Introduction
Non-interest banking is gaining traction in Nigeria as an alternative to conventional banking. This model operates on the principles of ethical finance, risk-sharing, and asset-backed transactions. It prohibits interest-based lending while promoting profit-sharing mechanisms.
In this newsletter, we explore the regulatory and compliance considerations for setting up a Non-Interest Financial Institutions (NIFI) in Nigeria and highlight the licensing process and governance requirements.
Non-Interest Banking and Regulatory Framework
Non-interest banking services in Nigeria are carried out by NIFIs licensed by the Central Bank of Nigeria (CBN). The CBN classifies these banks as specialized institutions. Under its Guidelines for the Regulation and Supervision of Institutions Offering Non-Interest Financial Services in Nigeria, the categorizes them into two types:
1. Institutions offering Islamic Financial Services (Islamic Banking) – Based on Islamic commercial jurisprudence.
2. Other Non-Interest Financial Institutions (Other Non-Interest Banks) – Operating under any other established non-interest principle.
Licensing Categories
Non-interest banking licenses fall into two main categories: National and Regional. In March 2024, the CBN increased the minimum share capital for a National non-interest banking license from ₦10 billion to ₦20 billion while a Regional license went from ₦5 billion to ₦10 billion. These changes take effect in April 2025 for new applicants, while existing NIFIs must comply by March 2026. The share capital must be fully paid up to meet the CBN requirement.
In addition to these, NIFIs providing Islamic Banking services can register as Microfinance Banks (MFBs) under the CBN’s Guidelines for the Regulation and Supervision of Non-Interest (Islamic) MFBs. The registration requirements align with those of conventional MFBs.*
Licensing Stages
There are three licensing stages for obtaining a NIFI license.
1. Pre-Approval Stage (Application for a Banking License)
Applicants must submit a formal application to the CBN which will include:
· a cover letter signed by the promoters;
· non-refundable application fee (determined by CBN);
· evidence of meeting the minimum capital requirement (including the source of funds);
· a detailed business plan/feasibility report covering the objectives and nature of the proposed bank, ownership structure, shareholding, and governance framework, financial projections for at least five years, Shariah governance framework, including the Advisory Committee of Experts (ACE) [for Islamic Banking]
· board composition, detailing qualifications and experience of proposed directors and key officers;
· draft copies of incorporation documents, including Memorandum and Articles of Association (indicating non-interest banking operations);
· evidence of deposit with CBN (minimum capital requirement must be deposited in an escrow account with CBN).
2. Approval-in-Principle (AIP) Stage
If the application meets CBN’s requirements, the bank will be granted an Approval-in-Principle (AIP) which will be valid for six months. During this period, the promoters must:
· register the bank as a limited liability company with the Corporate Affairs Commission (CAC);
· secure office premises and operational infrastructure;
· appoint a Board of Directors and Management Team, subject to CBN approval;
· implement an IT and banking system for operations; and
· recruit and train staff on non-interest banking principles.
3. Final License Approval
After fulfilling AIP conditions, the promoters must apply for the final banking license by submitting the following:
· a final inspection report from CBN confirming the operational readiness of the NIFI;
· certified copies of CAC incorporation documents;
· evidence of capital deposit confirmation by CBN;
· internal policies on risk management, anti-money laundering (AML), cybersecurity, and corporate governance;
· list of management staff and board members, with CBN’s approval.
Upon successful review, CBN will issue the final license which permits the bank to commence operations.
Corporate Governance
The CBN Corporate Governance Guidelines for Commercial, Merchant, Non-Interest, and Payment Service Banks** set out governance requirements for NIFIs, based on the Nigerian Code of Corporate Governance. Key provisions of the code include:
· Board Composition: The board of a NIFI must have between 7 and 15 members, with at least three independent non-executive directors for National NIFIs and two for Regional NIFIs.
· Diversity Requirements: The board must reflect gender diversity.
· Executive Roles: The Managing Director (MD) is subject to a maximum tenure of 10 years. The Company Secretary’s role must be distinct from that of the Head of Legal/Legal Adviser.
For Islamic Banking, additional governance requirements such as these will apply:
· Shariah Review and Compliance (SRC) Function: NIFIs carrying out Islamic Banking must establish an SRC unit responsible for regular assessments to ensure operations align with Shariah principles.
· Internal Shariah Auditor (ISA): NIFIs providing Islamic Banking must appoint an ISA as the head of the internal Shariah audit function, holding a position not lower than Assistant General Manager.
Difference Between Islamic Banking and Other Non-Interest Banks
There are certain differences between Islamic Banking and Other Non-Interest Banks. Some are explained below.
1.Underlying Principles
· Islamic Banking: Operate based on Islamic commercial jurisprudence (Shari’ah law), which prohibits interest (riba) and ensures financial transactions align with Islamic ethical standards.
· Other Non-Interest Banks: Operate on alternative non-interest principles that do not necessarily align with Islamic jurisprudence but still avoid interest-based transactions.
2. Shari’ah Compliance
· Islamic Banking: Must have a Shari’ah Advisory Board to ensure compliance with Islamic financial principles.
· Other Non-Interest Banks: Not required to adhere to Shari’ah principles and do not require a Shari’ah Advisory Board.
3. Permissible Transactions
· Islamic Banking: Engage in profit-sharing models (e.g., Mudarabah, Musharakah), asset-backed financing (e.g., Ijarah), and trade-based contracts (e.g., Murabaha).
· Other Non-Interest Banks: May adopt models such as ethical banking or other non-interest structures that do not necessarily follow Islamic finance contracts.
4. Regulatory Considerations
· Islamic Banking: Subject to both CBN regulations and Shari’ah governance frameworks, ensuring all transactions comply with Islamic finance principles.
· Other Non-Interest Banks: Only subject to CBN regulations without an Islamic governance framework.
5. Target Market
· Islamic Banking: Primarily cater to individuals and businesses seeking Islamic-compliant financial services.
· Other Non-Interest Banks: Serve a broader audience, including individuals and institutions looking for non-interest financial solutions without a religious requirement.
Conclusion
The growing adoption of non-interest banking in Nigeria underscores the need for a clear understanding of its regulatory framework. From licensing requirements to corporate governance, NIFIs must comply with CBN guidelines to ensure operational efficiency and sustainability. As the sector evolves, adherence to these regulations will be important in fostering trust, financial inclusion, and long-term stability in Nigeria’s banking sector.
Footnotes
* Please see our article on the categorization and license requirements for MFBs here https://pavestoneslegal.com/pavestones-regulatory-update-the-draft-revised-guidelines-for-the-regulation-and-supervision-of-microfinance-banks/
** Please see our article on the CBN Corporate Governance Guidelines for Commercial, Merchant, Non-Interest, and Payment Service Banks here – https://pavestoneslegal.com/regulatory-update-cbns-new-corporate-governance-guidelines-for-banks-commercial-merchant-non-interest-and-payment-services-banks/