The Central Bank of Nigeria (CBN) has taken a significant step towards strengthening the country’s Islamic finance sector by launching three new non-interest financial instruments aimed at improving liquidity management and fostering greater market participation.
This move addresses a long-standing liquidity challenge within the country’s non-interest banking system and aligns Nigeria’s Islamic finance framework with global best practices.
The new instruments, detailed in a circular released on Tuesday dated May 23, 2025, include:
- Nigerian Non-Interest Financial Institutions’ Master Repurchase Agreement (NNMRA): A standardised contractual framework for repurchase (repo) transactions compliant with Islamic finance principles. It sets clear rules for interbank funding and liquidity management, facilitating smoother operations among Islamic banks and the central bank.
- CBN Non-Interest Asset-Backed Securities (CNI-ABS): Tradable securities backed by tangible assets structured according to Shariah rules. These allow Islamic banks to manage excess liquidity and meet reserve requirements without resorting to conventional interest-bearing instruments.
- CBN Non-Interest Note (CNIN): An interest-free note designed as a loan instrument between the Central Bank and eligible financial institutions, providing an additional channel for liquidity injection and absorption via periodic auctions.
Bridging the liquidity management gap
For years, Islamic banks in Nigeria have faced operational challenges due to a lack of Shariah-compliant liquidity tools.
Traditional liquidity management methods often conflict with Islamic principles, limiting these banks’ ability to efficiently manage short-term funding needs and regulatory reserves.
The introduction of the NNMRA is expected to standardise repo market transactions, which are vital for short-term liquidity, while the CNI-ABS and CNIN instruments provide novel mechanisms for liquidity absorption and injection.
This framework will help Islamic financial institutions better integrate with the broader monetary system, improving their resilience and operational efficiency.
Regulatory compliance and market implications
The central bank has mandated that all authorised participants, including fully Islamic banks and conventional banks operating Islamic windows, incorporate these instruments into their liquidity management strategies.
Institutions must adhere strictly to existing guidelines to ensure regulatory compliance.
On days when CNI-ABS and CNIN auctions take place, participants will not have access to the apex bank’s discount window, underscoring the separation between Islamic and conventional liquidity operations.
What this means for Nigeria’s financial sector
The new instruments are expected to support the growth and stability of the Islamic banking sector, which plays a key role in Nigeria’s broader financial inclusion agenda.
By aligning the country’s non-interest finance market with international standards, the reforms could also attract greater foreign investment into the sector.
Additionally, the instruments offer the CBN more effective tools to manage liquidity risks across both conventional and non-interest banking segments
As Nigeria continues to expand its Islamic finance offerings, these new non-interest instruments mark a critical advancement in bridging the liquidity gap and promoting a more inclusive, resilient financial system.
