Standardization, Key To Bringing Certainty To Non-Interest Finance Market - Tosin Ajose


Sunday, March 13, 2020 / 1.00PM / Bukola Akinyele for WebTV / Header Image Credit: WebTV


The Standardization of documentation in the Islamic Finance industry will lead to certainty and increased growth in the non-interest finance market said Tosin Ajose, Lead Advisor, DealHQ Partners in an interview with Islamic Finance Weekly.


According to Ajose standardization of documentation enables parties  to have certainty as to the terms that apply to transactions in the non-interest market,  irrespective of the jurisdiction they reside.


She also noted that it would encourage proper governance and risk management, which would allow for an efficient non-interest domestic money market.


Speaking further, she acknowledged the fact that globally, there has been some effort amongst associations of non-interest banking practitioners to have standardization of documents within their respective countries.


"Principally, in the syndicated loan market standardization of documentation is one of the core principles that are prized.  The way the syndicated loan market works, it is essential that documentation is standardized. It is important because it is a complex segment of the financial market because of the diversity of parties, sometimes involving multiple currencies and sometimes has involving parties across jurisdictions" She said.


She noted that there has been standard documentation for the Wakala model and was optimistic that there will be more effort to entrench this within the local Nigerian market.


On the issue of standardization facing Islamic Finance, she said that there are two things that are responsible for the slow pace of standardization, first diverse schools of thought as to the principle of shariah, and second even among the Islamic scholars there is a lack of agreement on any particular issue.


She added "Nigeria should be working towards aggregating commercial principles and Shariah principles in a way that is efficient. Stakeholders should make commitments towards agreed standards".


Speaking on the issue of multi-currency and multi-jurisdictional syndication in the case of Sukuk issuance, she said it was not possible to have a loan market without having issues with multi-currency and multi-jurisdictional processes, particularly in the area of syndicated loan financing. This is why standardization was critical.


"The core feature of syndication is when you have access to global capital and also in the area of the syndicated market you must be able to transact across different currencies. The syndicated market recognises this in the cost of transactions where there is a need to aggregate efforts to raise capital across jurisdiction and in different currencies" Ajose said.  


The Lead Advisor for DEAL HQ also highlighted the fact that there are certain risks associated with syndicated finance in particular when it is multi-jurisdictional.

She made a strong case for clarity on the issue around conflict of laws, as it has to do with enforcements. 


"Irrespective of the law or principle that governs the contract you must enforce the decision on any dispute through a conventional court of law.  Dispute are determined in line with the shariah principle".


Mrs. Ajose noted that the financial market does not like uncertainty and the cost of difficult to quantify. According to her, it would be of advantage for an individual to deal in the area where there is certainty of laws or principles, to guide the transactions.


In terms of a legal framework, she said Nigeria has demonstrated that there is huge interest in the Islamic financial market through the two Sukuk issuances by the FGN, with 4 already existing takaful insurance companies and 2 licensed non-interest commercial banks that practice the principle.


Looking at the financial regulatory environment, she said the Central Bank of Nigeria needs to deepen the laws and regulations that relate to non-interest banking. She highlighted the fact that apart from  Sukuk, there were several non-interest finance instruments that could be assessed in the market that still need some measure of laws and regulations particularly through syndication. 


"Also, there is need to create sufficient awareness and knowledge. Apart from the financial market not being friendly with uncertainty it is also not friendly with things with insufficient knowledge. The CBN and Securities and Exchange Commission need to go beyond the good work that has been done in Sukuk bonds to look for other instruments" She said.


In the insurance market she emphasized the need for the regulator National Insurance Commission (NAICOM) to increase awareness of the insurance business and opportunities in the takaful market.


She added, "The principle of takaful is that there is collective effort to share risk between the user of the product and the insurance company.  If a lot of people understood the principle of Takaful, people will be more and willing to embrace it as an insurance product. A lot needs to be done in terms of social awareness, creating trust in the insurance sector itself and for people to understand the intrinsic benefits of having an insurance cover".


On the ongoing recapitalization in the insurance sector, she believed it would deepen takaful institutions and provude a solid financial base for  the industry.


Looking at the evolution of non-interest finance and legal practice, she stressed that there is a community of practitioners, scholars that are supporting the industry with the knowledge that would help to deepen the market. 


She noted that globally conventional banks are now delving into Islamic finance products and The slamic finance is becoming mainstream and more acceptable to users of capital market.


Speaking on what needs to be done in the area of capacity building, she said increasing awareness would help people to understand the fundamental principles of Islamic finance products.


From her perspective there is need for the development of more Shariah-compliant Islamic finance products that could have been ncrease participation in the non-interest financial market in Nigeria.


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