How Interest Free Financial Institutions Support Corporate Governance in Nigeria


FridayDay, August 6th, 2021/11:00 AM / by Bukola Akinyele-Yisau for WebTV / Header Image Credit: LinkedIn; Ummahani Amin

Non-interest finance can help improve corporate governance practices. Ms. Ummahani Amin, Managing Partner, The Metropolitan Law Firm, highlighted this point and contributed to the discussion on strengthening corporate governance in Nigeria’s interest-free financial market.

According to Amin, interest-free funding already has a framework to encourage good corporate governance practices. You mentioned regulators like that Accounting and auditing organization for Islamic financial institutions, AAOIFI, which has set policy for the board of directors in Nigeria with regulations that meet high standards.

Regarding the introduction of corporate governance in non-interest financial institutions, Ummahani stated that it was similar to traditional corporate governance practice. In her view, interest-free financing is also subject to the 2018 Nigerian Corporate Governance Code.

She said the interest-free financial institutions are unique in that their activities and products comply with Sharia law. This includes distributing the income to shareholders and directing investment opportunities for account holders.

It also focuses on providing guidance to NFIs on the broader social role. According to her, there is also a national Sharia committee with overall authority for the general policy of Sharia governance.

According to her, the corporate governance of the interest-free financial institution is led by the Sharia board of directors, which performs the necessary control functions.

She acknowledged that key regulators like the Central Bank of Nigeria (CBN), the Securities and Exchange Commission (SEC), the National Insurance Commission (NAIC), and the National Pension Commission (PENCOM) have provided guidelines for non-interest financial operations. This has enabled the harmonization and standardization of NFIs’ practices in accordance with Sharia principles.

On the standard corporate governance ethos that shapes Sharia-based businesses, she said that Islamic finance is principled and encourages effective capital mobilization for the benefit of the real economy.

She added that Interest-free finance is a realistic sector and promotes risk-sharing in all financial transactions. According to her, Islamic finance focuses on credit risk, as opposed to conventional finance, which decouples itself from the real sector.

Regarding the provisions on contract law in Nigeria, the attorney stated that contract law allows individuals to agree on the way they want to do business with each other.

Regarding the interest-free finance ecosystem, she said, “It is common for contractors to state that the contract should be governed in accordance with the laws of Islamic financial trade law. This is acceptable and common in all secular economies that support the Islamic financial system “.

In her opinion, the increasing acceptance of alternative financing structures in Nigeria is mainly determined by contracts that are based on Islamic principles. This also ensures that the parties to a transaction simply agree to get involved in a transaction Ijarah,
Salam or Istina in accordance with relevant standardized Sharia treaties.

She noted that when applying Islamic treaty laws in a nation like Nigeria, law is enforceable by the courts, and in the financial sector, standardization of Islamic treaties is in preparation with the development of a regulatory framework for the use of Islamic treaties.

Taking on the advocacy role, she stressed the fact that the Nigerian government’s legislative and regulatory approach to interest-free financing is aimed at creating a level playing field that will allow the large Muslim community to practice financing in accordance with their beliefs.

To distinguish between interest-free financing and conventional financing, she said the latter makes loans, requires collateral for loans, and continues to charge interest. For Islamic financial institutions there is a loan agreement and, in the event of default, also a penalty, which does not go to the lender but to charity.

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