The IMF gives Islamic banking supervision a nod – Nigeria’s take away

IFN Monthly Article on Nigeria: May 2018 Issue

The IMF gives Islamic banking supervision a nod – Nigeria’s take away


In May, the international Islamic finance industry welcome the heartwarming news that effective from January 2019, the International Monetary Fund (IMF) will begin to adopt the Islamic Financial Services Board’s Islamic banking supervision framework. This framework termed the ‘Core Principles for Islamic Finance Regulation’ (CPIFR) takes into consideration the specificities of Islamic banks as it pertains to risk, governance, Shari’ah compliance etc. The IMF will apply the CPIFR alongside BASEL principles for member countries where the Islamic banking sector accounts for over 15% of the financial sector. Whereas, it will apply the CPIFR solely, in countries with a dominant Islamic banking system.

The IMF’s decision evidences that the Islamic banking sector has now become systemically important across the globe. Stakeholders understand that the industry has unique risks that need to be catered for, to promote the industry’s stability and continued contribution to global growth. While Nigeria may not be considered one of the countries with a dominant Islamic banking industry, it may be beneficial for the local regulator to reflect on this new move by the IMF.

Over the years, the Nigerian central bank has been pro-active in tailoring existing conventional banking supervision framework to cater to the unique business model of Islamic banks and this has helped a great deal. The CBN has also gone further to recommend compliance with IFSB and AAOIFI standards to Islamic banks under its regulation. While this is common practice, the IMF’s move indicates that regulators like the CBN may need to go a step further in their oversight, by adopting a robust supervision framework specifically designed for Islamic banks.

Nigeria’s Islamic banking sector has maintained a gradual but encouraging growth path and it currently hosts a handful of operators largely focused in the south-west and northern regions. The industry has promising prospects given the country’s large Muslim population and the increased support it has received from regulators. However, it is important that the attendant growth be accompanied with adequate supervision and risk management infrastructure.

Nigeria once faced a major banking sector crisis in 2008 as the rapid expansion of the banking industry at the time outpaced supervision. This crisis led to erosion in investors’ capital, closure of a number of banks as well as some loss of confidence in the banking system by depositors. Fortunately, the banking sector came out of the crisis stronger, as a more robust supervision framework was implemented. However, tax payers’ funds had to be poured in to stabilize the industry. Considering this experience, it would be beneficial for the CBN to consider adopting a framework similar to the CPIFR that would protect the non-interest banking sub-sector which it desires to see expand in order to deepen financial inclusion.


Hajara Adeola

CEO/Managing Director

Lotus Capital Limited – the Pioneer Islamic Financial Institution in Nigeria