The Roadmap to Guided

Growth of the Nigerian

NICM

2014-2024

PROGRESS REPORT OF THE NICMP MASTER PLAN COMMITTEEPresented at the 1st quarter 2014 CMC meeting, 26th March, 2014

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Presentation CoveragePresentation Coverage

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The Mandate

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THE MANDATETHE MANDATE

• On 9th September, 2013, the SEC set up a technical committee and approved the mandate for the NICMPs Master plan

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TERMS OF REFERENCETERMS OF REFERENCE Review the current legal/regulatory framework for NICMPs to align with

international best practice.

Review and recommend an appropriate structure of over-sight bodies e.g. (Shariah Advisory Council) for NICMPs where necessary.

  Identify ways of using such NICMPs e.g. (Sukuk) as a tool for financing

infrastructure in Nigeria having considered the experience of other notable jurisdictions (Malaysia, Dubai etc.)

Identify the tax issues and other incentives that will attract participants toward NICMPs e.g. tax neutrality incentives for interest expenses to develop an appropriate market structure for such products.

Identify and examine any other factors that might affect the development of a robust basket of NICMPS and make appropriate recommendations.

Design/recommend appropriate capacity building programme for both the regulators and the market operators that would encourage financial inclusion.

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BROAD GOALS OF THE NICMBROAD GOALS OF THE NICM

ensuring financial inclusion - product offerings to attract both conventional and Islamic investors

national and regional economic growth and development - meet domestic needs and establish Nigeria’s NICM market internationally, particularly in Africa.

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Goals of the NICM Master Goals of the NICM Master Plan Plan To set the foundations for the NICM

segment of Nigeria’s capital market and to provide its strategic direction over the next 10 years

To build a NICM that would be competitive in meeting the country’s funding and investment needs and contributes to the long-term development of the country

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THE TECHNICAL COMMITTEE MEMBERS AND THE TECHNICAL COMMITTEE MEMBERS AND SPONSORSPONSOR

S/N NAME ORGANISATION FUNCTION

1 Rt. Hon. Zakawanu I. Garuba SEC Regulator

2Mrs. Hajara Adeola(Chairperson)

Lotus Capital Ltd Fund Management

3 Alh. Rasheed O. Yussuff Trustyields Securities Ltd Stockbroking

4 Mrs. Oluwatoyin Sanni Association Of Corporate Trustees Trustees

5 Mr. Kasimu G. Kurfi APT Securities Ltd Stock Broking

6 Dr. Timi Austen-Peters Timi Austen-Peters & Co. Solicitors

7 Mr. Dipo Omotosho NSE SRO

8 Mr. Dimeji Salaudeen KPMG Professional services

9Mr. Okosu D. Napoleon(Co-opted)

CBN Regulator

10Mr. Ahmad U. Kollere(Co-opted)

NAICOM Regulator

11Mr. Ibrahim Shehu Kangiwa(Co-opted)

PENCOM Regulator

12Mr. Masud Balogun(Co-opted)

Lotus Capital Fund management

13Dr. Basheer Oshodi(Co-opted)

Sterling Bank Banking

14Mrs. Patience Oniha (Co-opted)

DMO Debt Management

15Mr. Attahiru Maccido(Co-opted)

Accacia Holdings Ltd Portfolio Management

16 Mr. Abass Abdulkadir SEC SEC

17 Mrs. Mary E. Ekwo SEC Head, Secretariat

18 Mr. Mohammed Salihu SEC Secretariat

19 Mr. Daniel Okonji SEC Secretariat8

The Need for NICMPs in Nigeria

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The Alternative route …beyond The Alternative route …beyond traditional investmentstraditional investments

Because it is asset based, it promotes transparency , accountability and consequently , good corporate governance.

NICMPs promote financial stability by linking the financial sector with the real sector of the economy, hence making it attractive for infrastructure financing.

Conventional and alternative models can and do co-exist and enhance product depth and financial inclusion.

Following the slow growth in developed markets, it is critical to diversify our sources of investment capital and NIMCPs provides that opportunity.

A key prospect for this diversification is the concentrated wealth in the rising Asian Tigers and the GCC zone (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, UAE) which tracks shari’ah compliant investment instruments

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The Alternative route …beyond traditional The Alternative route …beyond traditional investmentsinvestments

By issuing alternative capital market products, the Nigerian sovereign and corporate organisations can access a new investor base . This will widen the liquidity available for investment in infrastructure and other priority projects

The market provides an investment platform to attract petrodollar investment potentials in the gulf Arab region which are expanding their investment focus to Africa to tap into the high returns in the African markets

The market will capture local investors who are seeking ethical-compliant investments and opportunities and thereby ensuring financial inclusion

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ATTRACTIVENESS OF NICMPsATTRACTIVENESS OF NICMPs

Priced competitively

Mostly rated instruments

Compliant with Islamic ethical principles

Inclusive

Typically less volatile

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VISION VISION Against these background, Nigeria has a significant potential to develop NICM that can contribute about 25% of the overall capital market capitalization within the next 10 years.

2014 2024

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Overall Capital MarketOverall Capital Market

Non-Interest Capital Market

Non-Interest Capital Market

Overall Capital MarketOverall Capital Market

NICMNICM

Vision: Sukuk 15% of Bond Market

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0

10

20

30

40

50

60

2014 2024

Sukuk

Overall DebtMarket

NICMPsNICMPs …The Current State …The Current State

Malaysia•Indices•Mutual funds•REITs•Ethical bonds (Sukuk)•Structured products•Futures•Exchange Traded Funds• Ethical Venture capital and PE

Nigeria•Sukuk•Mutual fund •Index

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The Growth Potential

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The Growth PotentialsThe Growth PotentialsHuge infrastructure deficit:

◦ According to ADB, Nigeria has an infrastructure need deficit of $360 billion

◦ Construction growth in Nigeria will be the fastest of all markets, according to the latest 10-year forecast from Global Construction Perspectives and Oxford Economics

Huge investment appetite of the Asian and GCC countries.◦ Substantial amounts of investment capital are

currently invested according to ethical principles. ◦ The estimated size of ethical assets was USD1.067

trillion globally.

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The Growth PotentialsThe Growth Potentials

Large population and seventh most populous country in the world – 170 million (2012 World Bank est.)

Size of the economy: The country has maintained an annual GDP growth of

between 5-6% over the past decade.

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The Growth Impediments

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Huge potentials … Huge potentials … underutilizedunderutilizedmarketmarket

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STRATEGIC OBJECTIVES ANDINITIATIVES

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STRATEGIC OBJECTIVES AND STRATEGIC OBJECTIVES AND INITIATIVESINITIATIVES

Strategic Objectives Strategic Initiatives

To build a strong regulatory foundation for NICM

Strengthen the institutional capacity of SEC Strengthen coordination among regulatory authorities

within the financial sector

To encourage the development of NICM market stakeholders

Regulatory authorities to engage stakeholders Conduct public awareness and education programmes Build capacity of stakeholders Ease entry into the NICM

To encourage the development of NICM products

Ensure availability of NICMPs that meet the regulatory requirements of non-interest banks, takaful, PFAs, assets managers and other fund/portfolio managers

Ensure availability of NICMPs that attract retail investors in order to achieve financial inclusion

Regulatory authorities to engage stakeholders to address tax issues related to new products

To create a regional NICM hubPromote and enhance cross listingPromote and enhance multi-currency listingRationalize cost of listing/issuanceEnsure active promotion of NICMEnhance liquidity in the market

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RECOMMENDATIONS

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RECOMMENDATIONSRECOMMENDATIONSTo Build a Strong Regulatory Foundation for

NICM

SEC to:• establish PMO to train and build internal

capacity on NICM

• Fast-track the review of guidelines on NICM

• standardize operational guidelines in line with international best practice

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RECOMMENDATIONSRECOMMENDATIONSSEC to: • foster synergy among regulators in the Non-interest

financial sector through the Financial Services Regulation Coordinating Committee. 

• accept independent internationally recognized Shariah advisors in addition to existing SEC rule requiring Shariah advice to be obtained from the operator/issuer.

• set robust minimum criteria for qualification of Shariah advisers or advisory council for the operator/issuer

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RECOMMENDATIONSRECOMMENDATIONSSEC to:

• Engage with NSE to understand structures and agree on classifications of NICMPs

• engage PENCOM to amend guidelines for PFA’s assets selection criteria to be risk-based rather than the current approach which differentiates between alternative (non-interest) products or conventional products by removing specificity in guidelines such as Sukuk and focus on broad asset class and risk e.g fixed income, variable income and REITs

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RECOMMENDATIONSRECOMMENDATIONSSEC to:

• work actively with other relevant regulators and the industry to initiate further measures to improve the incentives and avenues for exercising good corporate governance

• SEC to develop an enforcement framework to prevent market manipulation

• SEC to use short term incentives to promote NICM development

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RECOMMENDATIONSRECOMMENDATIONSCBN to: • amend BOFIA to accommodate the use of its assets

to create non interest liquidity instruments.

• consider restructuring the Financial Regulatory Advisory Council of Experts

• provide optional generic NIB contracts template as a guide.

• Issue non interest t-bills/OMO instruments and allow sub-sovereign/sovereign sukuk as liquidity instruments

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RECOMMENDATIONSRECOMMENDATIONSNAICOM to: consider restructuring the Takaful

Council of Experts

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RECOMMENDATIONSRECOMMENDATIONSTo encourage the development of NICM

market stakeholders

SEC to:• spearhead initiatives to enhance the

awareness of the market at domestic and international levels through a comprehensive educational and promotional programme, including presentations and conferences.

• establish a PMO to train management and staff on the rudiments of NICM in the next12-18 months.

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RECOMMENDATIONSRECOMMENDATIONSSEC to: educate retail financially excluded investors on

importance of the NICMPs through mosques and churches.

organize a roundtable on ethics and finance as a strategy to enlighten the public.

organise inter-faith roundtable/forum on the importance of NICMPs (e.g. NAIREC)

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RECOMMENDATIONSRECOMMENDATIONSSEC to:

• work with market stakeholders to define training programmes and certification requirements for licensing and continuous education of market participants

work with ministry of education to incorporate NICM as part of education syllabus in schools.

The SEC and SROs should commit a defined

minimum of their budget for investor education.

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RECOMMENDATIONSRECOMMENDATIONSSEC to:• revive the NCMI in collaboration with

qualified institutions to initiate and consolidate efforts towards providing training to enhance the technical knowledge and skills of CMOs and other stakeholders

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RECOMMENDATIONSRECOMMENDATIONSTo encourage the development of NICMCBN to: issue non-interest T-Bills and short term

papersexplore the use of national institutions to

create assetsAccept sovereign and sub-sovereign sukuk

as liquidity instruments

DMO to: issue sovereign sukuk to establish a

benchmark yield curve for Nigeria as there are no impediments in its Act

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RECOMMENDATIONSRECOMMENDATIONSSEC to: encourage operators to develop and offer

a broad range of NICM products such as Islamic ETF, Islamic REITs and services on a sustained basis to cater for a wider domestic and foreign issuer and investor base.

promote the development of new products to mirror the conventional capital market instruments

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RECOMMENDATIONSRECOMMENDATIONSSEC to: work closely with the investment

management industry to facilitate the introduction and promotion of a wider range of non-interest collective investment schemes.

Collaborate with the tax authorities to accelerate the process of addressing tax provisions that may impede product development and innovation, or discourage participation in non-interest capital market transactions.

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RECOMMENDATIONSRECOMMENDATIONSSEC to:collaborate with stakeholders to pursue the

amendment of LUA to make the process for perfection and transfer of title easier.

engage the Governors and relevant stakeholders in the land registry to create a level playing field for property acquisition using non-interest structure together with conventional structure, and dispense with the challenge of seeking double consent

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RECOMMENDATIONSRECOMMENDATIONSSEC to: Liaise with Federal Mortgage Bank and

other stakeholders to put in place adequate regulation in relation to primary mortgage institutions offering non-interest mortgages and also increase its services in the area of non-interest financing.

Promote the establishment of a functional commodity exchange with islamic index to encourage the trading of screened commodities

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RECOMMENDATIONSRECOMMENDATIONSTo create a regional NICM hubSEC to:Encourage DMO to issue sovereign

sukuk to establish the long term yield curve for the sukuk market.

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RECOMMENDATIONSRECOMMENDATIONSSEC to:spearhead focused promotional

programmes directed towards international markets

pursue beneficial synergistic relationships with other major Non-interest capital markets such as Malaysia, UAE and UK

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RECOMMENDATIONSRECOMMENDATIONSSEC to:actively work with domestic and

international financial institutions to ensure listing of Nigerian Non-interest equity funds on major world exchanges

Collaborate with stakeholders to conduct international road shows on NICM

create rules to encourage the establishment of market makers on NICMPs to enhance market liquidity.

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RECOMMENDATIONSRECOMMENDATIONSSEC to:develop guidelines on Good Corporate

Governance for NICMPs in tandem with International Standards

Liaise with FIRS to reinterpreted conventional tax law such that interest receivable is akin to ‘income’ in non-interest finance products/contracts

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RECOMMENDATIONSRECOMMENDATIONSSEC to: • In the interim, push for the implementation of the

provision of section 23(2) of the corporate income tax(CIT) to ameliorate some tax inequality.

The President of Nigeria may exempt or order:

“Any company or class of companies from all or any of the provisions of this Act; or from tax of all or any profit of any company or class of companies from any source, and on any grounds which appears to him sufficient”.

In the long run, pursue of tax statute to create laws covering certain contracts relating to NICMPs.

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RECOMMENDATIONSRECOMMENDATIONSGovernance It is expedient to adopt a de-centralised

Shariah decision-making structure in line with global best practice as follows:

i. Appointment of qualified Shariah advisers at industry level

i. Non establishment of Shariah Advisory Council at regulatory level

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RECOMMENDATIONSRECOMMENDATIONSGovernanceSEC to: adopt NAICOM’s provision that stipulates the

qualification for shariah scholars on a shariah board.

create educate programmes for shariah boards

to improve their knowledge based on finance

Amend SEC rule to permit leverage of any other shariah mechanism.e.g. outsourced

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RECOMMENDATIONSRECOMMENDATIONSOngoing Assessment

For effective implementation of the master plan reports, the mechanism for reviewing progress should be institutionalized (e.g using the CMC platform to monitor progress and periodically obtain stakeholders’ perspectives)

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OTHER OTHER RECOMMENDATIONSRECOMMENDATIONSTo facilitate the implementation

framework of NICMPs, SEC to:

• collaborate with FIRS to ensure that FIRS draft guidelines and regulation on non-interest transactions is released as a matter of urgency to further give confidence to investors

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THE OUTSTANDING WORK PLAN

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The Process of The Process of Developing the Master Developing the Master Plan Plan In drafting the master plan, we have had series

of brainstorming meetings and a review session with Mr. Omar Shaikh of IFC.

Some of the documents reviewed include: SEC rules on Sukuk and Islamic Finance

ManagementCBN guidelines on Non-interest bankingNAICOM guidelines on TakafulPENCOM guidelines on multi-fundReport of the Technical Committee on

Alternative Finance (Sukuk) in Nigeria

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The Outstanding Work plan for The Outstanding Work plan for formulation of the Master Plan formulation of the Master Plan ReportReportDeliverables Timeline

Consultation with relevant government Ministries and institutions: DMO, NSE, ICRC, FIRS, NSIA, NNPC, ICRC, CSCS, CBN, PENCOM, NAICOM, NCC, Ministry of Information, Ministry of Agriculture, and Ministry of Trade and Industry

April – May 2014

Harmonize and intergrate the metrics of NICM master plan with the other master plan committees

June 2014

Finalize NICM market master plan report

End of June 2014

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THANK YOU

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