The Central Bank of Nigeria (CBN) has issued a new guideline on the disposal of Non-Permissible Income (NPI) by Non-Interest Financial Institutions (NIFIs). The CBN had on the 13th of October 2021, issued a directive to all NIFIs on the allowable ways to dispose accruable NPIs. According to the directive, the CBN defines Non- Permissible Income (NPI) as ‘any income that accrues to the institution (NIFIs) in a Shari’ah non- compliant manner, such as interest income, penalties for delayed payment of debt obligations, or any income declared by the ACE (Advisory Committee of Experts) of the institution as impermissible according to the Shari’ah.

In the circular signed by CBN’s director of financial policy and regulation, Chibuzor Efobi, the regulator warned that all income classified expressly by the CBN definition or as may be determined by the ACE of the Non-Interest Financial Institutions now rank as Non-Permissible Income, hence not available for distribution to the owners nor for the use and benefit of the institutions themselves. Rather, in a new directive in favour of Nigerian social entrepreneurs and charitable organizations, the CBN guideline specifically declared that such NPIs gathered by these NIFIs can ONLY be disposed in support of a charitable cause. In the other words, the annual aggregate of interest income, default penalties on debt obligations and related income accruing to Non-Interest Financial Institutions in Nigeria have automatically become a pool of funds exclusively reserved for charitable organizations, even though the benefactor – NIFIs are not allowed to account for such as part of their Corporate Social Responsibility. Download a copy of the guideline here: https://bit.ly/3aFF3Fu.

The Spirit and the Letter

The latest CBN directive is embodied in a 9-point policy guideline as shown below:

  1. NPI is not an object of ownership of the NIB and does not confer any ownership rights on it.
  2. The NPI shall be put in a dedicated NPI account and shall not be commingled with the funds of the NIB.
  3. The NIB is under obligation to dispose of any NPI that accrues to it.
  4. Disposing the NPI to a charitable cause is regarded as proper disposal of the NPI on the following conditions:

a.   The NIB does not stand to benefit from the charitable cause in any way, even if by goodwill.

b. The charitable cause does not give benefit to any shareholder, director, ACE member or                             management staff of the NIB.

c. The disposal to the charity shall not be constituted nor included as part of the Corporate Social                   Responsibility of the NIB.

  1. The disposal of the NPI directly by the NIB or through a third party is acceptable, provided it fulfils the conditions mentioned under Paragraph (4) above.
  2. Whether the disposal is directly by the NIB or through a third party, the ACE shall review the disposal ex-ante and ex-post to ascertain that the conditions mentioned under Paragraph (4) above are fulfilled.
  3. The ACE shall ensure that the NIB does not delay the disposal of the NPI without justifiable cause, as any unjustifiable delay shall be tantamount to the NIB deriving benefit from the prohibited NPI.
  4. The ACE shall submit a quarterly report to the CBN on the disposal of the NPI.
  5. The ACE shall include in its annual report on the financial statements of the respective NIB a report on the disposal of the NPI.

As could be surmised from the Letters of the guideline, the CBN is seeking to promote strict adherence to the underlying principles of Non-Interest Banking by ensuring that all NIFIs do not accumulate income in a Shari’ah non- compliant manner. Whilst the underlying principles of Non-Interest Banking frowns at interest-yielding lending activities, such principle may be circumvented if the benefitting NIFIs reserve such Non-Permissible Income for their use or for distribution to their owners. Even if the NIFIs decide to deploy such income as part of their CSR activities, such action would be tantamount to a circumvention, as CSR also constitutes income distribution. This explains why the CBN has also disallowed the NIFIs from reporting the charitable disposal of NPIs as part of their CSR activities. The directive however permits the NIFIs to dispose their NPIs directly or through the use of third parties, while it empowered the ACE with oversight responsibilities of defining what other incomes can qualify as NPI, approving disposal of NPIs in line with this guideline and reporting quarterly to the CBN and annually via the NIFIs annual report.

Implication for Charitable Organizations

The latest move by the CBN has created an opportunity for social entrepreneurs and charitable organizations to access funding for their social impact and humanitarian activities. With combined total assets of over N250 billion and far more volume in terms of managed funds, investments and lending, the incidence of Non-Permissible Income by NIFIs may not be totally avoided. Hence, the directive provides a guaranteed source of charitable funds mapped out to support charity initiatives under the auspices of the CBN. Whereas entities express discretion in the amount of income they devote to charity, all NPIs gathered by NIFIs are solely and entirely reserved for charity. Sections 4a and b of the guideline precludes the NIFIs, their owners, ACE members and staff from directly or indirectly benefitting from the disposal to charity.

Here is an opportunity for fund managers and grant officers of qualifying charitable organizations and NGOs to position their organizations to benefit from this window to improve their funding status. While inadequate funding has been listed as the topmost challenge impeding the effectiveness of NGOs and charitable organizations in Nigeria, the latest regulatory pronouncement by the CBN will go a long way in easing the burden.