THE CEMAC REGULATION ON ISLAMIC FINANCE

 By Mfor Divine Afuba, LLM, LSE, Partner, head of banking & finance law practice

E: divineafuba@dayspringlaw.com

1. Introduction

The term Islamic finance is used to refer to financial activities conforming to Islamic Law (Sharia). One of the main principles of the Islamic finance system is the prohibition of the payment and the receipt of riba (interest) in a financial transaction. The term riba covers all forms of interest and is not limited to usury or excessive interest only.

In addition to the prohibition of riba, there are several other important provisions which may affect financial transactions. These include the prohibition of ‘gharar’ (uncertainty or asymmetrical information), ‘maysir’ (gambling, speculation), hoarding, as well as trading in prohibited commodities (for example, pork and alcohol).

Islamic finance has a number of important features, according to the Chartered Institute of Management Accountants.[1] These include the following.

Interest-free

All banking business and activities must prima facie be free of any interest.

The need for underlying assets

Islamic finance requires that all banking business based on sale or lease must have an underlying asset.

Profit and loss sharing

Profit and loss sharing is possible in some Islamic banking activities. The bank will share the profit made with its customers either on a proportionate basis or on an agreed profit-sharing ratio. The loss is borne by the bank under a mudarabah contract or proportionately by both parties under a Musharakah contract.

Shari’ah compliance

This is at the heart of Islamic finance. To ensure compliance, a distinctive feature of Islamic finance is the establishment of a shari’ah advisory or supervisory board to advise IFIs, Islamic insurance companies, Islamic funds and other providers of Islamic products.

On 9 November 2022, the CEMAC region adopted Regulation N° 04/22/CEMAC/UMAC/COBAC on the conditions for exercising and controlling Islamic finance in CEMAC (herein after referred to as the Regulation). The Regulation is the first of its kind in CEMAC and represents the determination of the CEMAC lawmaker to increase its offering of financial services.

This paper examines some salient aspects of the Regulation and advocates for the setting up of all other institutions that would ensure its full and proper implementation.

2. The transposition and “domestication” of pre-existing international norms on Islamic finance

Islamic finance is not a novel concept. The Regulation therefore does not purport to introduce a new concept in banking and finance. It merely transposes and domesticates in the CEMAC region pre-existing international norms on Islamic finance. In fact, the preamble of the Regulation speaks volumes in this regard. Preambular paragraph 14 of the Regulation enacts that the development of the CEMAC region’s Islamic financial market shall be enhanced by the transposition into this region of Islamic finance principles, notably those set by the (AAOIFI) Accounting and Auditing Organization for Islamic Financing Institutions and the (IFSB) Islamic Financial Services Board.

3. Definitions

The Regulation begins with a long list of definitions, spread over articles 1, 3 and 4. Article 3 of the Regulation defines the activity of Islamic finance “l’activité de finance Islamic” as one that comprises all products, services, transactions and commercial, financial and investment activities commercialized or realised habitually by a reporting institution “établissement assujetti”[2] and that is based on the following principles:

• the prohibition on the payment or making of interest;
• the prohibition of uncertainty and of speculation;
• the prohibition on investing in illicit activities;
• the backing by tangible assets; and,
• the sharing of profit and losses.

One will note that the definition contained in article 3 of the Regulation encompasses the main features of Islamic finance enumerated in the introduction of this paper.

Article 4 of the Regulation contains a list and definition of products through which reporting institutions can finance the activities of their clients. These include mourabaha, moussawama, ijara, salam, istisnaa, moudaraba and moucharaka.

4. Consents, permits and authorizations

Like with all other banking and financial activities in the CEMAC region, Islamic finance is regulated and subjected to consents, permits and authorizations. Reporting institutions can carry out Islamic finance in two ways: either exclusively “à titre exclusive”, or partially “à titre partiel”.[3]

According to article 8 of the Regulation, the exclusive exercise of Islamic finance activities in any CEMAC member state by a financial or microfinance institution is subject to obtaining an authorization from the national monetary authority, delivered after obtaining the assent of COBAC.

In the case of the partial exercise of Islamic finance activities, reporting institutions involved in these types of activities should do so through a special structure called “Islamic window”.[4]The opening of an Islamic window by a reporting institution is subject to the prior authorization of COBAC.

5. The principle of complementarity

As stated above, only reporting institutions can carry out Islamic finance activities and these reporting institutions are either credit institutions or microfinance institutions. The Regulation does not provide new conditions for approval for credit and microfinance institutions that intend to offer Islamic finance products. The approval conditions are enshrined in pre-existing CEMAC enactments.

The Regulation therefore does not repeal or amend these CEMAC regulations; it merely complements them. However, in complementing these CEMAC Regulations it asserts its primacy over the said Regulations in matters of Islamic finance. It is in this regard that the second paragraph of article 9 of the Regulation states that COBAC shall only issue its assent in respect of the approval of credit and microfinance institutions to carry out Islamic finance activities on an exclusive basis where the conditions for the exercise of Islamic finance activities laid down in the Regulation and its implementing enactments are met.[5]

6. A system of checks and balances

The Regulation introduces a system of checks and balances by making it mandatory for every reporting institution to have a compliance committee “comité de conformité”.[6] Pursuant to article 13 of the Regulation, the compliance committee is competent to do the following:

• make pronouncements on compliance of the reporting institution with the Regulation;
• examine and validate contractual documentation and various procedures relating to the operations, products and services of the reporting institutions in the exercise of Islamic finance activities;
• issue compliance certificates “certifcats de conformité”[7] for products and services sold by the reporting institution in the exercise of Islamic finance activities;
• issue recommendations to ensure that documents and procedures are Islamic finance compliant;
• propose remedial measures for transactions considered non-compliant with Islamic finance regulations.7. The FOGADAC Islamic Window: An Insurance-Policy-like Fund

The FOGADAC (Central African Deposit Guarantee Fund – Fonds de Garantie des Dépôts en Afrique Centrale) Islamic window is a compartment created within FOGADAC by article 16 of the Regulation. FOGADAC was created by a 2009 CEMAC Regulation[8] with the aim to indemnify depositors of a financial institution in case of unavailability of their deposits, and to support any financial institution that finds itself in a situation in which there is a fear of a total or partial unavailability of reimbursable deposits or other funds.[9]The FOGADAC Islamic window is created to achieve the same objectives with respect to Islamic finance.

8. Supervision and Enforcement

Supervision and enforcement are vital instruments in the orchestration of an effective regulatory framework for Islamic finance. Article 17 of the Regulation entrusts the Central African Banking Commission (COBAC) with the onus of supervising the Islamic finance operations within the CEMAC zone. The CEMAC lawmaker paints the competence of the COBAC in this regard with a broad brush, anointing it with full authority to enact rules for reporting institutions in relation to:

• corporate governance, including setting the rules relating to the number and qualifications of managers;
• management rules to guarantee liquidity, solvency, financial stability and long-term sustainability;
• accounting standards, the consolidation of accounts, and the publication of accounting documents and other information.

As regards its enforcement mandate, the COBAC is competent to impose sanctions on any reporting institution the defaults in its obligations within the time limits laid by the Regulation.

9. Conclusion

The CEMAC Regulation on Islamic Finance is a watershed in the recognition and integration of Islamic finance within the CEMAC region. The Regulation assimilates international norms to the regional context, providing an incisive and comprehensive operational and regulatory framework for Islamic finance. The Regulation will not be able to take its proper place in the CEMAC legal orbit in the absence of the implementing instruments mentioned in the Regulation that still have to be enacted. Of course, there is an urgent need to enact these implementing instruments to add flesh to this fledgling system of norms.

Dayspring Law Firm is one of the leading law firms in banking and financial law in the sub-region. Our banking and financial law practice involves representing both providers of financial products and consumers. We assist borrowers and lenders on the transactional elements of arranging deals. We advise on the law of security interests (OHADA uniform act on security interests), and draft complex financial contracts. We assist clients to assess legal risks in international project finance and draft international project finance contracts.

As corporate finance lawyers, we accompany start-ups, entrepreneurs, and medium and large businesses in sourcing funding to inject into their capital investment needs and business operations and help structure financial deals. We also assist clients in the financial structuring of infrastructure projects in PPPs and public contracts. We equally help our clients to surf through international banking and finance regulations, especially those relating to anti-terrorism, money laundering and financial crime prevention.

Our lawyers have worked with several credit establishments to assist them to design internal oversight & regulatory compliance program, they have advised banks, corporations and government agencies in connection with PPP financing of construction and maintenance projects, advised several groups of lenders in syndicated borrowing facilities for businesses in the mining and oil and gas sector, conducted due diligence within the framework of various financing deals, advised banks on medium and long-term credit facilities, provided legal advice relating to large scale bond transactions, drafted several loan agreements, advised on cross-border credit facilities, accompanied lenders in project financing deals in the power and energy sector, etc.

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[1] Chartered Institute of Management Accountants, “An introduction to Islamic finance” (available with the author of this article)

[2] A reporting institution, as defined in article 1 of the Regulation, is a credit or microfinance institution authorized to carry out an Islamic finance activity.

[3] Article 7 of the Regulation.

[4] Article 10 of the Regulation.

[5] Article 9 paragraph 6 of the Regulations states that the composition of the file for the application of approval shall be laid down by a COBAC Regulation.

[6] The organization and functioning of the compliance committee shall be laid down by COBAC Regulation (article 13 paragraph 3 of the Regulation).

[7] A compliance certificate is an opinion issued by the compliance committee. The nature and the conditions for the delivery of certificate shall be laid down by COBAC Regulation (article 14 of the Regulation).

[8] Regulation N° 01/09/CEMAC/UMAC/COBAC of 20 April 2009 on the creation of the Central African Deposit Guarantee Fund.

[9] Article 1 of the aforementioned 20 April 2009 regulation.