ISLAMIC BANKING: CBN GUIDELINES FOR LIQUIDITY STATUS.

In order to make it easier for banks to subscribe to certificates of equal value (SUKUK) issued by state governments the Central Bank of Nigeria has released guidelines for according sukuk liquidity status while computing bank capital adequacy ratio.

According to public notice dated October 6 and signed for the Director, Financial Markets by Dr Mrs Angela Sere-Ejembi, the guidelines cover needed enabling legislation, repayment structure, maximum tenor and investment limits, amongst others.

For example. to qualify to be classified as liquid asset, the sukuk must be backed by a law enacted by the relevant state house of assembly specifying modalities for the sinking fund for repayment which will be replenished from consolidated revenue.

There must also be a fiscal responsibility law that establishes the state debt management department.

Also, the Securities and Exchange Commission (SEC) must confirm that all proceeds from the sukuk have been disbursed in line with its prospectus and the sukuk itself must have investment rating determined by a rating agency accredited by SEC

In respect of repayment structure, this must be from a funded sinking fund replenished by irrevocable standing order with statement of accounts  rendered to the CBN every six months.

As for tenor, maximum allowed will be 10 years and the sukuk must be approved by both the SEC and the Federal Ministry of Finance.

In calculating capital adequacy ratio, sukuk  will be assigned a weight of 20% by the CBN but no bank can hold more than 10% of total amount outstanding in a sukuk and even then, such must not above 30% of its total portfolio of debt instruments.

The issued guideline itself was signed by Dr Alvan E Ikoku, Director, Financial markets of the CBN.

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