Nigeria to offer liquidity support to boost Islamic banking

By Chijioke Ohuocha

LAGOS, Aug (Reuters) – Nigeria’s central bank said on Thursday it is setting up two financial instruments to provide liquidity support to its non-interest paying lenders.

It is a push by Nigeria, home to the largest Muslim population in sub-Saharan Africa, to establish itself as the African hub for Islamic finance, which follows religious principles such as bans on interest and gambling.

image used for illustrative purposes. A bureau de change operator counts U.S. currency notes in Abuja, March 12, 2015. In Nigeria, holding naira has become increasingly unpopular as it has lost its value. Basic everyday goods can still be paid for in the local currency but many items are scarce and Nigerians need U.S. dollars for imports such as drugs or fabrics sold by small-time traders, to send money to relatives abroad or to purchase western clothes that are important status symbols. Faced with a massive drop in oil revenues and declining reserves, Nigeria's central bank devalued the naira and then imposed rules restricting access to dollars to all but importing companies to curb what it termed "speculation". Picture taken March 12, 2015. REUTERS/Afolabi Sotunde

image used for illustrative purposes. A bureau de change operator counts U.S. currency notes in Abuja, March 12, 2015. In Nigeria, holding naira has become increasingly unpopular as it has lost its value. Basic everyday goods can still be paid for in the local currency but many items are scarce and Nigerians need U.S. dollars for imports such as drugs or fabrics sold by small-time traders, to send money to relatives abroad or to purchase western clothes that are important status symbols. Faced with a massive drop in oil revenues and declining reserves, Nigeria’s central bank devalued the naira and then imposed rules restricting access to dollars to all but importing companies to curb what it termed “speculation”. Picture taken March 12, 2015. REUTERS/Afolabi Sotunde

The central bank has been working to set regulatory ground rules for such things as Islamic bonds (sukuk) and insurance (takaful) to try to emulate the success of the industry in Malaysia.

Nigeria’s banking industry is dominated by lenders offering conventional products.

But Nigeria wants to increase the sector.

“In a bid to aid liquidity management and deepen the financial system, the central bank hereby introduces two new financial instruments … for access by non-interest financial institutions,” the central bank said in a circular.

Nigeria is gradually opening up to Islamic finance to bring non-interest banking to over 80 million Muslims and develop one of Africa’s growing consumer and corporate banking sectors.

In October the regulator granted liquidity status at its discount window for banks’ investment in Islamic bonds issued by national governments, and for banks’ liquidity ratios.

Among other conditions, it said non-interest lenders must have a liquidity problem to be able to access the new window — which will offer liquidity at zero interest, although lenders will be required to post collateral.

If a lender is unable to repay the funds, the central bank will discount the collateral at maturity, the regulator said in the circular.

Islamic banking products, which are compliant with Islamic sharia law, do not charge interest on financing. Profits or losses are instead shared with the borrower, meaning they discourage unnecessary speculation and spread risk.

Nigeria launched a 100 billion naira ($318 million) debut sovereign sukuk in the local market in June to help develop alternative funding sources for government and to establish a benchmark curve for corporates to follow. ($1 = 314.00 naira)

(Reporting by Chijioke Ohuocha Editing by Jeremy Gaunt) ((chijioke.ohuocha@thomsonreuters.com; +234 703 4180 621; Reuters Messaging: chijioke.ohuocha.thomsonreuters@reuters.net))

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