIREMENTS FOR DIRECTORS

1.      The maximum number of directors on the Board of a finance company shall be seven while the minimum shall be three. To qualify for the position of a director in a finance company, it is hereby required that the person(s) must not be current employees or directors of banks or other financial institutions, except the finance company is promoted by the banks or other financial institutions and are representing the interest of such institutions. In circumstances, however, where current directors or employees of banks or Other financial institutions are proposed for the position of Director, the consent of their employers must be given in writing to the CBN.

2.      The appointment of new directors must be preceded by CBN’s approval.

MANAGEMENT REQUIREMENTS

The following minimum qualifications and experience are mandatory for officers who may occupy the key/top management positions in the finance company.

1.      Managing Director/Chief Executive – a recognized university degree or professional qualification with at least 7 years of post-qualification experience in relevant fields.

2.      Departmental Head – a recognized university degree or professional qualification with at least 5 years of post-qualification experience in relevant fields.

3.      Support staff – shall be qualified and be of proven ability.

4.      A person with any other qualifications or experience that may be considered adequate by the CBN can hold any of the positions [i], [ii] and [iii] within the organization.

CONDITIONS PRECEDENT TO THE COMMENCEMENT OF OPERATIONS

1.      The promoters of a finance company shall submit the following documents to the CBN before such finance company is permitted to commence operations:

a.       A copy of the shareholders’ register in which the equity interest of each shareholder is properly reflected [together with the original for sighting].

b.      A copy of the share certificate issued to each shareholder.

c.       A certified true copy of Form C02 [Return of Allotments] filed with the Corporate Affairs Commission.

d.      A certified true copy of Form C07 [Particulars of Directors] and written confirmation that the Board of Directors approved by the CBN has been installed.

e.       A certified true copy of the Memorandum and Articles of Association filed with the Corporate Affairs Commission.

f.       The opening statement of affairs audited by an approved firm of accountants practising in Nigeria.

g.      A certified true copy of the certificate of incorporation of the company [together with the original for sighting purposes only].

h.      A copy of each of the letters of offer and acceptance of employment by management staff and a written confirmation that the Management team approved by the CBN has been put in place.

i.       A letter of undertaking to comply with all the rules and regulations guiding the operations of finance companies.

j.       Evidence of registration with the finance company’s association umbrella body.

2.      The finance company shall inform the CBN of the location and address of its Head Office.

3.      The finance company shall be informed in writing by the CBN that it may commence business after physical inspection of its premises.

4.      The finance company shall inform the CBN in writing of the date of commencement of business.

CONCLUSION

To recapitulate, it is compulsory for every company desiring to be licensed as a finance company to be a stand-alone and therefore, be strictly limited to solely engaging in finance company businesses as stated in the body of the article.