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The Roadmap to Guided Growth of the Nigerian NICM 2014-2024

The Roadmap to Guided Growth of the Nigerian NICM 2014-2024. PROGRESS REPORT OF THE NICMP MASTER PLAN COMMITTEE Presented at the 1 st quarter 2014 CMC meeting, 26 th March, 2014. Presentation Coverage. The Mandate. THE MANDATE.

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The Roadmap to Guided Growth of the Nigerian NICM 2014-2024

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  1. The Roadmap to Guided Growth of the Nigerian NICM2014-2024 PROGRESS REPORT OF THE NICMP MASTER PLAN COMMITTEE Presented at the 1st quarter 2014 CMC meeting, 26th March, 2014

  2. Presentation Coverage

  3. The Mandate

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

  5. TERMS 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.

  6. BROAD 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.

  7. Goals of the NICM Master 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

  8. THE TECHNICAL COMMITTEE MEMBERS AND SPONSOR

  9. The Need for NICMPs in Nigeria

  10. The Alternative route …beyond traditional 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

  11. The Alternative route …beyond traditional investments • 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

  12. ATTRACTIVENESS OF NICMPs • Priced competitively • Mostly rated instruments • Compliant with Islamic ethical principles • Inclusive • Typically less volatile

  13. Overall Capital Market Overall Capital Market Non-Interest Capital Market NICM 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

  14. Vision: Sukuk15% of Bond Market N Trillions

  15. NICMPs …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

  16. The Growth Potential

  17. The Growth Potentials • Huge 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.

  18. The 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.

  19. The Growth Impediments

  20. Huge potentials … underutilizedmarket

  21. STRATEGIC OBJECTIVES AND INITIATIVES

  22. STRATEGIC OBJECTIVES AND INITIATIVES

  23. RECOMMENDATIONS

  24. RECOMMENDATIONS To 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

  25. RECOMMENDATIONS SEC 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

  26. RECOMMENDATIONS SEC 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

  27. RECOMMENDATIONS SEC 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

  28. RECOMMENDATIONS CBN 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

  29. RECOMMENDATIONS NAICOM to: • consider restructuring the Takaful Council of Experts

  30. RECOMMENDATIONS To 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.

  31. RECOMMENDATIONS SEC 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)

  32. RECOMMENDATIONS SEC 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.

  33. RECOMMENDATIONS SEC 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

  34. RECOMMENDATIONS To encourage the development of NICM CBN to: • issue non-interest T-Bills and short term papers • explore the use of national institutions to create assets • Accept 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

  35. RECOMMENDATIONS SEC 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

  36. RECOMMENDATIONS SEC 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.

  37. RECOMMENDATIONS SEC 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

  38. RECOMMENDATIONS SEC 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

  39. RECOMMENDATIONS To create a regional NICM hub SEC to: • Encourage DMO to issue sovereign sukuk to establish the long term yield curve for the sukuk market.

  40. RECOMMENDATIONS SEC 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

  41. RECOMMENDATIONS SEC 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.

  42. RECOMMENDATIONS SEC 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

  43. RECOMMENDATIONS SEC 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.

  44. RECOMMENDATIONS Governance • It is expedient to adopt a de-centralised Shariah decision-making structure in line with global best practice as follows: • Appointment of qualified Shariah advisers at industry level • Non establishment of Shariah Advisory Council at regulatory level

  45. RECOMMENDATIONS Governance SEC 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

  46. RECOMMENDATIONS Ongoing 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)

  47. OTHER RECOMMENDATIONS To 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

  48. THE OUTSTANDING WORK PLAN

  49. The Process of Developing the Master 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 Management • CBN guidelines on Non-interest banking • NAICOM guidelines on Takaful • PENCOM guidelines on multi-fund • Report of the Technical Committee on Alternative Finance (Sukuk) in Nigeria

  50. The Outstanding Work plan for formulation of the Master Plan Report

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