The Central Bank of Nigeria has introduced guidelines on the management of investment account holders for Non- Interest Financial Institutions in Nigeria.
The regulatory body said the objectives of the guidelines was to provide the minimum standard to be met by NIFIs operating in Nigeria before they could recognise Profit Sharing Investment Account Holders deposits as risk absorbent and deduct same from the computation of Risk Weighted Assets.
This would enable them to calculate the Capital Adequacy Ratio as specified in the guidance notes on regulatory of capital for NIFIs in Nigeria issued by the CBN.
It stated that the guidelines complemented the regulations for NIFIs in Nigeria issued by the CBN such as guidance notes on calculation of capital requirements for NIFIs; Guidelines on income soothing for NIFIs; and guidance notes on disclosure requirements to promote market discipline for NIFIs.
According to the CBN, NIFIs mobilise large percentage of their funds using Mudarabah and Wakalah contracts.
In Mudarabah, the bank is acting as the Mudarib (entrepreneur) and the fund providers as the Rabb-ul-Mal otherwise called PSIAHs.
It explained that, “In Wakalah, the bank acting as Wakeel (investment agent) for the PSIAHs, earns a Wakalah fee, and an incentive fee in the event of the realised profit exceeding an agreed threshold, and the agreed profit goes to the PSIAHs.
“Mudarabah contract by its nature entails the sharing of profit between the contracting parties based on pre-agreed profit sharing ratio and the bearing of loss by the fund provider except in cases of proven negligence, misconduct or breach of contract by the entrepreneur in which case the entrepreneur would bear such loss.”
The CBN explained that NIFIs in Nigeria essentially maintained two different types of Mudarabah accounts used for deposit mobilisation “which are Restricted Investment Accounts and Unrestricted Investment Accounts.”
Under the RIA contract, it added, the bank would act strictly based on the investment mandate of the customer, while under URIA contract, the bank was free to invest the funds as it deemed fit.
In practice, NIFIs co-mingle such PSIA deposits with other funds like shareholders’ funds and current account deposits into different pools and invest in profitable ventures.
“Being an equity-based contract, the PSIAHs are expected to bear the credit risk of any counterparty the funds are invested with, as well as the market risk of the assets in which the funds were invested,” it stated.