Regarded as one of the fastest growing segments of the global financial industry by the International Monetary Fund (IMF), Islamic finance and banking is currently valued at $1.14 trillion, growing at 15-20 percent annually in the past three years. With such a unique growth potential, the role of legal practitioners is crucial as the majority of transactions involve creative legal thinking.
Proficient legal drafting skills, knowledge of conventional and Islamic banking and finance, deal structuring, securitisation and capital market expertise are essential skills required by a lawyer willing to specialise in this niche financial sector. Whether as independent legal advisers, or as in-house counsels, lawyers have a critical role in every sphere of Islamic finance including banking, insurance (takaful), Islamic fixed income instruments (sukuk), Islamic asset management, amongst others.
Generally, the role of lawyers and particularly in-house counsels in Islamic banking and finance includes the preparation of all transactional documents and contracts, ensuring compliance with the tenets of Islamic commercial jurisprudence, setting up the appropriate corporate structure for the company including compliance with all corporate formalities, developing and implementing a code of conduct and managing litigation generally handled by external counsel.
In my opinion, a more strategic function is to liaise with industry regulators such as the Nigerian Stock Exchange, Securities and Exchange Commission, Central Bank of Nigeria, etc. Furthermore, lawyers are required to liaise with the Shariah Advisory Board of their institution on Shariah Compliance Audit and ensure that contractual dealings and practices comply with the international best practices as standardised by the Islamic Financial Services Board (IFSB) and the Accounting and Auditing Organisation for Islamic Financial Institution (AAOIFI). These two international institutions – The IFSB and AOOIFI – are both responsible for issuing guiding principles on accounting, auditing and Shariah standards within the banking, insurance and capital market sectors in the Islamic financial services industry.
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Particularly, an Islamic finance lawyer is expected to be very familiar with the basic principles of Islamic banking and its prohibition on interest-based transactions (riba), speculation (gharar), gambling (maysir), adult entertainment, production of arms and ammunition, and all things prohibited by the Shariah law. More so, the lawyer is expected to understand the various Islamic contracts and the reflection of Shariah provisions and tenets in the contracts. Some of the key contracts lawyers will be required to prepare are:
(i) Murabaha contracts (Cost plus profit financing): The institution finances the purchase of goods or assets by buying them on behalf of its client and reselling to the client at a mark-up price with payment on the spot or deferred.
(ii) Ijarah contracts (leasing financing): Transfer of assets usufruct to another for an agreed period and at an agreed consideration.
(iii) Musharakah contracts (joint venture financing): This is a kind of partnership where a bank may decide to join another entity or individual to execute a project or set up a joint venture with each contributing particular amount in equal or varying degrees. While profit can be shared according to a pre-arranged formula, losses are shared in proportion to capital contribution.
(iv) Mudarabah contracts (investment partnership financing): This is another kind of partnership where the bank contributes the finance and the client provides the expertise, management and labour. Profits are shared by both the partners in a pre-arranged proportion, but when a loss occurs the total loss is typically borne by the bank.
(v) Istisna’ (built to order financing): These are contracts to manufacturers with the possibility of payment in instalments. It can be used to finance ‘Buy Operate and Transfer’ (BOT) contracts and ‘Private Public Partnerships’.
(vi) Salam (agriculture financing): Salam is mainly used in the agricultural sector. The seller (typically the farmer) supplies specific goods (agro-commodities) to the buyer at a future date for advanced price fully paid at spot.
(vii) Sukuk (Islamic bond financing): Sukuk are certificates of equal value representing undivided share in an underlying asset. Assets are identified that the issuer of the sukuk will acquire to generate income or gains within a specified period of time.
Interestingly, since the CBN issued guidelines for the operation of non-interest banking in Nigeria, Jaiz Bank plc emerged the first and currently only full-fledged bank in Nigeria in November 2011 with regional licence to operate in the northern part of Nigeria, while Stanbic IBTC plc and Sterling Bank plc followed, acquiring non-interest banking window licences nationwide.
S.23 (1) and S.66 of Banks and Other Financial Institutions Act (BOFIA) 1991 (as amended) provides for the licensing of non-interest banks (NIBs). Being a specialised bank, NIBs could either be Islamic financial institutions (IFIs) offering Shariah-compliant products and services or other non-interest financial institutions based on any other established non-interest principles.
Kazim O. Yusuf