CBN in market deepening move with Non-Interest Asset-Backed Securities

By Charles Abuede

• Issues framework
• Says asset a tradable instrument on single exchange rate

The Central Bank of Nigeria (CBN) is continuing with its raft of measures, first to steady the market, but perhaps more crucially, to deepen it. Not a few analysts will tell you from about 15 years ago, that even though the market has taken a few steps forward during this time, it is still a rather shallow market. And they will add that the financial regulatory authorities have not been helpful in their lack of proactivity, perhaps ultra-conservative, some would say, in not allowing the market to be well geared to churn out different tradable instruments for the purpose of deepening the market. Now, the ball is in their court, and the CBN appears to be acting … fast, would you say?

So, on Friday, the CBN was active and it did quickly throw something to the market, arguably to allow market participants and analysts chew on it over the weekend. In what was described as a concerted effort to deepen the Nigerian financial markets, increase financial inclusion and provide a liquidity management instrument that is compliant with the principles of non-interest finance in Nigeria, the CBN issued the framework for the operationalisation of the CBN Non-Interest Asset-Backed Securities (CNI-ABS).

The apex bank in a circular on its website explained that the framework will allow for the full or partial securitization of the non-interest assets based on the maturity profile, which shall serve as the issue account, for auction purposes into local currency; and the assets can be auctioned to eligible institutions as the allotment of the auction to an eligible institutions will be based on subscriptions.

On the transfer of earnings received related to the securitised assets to eligible institutions based on their holdings, less all amounts outstanding, the apex bank said this shall be net of applicable charges as may be approved from time to time, and added that the assets shall meet the condition of tradability in shariah.

Meanwhile, the apex bank further explained that the investor shall enter into a unilateral binding undertaking to sell the nominal to the CBN at maturity, which will make the asset become a CBN’s asset exclusively and the CBN, in turn, reserves the right to hold or reissue it to the market.

Furthermore, governance structure of the CNI-ABS shall be in accordance with the provisions of the CBN Act of 2007 as amended, the banking and other financial institutions act (BOFIA) of 2020 as amended among other relevant circulars or guidelines of the CBN. Thus, the eligibility for the auction requires all interested non-interest financial institutions (NIFIS) and any other institution to participate as may be approved by the CBN from time to time.

Accordingly, the CBN shall also issue a calendar as well as publish notices for actions which can take place on any weekday and determined period through the appropriate media, and calling on interested and eligible firms to bid in auctions.

The apex bank also explained that at every auction, the amount shall be predetermined by the securitized amounts outstanding in the issue account; while bidders shall not be allowed to submit multiple bids as no institution with its affiliated entities as a group may be allotted more than 25 per cent of the auction amount in line with ensuring that all institutions are presented with a fair opportunity.

The minimum bid amount shall be N1,000,000 and integral multiples of N1,000 in excess shall be during a submission in which the bidder’s name shall be sent through the appropriate media  for sorting by the CBN in ascending order and the auction results shall be announced to all participants or CBN counterparties through electronic media at the same time. Also, a single exchange rate applies to its issue, maturity and return based on Wa’d under the shariah.

Consequently, the framework also stipulated that where an issue matures before receipt of the coupon by the CBN, the bank shall pay the accrued return as advance or a loan at zero interest rate in anticipation of expected return. However, the CBN shall charge a Wakala fee  as follows: an underlying return for 1 to 30 days investment (10%);  31 to 90 days (7.5%); 91 to 180 days (5%); and 181 to 365 day (2.5%).