IFN Monthly Article on Nigeria

Central Bank of Nigeria extends access to COVID-19 intervention funds to the Islamic finance sector

 

This month, the Central Bank of Nigeria (CBN) published guidelines effectively extending ten of its existing intervention funds to the non-interest finance sector in Nigeria. The guidelines detail the process through which businesses in multiple sectors of the economy, including agriculture, manufacturing and healthcare, can access low cost funding through Non-interest Banks (NIBs) and licensed fund managers. The new regulations are part of the apex bank’s continued efforts to promote financial inclusion and enhance access to finance for all Nigerians.

Under the new non-interest schemes, the CBN will utilize relevant Islamic finance contracts to extend funding to beneficiaries through non-interest financial intermediaries at concessionary profit rates or mark ups of between 4.5% and 9% per annum. In eight of the intervention schemes, the CBN will be the sole financier, while in its agri-business, small and medium enterprises investment scheme (AGSMEIS), part of the funding will come from contributions from participating non-interest banks. In another scheme, the real sector support facility (RSSF), funding will be sourced from the statutory cash reserves of NIBs. For the Islamic finance institutions, the new guidelines provide long-awaited access to funding that had previously only been available to their conventional bank peers.

Interestingly, NIBs are not the only participating financial institutions in these programmes. Under the AGSMEIS, the CBN intends to provide funding to small and medium scale enterprises via licensed fund managers. Though the details are not yet clear, fund managers are to act as equity and quasi-equity investment vehicles for the CBN in these enterprises.

The latest measures from the apex bank have been warmly welcomed. The provision of a non-interest window to the CBN intervention funds is expected to widen and diversify participation, boost the programmes’ reach and enhance the impact on the economy. Many previously excluded small and medium enterprises especially in the country’s food belt may now access the funding as it now aligns with their ethical inclinations. For an economy that is projected to be in recession by the third quarter of this year due to COVID-19, the Nigerian economy does indeed need all available stimuli targeting as broad a demographic as possible.

A collateral benefit could be increased standardization of domestic Islamic finance contracts once the schemes become fully operational as the CBN’s Advisory Council of Experts and the various NIFIs’ Shariah Advisory Boards collaborate on a working structure for these contracts.

This is a strategic win for the policy makers. The laudable financial inclusion objective aside, this goes a long way towards soothing a long held feeling of disenfranchisement amongst the non-interest community. Farmers and SMEs will hopefully be able to access non-interest finance at attractive rates, non-interest banks will be able to fully participate in this vital intermediation process and capital will be circulated to help revive previously inaccessible sections of the economy. A silver bullet.