National and Global Islamic Financial Architecture:
Problems and Possible Solutions for the OIC Member Countries
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the adverse impact of tax regimes on Islamic finance which was identified to include a non-
level playing field between the Islamic financial institutions (IFIs) and Conventional financial
institutions (CFIs) as well as double taxation.
The guidelines highlighted all the tax issues in various Islamic financing products and
suggested the tax treatment in them. Specifically it discusses the unique features of sukuk and
provides that the coupon/gains arising out of any sukuk arrangement should be treated as
interest accruing to the financial institution and be subject to the provisions of the Companies
income Tax Act and that sukuk should be treated as conventional bonds for the purposes of tax.
Specifically, the guidelines give a general provision for any Islamic finance structure that might
arise and that is not discussed in the guidelines as follows: “Wherever Withholding Tax (WHT),
Value Added Tax (VAT), Capital Gains Tax (CGT) and Stamp Duty (SD) arise twice in any
Islamic finance structure on a single transaction different from the product/services discussed
in the guidelines, the second transaction between the IFI and its customer shall be equivalent
to financial transaction similar to bank/customer relationship in CFI”.
Dispute Settlement/Conflict Resolution Framework and Institution
Dispute resolution in Nigeria’s financial sector is achieved in two common ways: litigation and
arbitration. Litigation involves the Federal High Court while arbitration involves an approved
arbitrator for the purpose of settlement. For effective dispute/conflict resolution, the Bankers’
Committee (comprising of CBN and all deposit money banks) has initiated some resolution
mechanisms by establishing the Ethics and Professionalism Sub-committee for settling
disputes between banks. In case of litigation, according to Section 25(1) (d) (j) of the
Constitution of the Federal Republic of Nigeria 1999, it is only the Federal High Court that can
decide on cases relating to banking, banks, the Central Bank of Nigeria, other financial
institutions, bankruptcy and insolvency. Thus, the dispute/conflict resolution mechanism does
not differentiate between Islamic and conventional finance. However, in the case of Islamic
financial institutions, the contract document signed with the customer provides for arbitration
between the bank and the customer with one member of the Advisory Committee of Experts
(ACE - the bank’s shari’ah board) in attendance, and, where a case cannot be resolved, the case
is referred to an appropriate Court for adjudication. Since Nigeria has yet to witness any court
cases involving Islamic finance and since Nigeria’s laws are fashioned after English laws, any
such cases that may occur will likely be adjudicated in a similar manner as was handled in
some Islamic finance cases in the UK as reported by Hasan and Asutay (2011).
Bankruptcy and Resolution of Banks
The laws governing the bankruptcy and resolution of banks are embedded in Sections 35–42 of
Banks and Other Financial Institutions Act 1991 and Sections 2, 37 – 44 of the Nigerian Deposit
Insurance Corporation (NDIC) Act. It states that where a bank is likely to become unable to
meet its obligations or is about to suspend payment to any extent or it is insolvent or where
after an examination the CBN is satisfied that the bank is in a grave situation, the Governor of
the CBN may take drastic actions in order to revive the bank. If after taking such actions the
condition of the bank does not improve, control and management of the bank is transferred to
the NDIC for further management. However, in the event that the bank managed by the NDIC
cannot be rehabilitated, the NDIC can recommend to the CBN other resolution measures that
may include the revocation of the bank’s license. Once the license is revoked, the NDIC should
apply to the Federal High Court for a winding up of the bank.