Court referral and Nigeria's Financial Regulation Advisory Council of Experts (FRACE)

Zakariya Mustapha; Sherin Kunhibava; Aishath Muneeza Article Court referral and Nigeria's Financial Regulation Advisory Council of Experts (FRACE) ISRA International Journal of Islamic Finance Provided in Cooperation with: International Shari'ah Research Academy for Islamic Finance (ISRA), Kuala Lumpur Suggested Citation: Zakariya Mustapha; Sherin Kunhibava; Aishath Muneeza (2019) : Court referral and Nigeria's Financial Regulation Advisory Council of Experts (FRACE), ISRA International Journal of Islamic Finance, ISSN 2289-4365, Emerald, Bingley, Vol. 11, Iss. 2, pp. 206-225, https://doi.org/10.1108/IJIF-11-2018-0126 This Version is available at: https://hdl.handle.net/10419/236947 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Court referral and Nigeria’s Financial Regulation Advisory Council of Experts (FRACE) Zakariya Mustapha and Sherin Kunhibava Faculty of Law, University Malaya, Kuala Lumpur, Malaysia, and Aishath Muneeza International Centre for Education in Islamic Finance, Kuala Lumpur, Malaysia Abstract Purpose –This paper aims to highlight resolution of Islamic finance dispute by common law-oriented courts in Nigeria with respect to Sharīʿah non-compliance and legal risks thereof, as well as the lesson to learn from Malaysia in that regard. This is with view to ensuring Sharīʿah compliance and legal safety of Islamic finance practice as prerequisites for sustainability of the Nigerian Islamic finance industry. Design/methodology/approach –A qualitative method was used; interviews were conducted with different categories of experts and primary data collected in relation to Sharīʿah non-compliance and legal risks in adjudicating Islamic finance dispute by civil courts and the role of expert advice as basis for court referral to Financial Regulation Advisory Council of Experts. A doctrinal approach was adopted to analyse relevant legislative provisions and content analysis of secondary data relevant to applicable provisions in matters of finance before civil courts. Findings –The paper discovers an indispensable role of conventional financial regulations in sustaining Islamic finance industry. Appropriate laws for Islamic finance under the conventional framework foster legal safety and Sharīʿah compliance of Islamic finance activities in related cases handled by courts. Nigeria civil courts can aid sustainability of Islamic finance when so equipped and enabled by laws that address apparent Sharīʿah non-compliance and legal risks in judicial dispute resolution. Inadequate legal provisions for dispute resolution breeds Sharīʿah non-compliance and legal risks in Islamic finance, undermine its prospects and stand inimical to its sustainability. Research limitations/implications –This research is limited by its focus on Sharīʿah non-compliance and legal risks alone, which emanate mainly from judicial resolution of Islamic finance dispute by Nigerian civil courts. Practical implications –This research seeks to motivate a determined and deliberate regulatory action and change in approach towards addressing apparent risks associated with Islamic finance while resolving disputes therein by civil courts. It has implications on common law jurisdictions generally that adopt similar approach as Nigeria’s while introducing Islamic finance into their conventional finance framework. Originality/value –Dispute resolution and other regulatory functions of civil courts are important to Islamic finance though apparently overlooked while introducing Islamic finance in Nigeria as in other emerging jurisdictions. This research ascertains the role of the civil courts as indispensable for Islamic Financial Institution (IFIs) operations and demonstrates that such courts are needed for the development and © Zakariya Mustapha, Sherin Kunhibava and Aishath Muneeza. Published in ISRA International Journal of Islamic Finance. Published by Emerald Publishing Limited. This article is published under the Creative Commons Attribution (CC BY 4.0) licence. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this licence may be seen at http://creativecommons.org/licences/by/4.0/legalcode The authors would like to acknowledge the financial support provided by the Ministry of Higher Education Malaysia under UM-INCEIF Islamic Finance Research Grant No. MO010-2017. IJIF 11,2 206 Received 16 November 2018 Revised 2 January 2019 15 February 2019 5 May 2019 10 May 2019 31 May 2019 Accepted 31 May 2019 ISRA International Journal of Islamic Finance Vol. 11 No. 2, 2019 pp. 206-225 Emerald Publishing Limited 0128-1976 DOI 10.1108/IJIF-11-2018-0126 The current issue and full text archive of this journal is available on Emerald Insight at: www.emeraldinsight.com/0128-1976.htm sustainability of Islamic finance industry. The research demonstrates the end-to-end requirement of Sharīʿah compliance of Islamic financial transactions as absolute and needs be ensured and guarded at dispute resolution level by properly equipped courts. Keywords Nigeria, Dispute resolution, Sharīʿah compliance, Sharīʿah governance, FRACE, Sharīʿah advisory council, Islamic finance disputes, Sharīʿah issues, SAC Paper type Research paper Introduction Islamic finance has assumed an important place in Nigeria’s banking and finance scene since its formal and full-fledged commencement in 2012. It is today a multibillion naira industry that comprises several institutions offering Islamic financial products and services. These include one standalone Islamic bank (Jaiz Bank Plc), two Islamic windows of conventional banks (Sterling Bank and Stanbic IBTC Bank), two tak aful (Islamic insurance) companies (Jaiz Takaful, Noor Takaful) as well as sovereign  sukūk(Islamic investment certificates) issuances (by state and federal governments) among other Islamic capital market activities. In addition, there are a few Islamic asset/fund management and investment companies that operate in the country. The industry comes with tremendous economic gains for Nigeria. The development and growth of the Islamic finance industry certainly bring about the chances of disputes in the transactions. So long as Islamic finance subsists as a viable alternative to the conventional financial system, the resolution of its disputes remains fundamental and needs to be catered for in that regard. Disputes are generally considered inevitable in human dealings, especially in commercial transactions. Disputes could escalate to a point where contracts are terminally affected and, by extension, the underlying businesses as well. Resolving disputes amicably reduces the likelihood of differences or misunderstandings emanating from the operation of contractual relations. Dispute resolution mechanisms are crucial in the development of modern banking and financial dealings. Courts are central and play a critical role in this regard, as they determine underlying issues with finality to ultimately establish or disprove a particular contract or business conduct. For Islamic finance cases, courts need to have an appropriate jurisdiction with mastery and expertise in the subject of Islamic commercial jurisprudence. Notably, as the Nigerian Islamic finance industry operates under the conventional legal and regulatory regime, the courts have jurisdiction on banking and finance. Nigeria’s conventional courts’lack of expertise in handling matters of Islamic commercial jurisprudence and Islamic finance has been well established (Sambo and Abdulkadir, 2013;Oseni, 2011,2015a,2015b). Nonetheless, it is the courts that will hear such matters under Nigeria’s Constitution and the law. A similar fate awaits Islamic finance cases in several other jurisdictions; for instance, in the USA, the UK and emerging Islamic finance jurisdictions in Africa such as Kenya, Tanzania, Cameroon and South Africa, among others (Ainley et al., 2007;Faye et al.,2013; Sulayman, 2015;Colon, 2018). The current practice among some jurisdictions is to refer intricate Sharīʿah issues in Islamic finance cases for expert opinion, which in itself presents another challenge of uncertainty due to its variation and the subjectivity of individual experts’perceptions[1]. Accordingly, this motivated the researchers to examine how Islamic finance disputes bordering on Sharīʿah (Islamic law) issues would fare before the current Nigeria’s judicial dispute resolution mechanism. Obviously, an Islamic finance transaction would appear to be exposed to legal and Sharīʿah non-compliance risks[2] by subjecting it to the working and procedure of the regular civil courts that lack expertise in Islamic financial jurisprudence. Court referral and FRACE 207 This remains an anomaly that seems not to have received the deserved legal attention in relation to Islamic finance matters. While this situation holds, this research seeks to bolster and build upon existing regulatory and governance mechanisms. This is with a view to developing and enhancing the adjudicatory competence of the civil courts in Islamic finance matters towards a legally safe and Sharīʿah-compliant decision. This is by referral of questions of Islamic finance or Sharīʿah issues therein to a pool of Sharīʿah scholars and experts at the Central Bank of Nigeria’s (CBN’s) Financial Regulation Advisory Council of Experts (FRACE)[3] for the ascertainment of applicable Sharīʿah rules on such matters. It is an obvious fact that several categories of experts are required for the smooth operation and sustainability of the Islamic finance industry. A person who is knowledgeable and skilful in some specialised field of human endeavour by virtue of his learning and training can be said to be an expert in that field. Circumstance would warrant experts to provide a court of law with an opinion on their particular endeavour during an expertopinion elicitation. As far as Islamic finance is concerned, an expert can be a natural person of considerable learning, to a level of public and official recognition, in the theoretical and practical aspects of Islamic financial jurisprudence. An expert’s opinion is sought as an informal verdict over an issue by virtue of his expertise therein. Though not decisive as a verdict, being open to argument, an expert opinion is held probable or true in the expert’s mind (Ayyub, 2001). More often than not, such experts are required as crucial to ascertaining issues relevant to judicial resolution of Islamic finance disputes. Where helpful, it would be in line with the experts’viewpoints and deliberations thereon that such issues would be examined, analysed and determined by the courts in Islamic finance litigations. Without equivocation, under the extant Nigerian judicial system, this is the fate of matters arising from and out of the Nigerian Islamic finance industry. Against this backdrop, the researchers in this work conferred with scholars and stakeholders and examined and analysed their viewpoints in the context of relevant practices in other jurisdictions. Unlike most of the existing works on Nigeria’s Islamic finance dispute resolutions[4], this research employs a more distinct approach, i.e. qualitative, in examining relevant issues to propose reforms that will improve current practices. In effect, the research seeks to strengthen litigation, which is more readily available with respect to Islamic finance dispute resolutions. This is by facilitating the handling and addressing of Sharīʿah issues in Islamic finance disputes by relevant courts with the aid of standardised and harmonised experts’opinion to resolve such issues arising in Nigeria’s Islamic finance industry. The paper is structured in the following way. The first part states the questions and methodology of the research. The second part highlights Sharīʿah compliance as an inalienable fundamental that Islamic finance embodies and which should be ensured in every dealing. The third part details discussions on the significance of judicial resolutions in Islamic finance disputes; Nigeria’s judicial dispute resolution process for Islamic finance; and the legal and Sharīʿah non-compliance risks it entails. The fourth part highlights the establishment and functions of FRACE and the Advisory Committee of Experts (ACE)[5]as the Sharīʿah governance mechanism for the ascertainment of Sharīʿah compliance in Islamic financial transactions. This part elucidates FRACE’s Sharīʿah Governance Scope, Capability and Limitation. The fifth part examines court referral and the role of expert opinion in Islamic finance dispute resolutions; the general dearth of experts in Islamic commercial jurisprudence; and issues in court referral generally. This part also looks at court referral in Malaysia and how it works; and lessons therefrom for Nigeria. The sixth part charts the way forward for adjudicating Nigeria’s Islamic finance industry disputes. The last part advances recommendations and concludes the paper. IJIF 11,2 208 Research questions and methodology The research will delve into the following questions: RQ1. How has Sharīʿah governance been provided for in the Islamic finance industry in Nigeria? RQ2. How has Islamic finance judicial dispute resolution been provided for in terms of Sharīʿah governance under Nigerian law and what risks does Islamic finance face from extant judicial dispute resolution mechanisms? RQ3. How would court referral to FRACE work and what lessons can Nigeria learn from Malaysia in terms of Sharīʿah-compliant judicial dispute resolution? RQ4. What reform would court referral require to ensure that the lessons to be learnt are accommodated? In the quest of investigating and finding answers to these questions, a qualitative methodology was employed, involving primary data collection through in-depth interviews over a period of five months (September 2017 to January 2018), to address salient issues raised by the work. The interviews were conducted with different categories of experts on various aspects of the Islamic finance industry, comprising: a judge of the Shariah Court of Appeal, Abuja, Nigeria; the Executive Director of ISRA, international Sharīʿah scholar and member of FRACE; a university academician, Sharīʿah scholar, Advocate and Solicitor Supreme Court of Nigeria and member of the CBN’s FRACE; an executive Director (Legal and Compliance) and General Counsel of the IILM (International Islamic Liquidity Management Corporation) and Advocate and Solicitor Supreme Court of Nigeria; an in-house solicitor, Head, Drafting and Litigation Unit, Legal Department of Jaiz Bank Plc., a standalone Islamic bank in Nigeria; and an Islamic finance consultant, formerly Sharīʿah scholar at ISRA and member of Advisory Committee of Experts (ACE) Sterling Alternative Finance, an Islamic window of Sterling Bank Plc, Nigeria. Basically, all interviews were conducted on a face-to-face basis; three were held in Nigeria and three in Malaysia. Each interviewee was asked to discuss and share their understanding and opinions about: current provisions of law on Islamic finance in relation to judicial resolution of Islamic finance disputes in Nigeria; Sharīʿah governance of the judicial dispute resolution process; whether Nigerian civil courts are competently equipped to hear such disputes; legal risks and possible Sharīʿah non-compliance issues in judicial decisions of Islamic finance matters; lessons Nigeria can learn on Sharīʿah-compliant judicial dispute resolution; the way forward to aid the civil courts responsible for handling Islamic finance disputes and to sustain the burgeoning Islamic finance industry in Nigeria. Accordingly, the questions elicited decisive responses from the interviewees, which were transcribed verbatim. Where relevant, the responses are directly quoted and analysed under different sub-headings in this paper, in the build up to results and findings of the work. In the same vein, secondary data was also utilised comprising authoritative works on judicial dispute resolution generally and judicial processes for the settlement of Islamic Court referral and FRACE 209 finance disputes under a conventional framework in particular. Along with primary data, the analyses and discussions of the work are presented hereunder. Sharīʿah governance and inalienable fundamentals of Islamic finance Islamic finance is generally defined as conducting financial dealings in accordance with the rules of Sharīʿah. In other words, it is a financial system governed by Sharīʿah. Sharīʿah governance is said to encompass a series of organisational as well as institutional mechanisms established by regulators and players of the finance industry through which an institution offering Islamic financial services (IIFS) provides and safeguards effective independent supervision over processes and structures of governance to ensure it complies with the Sharīʿah (IFSB, 2009). The rules of Sharīʿah prescribe certain criteria of prohibitions and permissibility in dealings among people generally. The rules here basically comprise those on prohibition of rib a(usury and interest), maysir (speculation) and gharar (uncertainty including excessive risk). Additional prohibitions include iktin az (hoarding), i htik ar (monopolies), deception, gain without work or appropriate risk-taking for it, and investment in assets or activities that are non-  hal al (non-permissible) including gambling and alcohol (Ghassen and Lahrichi, 2017). The prohibition of these activities is an inalienable fundamental of the Sharīʿah. Unlike in conventional finance, where these activities are legal, the Sharīʿah provides alternatives that link capital and work in participatory operations so that the responsibility to pay/work for legitimate products and services and lawful risk-taking offset those prohibited activities. Everything not contrary to the precepts of the Sharīʿah is considered permissible. The Sharīʿah is meant to bring yusr (ease) to people, and Islamic finance is meant to offer a just and innovative financing alternative in accordance with the dictates of the Sharīʿah (Ayub, 2007;Ainley et al.,2007; Ahmed, 2014;MIFC, 2014;Rusni, 2016). Sharīʿah governance in Islamic finance embodies compliance with Sharīʿah in the way and manner institutions that offer Islamic financial services are operated. This includes how their financial contracts, services and products are initiated, conducted and concluded. In other words, Sharīʿah governance is synonymous to the end-to-end requirement of Sharīʿah compliance in Islamic financial practices and the operations of IIFS. Relevance of courts in the adjudication of Islamic finance disputes It is obvious that the objective of end-to-end Sharīʿah compliance in Islamic finance practices could be defeated if such compliance cannot also be assured at the judicial dispute resolution stage (Rasyid, 2013). Regardless of whether Sharīʿah compliance has been attained at the level of products/services development or contract performance, it is vital to ensure Sharīʿah compliance during judicial dispute resolution for a couple of reasons. A properly equipped court of law will facilitate the attainment of end-to-end Sharīʿah compliance by compelling Sharīʿah governance with judicial force. Conversely, an illequipped court may negate the attainment of that objective by its omission or commission. This could arise in the event a Sharīʿah-compliant Islamic finance product/service becomes the subject of a pronouncement and/or interpretation of its enabling law by the court in the light of other existing laws[6]. Importantly, a court’s judgment serves as a precedent for other courts to potentially follow, in addition to subsequent and future cases where such pronouncements may be deemed binding as long as the dispute relates to similar facts and issues (Carnwath, 2012). This rule, known as judicial precedent, is an established common law doctrine that makes the lower court bound to follow superior court judgments. In view of this legal principle, it is the researchers’view that Sharīʿah compliance of Islamic financial transactions can be IJIF 11,2 210 ensured and sustained through judicial precedent as much as by the legal safety of the transactions themselves. Islamic finance and the adjudication of its matters under Nigerian law Islamic finance in Nigeria is practiced within the legal and institutional framework for conventional finance (Daud et al., 2011). Except for CBN’s regulatory guidelines that were issued between 2010 and 2011[7], no legislation wholly envisages the idea, object and fundamentals of the Islamic finance industry or any of its peculiarities (Momodu, 2013; Oladimeji et al., 2015). Except for section 61 of the Bank and Other Financial Institutions Act (BOFIA) 2004 that contemplates a ‘profit-loss sharing’bank type, Nigeria’s legal regime for the financial sector is altogether bereft of provisions contemplating Islamic finance and/or adjudicating its disputes. It is submitted that section 61 does not and cannot be the legal basis for the whole of Nigeria’s Islamic finance industry that comprises Islamic banks, tak aful and Islamic capital market activities. Under this circumstance, the operations of IIFS are eminently open to legal and Sharīʿah non-compliance risks (Lahsasna, 2014)[8]. This is particularly more so in the likely event Islamic finance disputes become the subject of determination before civil courts that lack expertise in Islamic finance (Buang, 2007; Hikmany and Oseni, 2016). The safety of a development-driven Islamic finance practice generally requires the right mix of positive and deliberate legislative as well as policy and regulatory actions. These would facilitate the attainment of financial inclusion of Muslims among other economic development and financial gains anticipated from the introduction of the Islamic finance industry in Nigeria (Soludo, 2007;CBN, 2010b)[9]. However, the Nigerian situation would contrast to the approach in Malaysia where laws and/or amendments of existing legal and institutional frameworks of finance were provided for to accommodate the introduction of a parallel Islamic finance system and its peculiarities (Mirakhor and Haneef, 2014). Under Nigeria’s 1999 Constitution (as amended), banking and finance are items that are categorised under the Exclusive Legislative List, which only the Federal Government can and does legislate[10]. The Constitution provides for Federal and State High Courts under sections 251 and 272 respectively and vests them with exclusive jurisdiction over banking and finance matters. This, by necessary implication, includes Islamic finance matters. It also implies the determination of Islamic finance matters in accordance with existing laws applicable to conventional finance (Ostien and Dekker, 2010). As the High Courts are primarily expert in hearing conventional banking and finance matters, it is contended that they would be ill equipped to hear Islamic banking and finance disputes, particularly on Sharīʿah issues[11]. However, Nigeria’s Islamic finance industry being new and tender, it is noteworthy that no case on Sharīʿah issues in Islamic finance has so far come to the courts in Nigeria. Nothing, however, can guarantee that one will not come up at any time. As the industry grows and develops, disputes on such issues are virtually inevitable, as was the case in other jurisdictions[12]. In the course of conducting the interviews for this research, the question was raised of whether Nigerian civil courts are equipped and competent enough to determine Sharīʿah issues in Islamic finance disputes. One respondent, a judicial officer, was quick to respond thus: As far as Nigeria’s legal system and judiciary are concerned, I don’t think there is anything in place regarding equipping Nigerian judges with Islamic finance knowledge. We have the National Judicial Institute (NJI), which is the body responsible for the training and re-training of judges I Court referral and FRACE 211 attended so many programmes initiated by the National Judicial Institute but I don’t think Islamic finance is part of it[13]. When confronted with the same question, an Islamic bank’s solicitor and Islamic finance practitioner retorted[14]: No, not at all. Why? This is because at the moment they have dearth of knowledge about Islamic finance principles. The judges in Nigerian courts were trained to adjudicate matters strictly based on the received English common law as well as Nigerian local laws, which are devoid of Islamic principles or devoid of Sharīʿah. So the challenge, which expectedly would come up, is how to handle issues relating to Sharīʿah principles. So, we are going to have some challenges in these judges deciding cases on Islamic finance because of their background. However, some respondents hold the conviction that from the perspective of contracts alone the courts are equipped to determine matters, but they expressed their opinion that, unless aided by proper expert evidence and opinion, the courts are incompetent to delve into Sharīʿah issues. According to one of the respondents[15]: Basically, the courts are equipped in terms of contract [...] that is focusing on contractual issues, which globally are handled by the civil courts [...].When it comes to Sharīʿah issues, then there are problems, particularly if the Sharīʿah issue pertains to or if a party comes with Sharīʿah noncompliance defence: that the transaction is not Sharīʿah-compliant. How would the courts handle it? Here, the courts are not equipped [...] and that is where the problem lies. Now, under the common law as you are aware in Nigeria, the best they can rely on is expert opinion. Another respondent[16] opined similarly: Currently, I believe the courts are not equipped to decide on cases of Islamic banking and finance, simply because knowing Islamic law is one thing and being versatile and having a grip of the rudiments of Islamic banking and finance principles is entirely another. Without exaggerations, therefore, I strongly believe the courts would find it rather substantially difficult to listen to Islamic finance disputes with in-depth accuracy and full comprehension [...] The only possible way out is to invite experts to give opinion, which the judge might consult as a way of persuasive evidence. From the researcher’s observation, this situation is anomalous to Islamic finance practices. Courts’lack of expertise in Islamic finance fosters uncertainty and the risk of such courts delivering rulings or judgments inimical to Islamic financial services, products and contracts or to render certain transactions nugatory. Accordingly, the court as an indispensable dispute resolution forum needs to be aided in handling Islamic finance matters. This is needful as part of Sharīʿah governance of such matters so that decisions on them can be Sharīʿah-compliant and legally safe for Nigeria’s Islamic finance industry. Establishment of FRACE, Sharīʿah governance and ascertainment of Sharīʿah in Nigeria’s Islamic finance industry As a governance strategy, certain mechanisms are established by the CBN via regulatory guidelines to provide for Sharīʿah governance as well as ascertainment of relevant and applicable rules of Sharīʿah for Islamic finance practice in Nigeria. These mechanisms are located at the level of both individual financial institutions and the CBN. They are bodies of Islamic finance experts which regulations require individual IFIs (including Islamic windows of conventional banks) and the CBN to establish and maintain in their respective domains. The composition and power of these governance bodies vary between those of individual IFIs and that of the CBN. IJIF 11,2 212 For the individual IFIs, paragraph 1 of CBN Guidelines on Sharīʿah Governance for Noninterest Financial Institutions in Nigeria 2011 (Sharīʿah Governance Guidelines)[17] requires all Non-interest Financial Institutions (NIFIs)[18] that are subject to supervision of the CBN to establish a Sharīʿah Advisory Council (SAC) as an integral component of their governance structure. Due to regulatory restrictions, the title “Sharīʿah Advisory Council” was changed to Advisory Committee of Experts (ACE) by the CBN under the Guidelines for the Governance of Advisory Committees of Experts for Non-Interest (Islamic) Financial Institutions in Nigeria 2015. An appointment into an ACE, which shall comprise three members under item 5.3.1 of the 2010 Guideline, is subject to approval of the CBN. Under item 5.2 of the 2010 Guidelines (CBN, 2010a), qualifications of persons to be appointed members of an ACE include being skilled in Sharīʿah (Islamic Law) and/or usūl-al-fiqh (Islamic jurisprudence), a sound mastery of written Arabic, including proficiency in spoken Arabic as well as English, in addition to acquaintance with the field of business and finance notably Islamic finance among others. The ACE is in charge of all decisions on Sharīʿah as well as opinions and views thereon; it is responsible for advice on Sharīʿah matters to the NIFI’s management and board in order to ensure Sharīʿah compliance in the institution’s operations. In order to operate effectively, the ACE plays its roles independently, with confidentiality, competence and regularity duly enshrined as its working principles. An ACE that operates independently would garner public confidence and thus bring about the desired expansion and development of the Islamic finance industry generally. According to paragraph 8(ii), the Guidelines require a NIFI to be responsible for the implementation of its ACE’s advice on relevant matters. Paragraph 9 requires all cases of non-compliance with the Sharīʿah to be recorded and reported to the Board of Directors (BOD) by the ACE which shall also recommend appropriate remedial measures. If such non-compliance is not addressed, or no remedial measures are taken by the concerned NIFI, the ACE shall inform the CBN. However, the Guidelines appear silent as to regulatory sanctions against the NIFI in this circumstance. Paragraph 9.2 of the Sharīʿah Governance Guidelines provides that when conflicting opinions do not give way to a unanimous position pertaining to a Sharīʿah ruling among an ACE’s members, the NIFI’s BOD is mandated to refer the matter to FRACE at the CBN. The FRACE is authorised to determine the position on such matter with finality. Established in 2013 as a national advisory body on Islamic banking and finance, FRACE is provided for and located at the CBN originally by virtue of section 9.1 of CBN Guidelines for the Regulation and Supervision of Institutions Offering Non-Interest Financial Services in Nigeria (Non-Interest Banking Guidelines)[19]. Accordingly, the CBN has issued guidelines that specifically direct the activities and general operations of FRACE. The guidelines, designated as “Guidelines on the Governance of Financial Regulation Advisory Council of Experts for Non-Interest (Islamic) Financial Institutions in Nigeria, 2015”(FRACE Guidelines), specifies among others the responsibilities and duties of this experts’council as well as its composition and members’qualifications. The FRACE is the highest Sharīʿah governance body in Nigeria for the Islamic or non-interest finance industry. Paragraph 4.0 of the FRACE Guidelines states that it is to be composed of a minimum of five members and that appointment thereto is made by the CBN for two years. (Subject to satisfactory performance, it is renewable for another two years). A member shall not be a corporate body or institution but an individual person. It is required of the member to have the minimum requisite skills, knowledge and expertise in the field of usūl-al-fiqh, having specialised in Islamic commercial jurisprudence. In addition, a member shall demonstrate expertise and mastery in Sharīʿah and proficiency in written and spoken Arabic and Court referral and FRACE 213 judicial prowess. This is in addition to mandating them to refer to FRACE in matters of Sharīʿah and for its ascertainment to be applied to relevant cases. Accordingly, FRACE should have its Sharīʿah resolutions published to be referred to by the courts to facilitate trials. The courts would refer to FRACE directly only in matters where no resolution has been issued yet. However, unlike the current Malaysian position where the ruling of SAC shall be binding, and to avoid questions of constitutionality, it should be up to the courts upon receiving the ruling of FRACE to determine whether to apply it to the facts of the case. That discretion should be left to the courts. Further, as in Malaysia, the CBN should issue standards for the Islamic finance industry based on the rulings of FRACE. In addition, training to equip judges with requisite skills and knowledge in Islamic financial jurisprudence should be made part of judges’continuous mandatory judicial training. When the establishment of FRACE is backed by a law that arms it to offer binding advice to the court of law, the stage will then be set for sound, legally safe and Sharīʿah-compliant decisions from civil courts in Islamic finance matters. For these to take off and be operational, a new law needs to be enacted, the equivalent of the Malaysian IFSA 2013, whereby Islamic finance and all issues pertaining to Sharīʿah governance can be catered for. Additionally, the CBN Act 2007 should be amended to explicitly provide for Islamic finance and NIFIs within the regulatory purview of the CBN. Again, the laws so enacted and/or amended need to categorically provide for Sharīʿah governance and compliance in Islamic finance as a statutory duty upon NIFIs, with appropriate sanctions in the event of non-compliance. When legal issues become intertwined with Sharīʿah non-compliance issues due to the absence of legislation and requisite personnel expertise, stakeholders may find it difficult to attain the desired sustainability of Islamic finance. Hence, it is the researchers’view that a statutorily backed FRACE, issuing advice and resolutions to competently equipped courts would assuage the legal and Sharīʿah non-compliance risks and establish a sound practice that is robust and sustainable in Nigeria. In addition, lawyers and judicial officers in Islamic finance litigation are not left out in the quest to build a competent judiciary for Islamic finance dispute resolution. Notes 1. This practice takes place in both civil and common law-based legal systems as, for instance, illustrated by the UK case of The Investment Dar Company KSCC v. Blom Developments Bank Sal (2009) EWHC 3545 (Ch). 2. Risk of Sharīʿah non-compliance has been defined as the “risk that arises from an IFI [Islamic financial institution] failure to comply with the Sharīʿah rules and principles determined by its Sharīʿah board or the relevant body in the jurisdiction where the IFI operates”(IFSB, 2005). This definition appears restrictive, as it does not envisage the possible failure to apply the required rule of Sharīʿah in judicial dispute resolutions; i.e. where the court of law upholds an otherwise Sharīʿah non-compliant transaction in its decision over a particular Islamic finance dispute. This is a Sharīʿah non-compliance event occasioned by legal risk and it is the type of Sharīʿah non-compliance risk envisaged and referred to by this research work. 3. Financial Regulations Advisory Council of Experts (FRACE) is an essential component of the Sharīʿah governance structure for Islamic financial institutions (IFIs) in Nigeria. Located at the Central Bank of Nigeria (CBN), it functions as a national Sharīʿah governance body. IJIF 11,2 220 4. Most of the works on Nigeria’s Islamic finance litigations employed traditional legal research technique of doctrinal method. Examples of such works include Sambo and Abdulkadir (2013); Oseni (2011, 2015a, 2015b), among others. 5. Advisory Committee of Experts (ACE) is part of the Sharīʿah governance structure established at the level of individual IFIs in Nigeria. It is the equivalent of Sharīʿah Committee or Sharīʿah Board as designated in other jurisdictions. 6. The validity of law or regulation that backs the formulation of a particular product/service would be said to hang in the balance in the event of conflict with other laws. This is notwithstanding the effectiveness and compliance levels with the law or regulation. Thus, the certainty of the court’s interpretation/pronouncements, where necessary, must be ensured through decisive and positive harmonisation of current laws. The power of the court to make such interpretation/ pronouncements is an established principle of the law, enshrined in s. 315(3) of the 1999 Constitution of Nigeria (as amended). 7. Principal of such guidelines are the “Guidelines for the Regulation and Supervision of Institutions Offering Non-Interest Financial Services in Nigeria”, issued via circular No. FPR/DIR/CIR/GEN/ 01/010B on 13 January 2011. Subsequently, two other supporting guidelines, provided for under the principal one, were issued: (1) “Guidelines on Shariah Governance for Non-Interest Financial Institutions in Nigeria”; and (2) “Guidelines on Non-Interest Window and Branch Operations of Conventional Banks and Other Financial Institutions”. The CBN issued the principal guidelines by virtue of its power as the regulator of the Nigerian finance industry under the provisions of section 33(1)(b) of the CBN Act 2007 and sections 23(1)52; 55(1); 59(1)(a) and 61 of Banks and Other Financial Institutions Act (BOFIA) 2004 (as amended). 8. As an end-to-end requirement, Sharīʿah compliance is an all-encompassing phenomenon in Islamic financial operations. Sharīʿah compliance involves everything in Islamic finance and incidences of non-compliance must be eliminated in all ramifications. Certain aspects of Islamic financial operations have been discerned and identified as susceptible to posing Sharīʿah non-compliance risk such that attention needs to be paid on them. These, among others, include legal documentation and its execution; marketing and implementing a financial service or product; the structure of a financial service/product/facility; the conditions and/or terms of the service/product/facility; advertisement as well as related information dissemination system about the service/product/facility, including broadcasting. 9. Nigeria introduces Islamic finance to garner financial inclusion, particularly regarding its Muslim majority population, as part of the plan to achieve its Financial System Strategy 2020 (FSS2020), popularly known as Vision-2020. The strategy is aimed at enabling Nigeria to become one of the world’s 20 largest economies by the year 2020. 10. Section 4(1)-(3) and Part I, Second Schedule, 1999 Constitution of the Federal Republic of Nigeria (as amended). In this regard, the principal legislation on banking and finance in Nigeria, enacted by the National Assembly, is the Banks and Other Financial Institutions Act (BOFIA), CAP.B3, Laws of the Federation of Nigeria (LFN) 2004 (as amended). 11. Already there are judicial decisions by the Court of Appeal and the Supreme Court of Nigeria to the effect that jurisdiction in matters bordering on finance, land as well as any contractual dealing (other than personal status) vests with High Courts. This was illustrated by the courts in Alkali v Alkali (2002) 1 NWLR (pt. 748), at 453; and Magaji v Matari (2006) 8 NWLR (pt. 670), at 722. 12. From the onset, introducing Islamic finance in Nigeria came with some controversies that even prompted a legal action against the whole initiative. This was an action instituted by Sunday Ogboji against the Central Bank of Nigeria (CBN) in 2012 at Abuja Federal High Court [Ogboji v. Central Bank of Nigeria (CBN) (unreported)], suit no. FHC/ABJ/CS/710/2011). The action challenged the legality of the CBN Governor’s action in issuing guidelines for establishing an Court referral and FRACE 221 Islamic bank and licensing such a bank under current laws. Although the CBN succeeded in challenging the locos standi of the plaintiff, the court nonetheless declared, among others, that the CBN had no power, within contemplation of s.66 of BOFIA to designate a specialized bank as ‘Islamic’and the power to do so was with the National Assembly by an Act or amendment to existing laws; and that issuing a licence to a bank so designated and guidelines to govern it were illegal as well. While dismissing the action, the court reiterated that it would have been competent if it were instituted by the Attorney General of the Federation, not an individual. Whereas these declarations are not on record (the action been dismissed on technicality), they portend the vulnerable legal footing of the Islamic finance industry in Nigeria and the possibility of adverse outcomes from litigating Islamic finance matters. 13. A judge of Shariah Court of Appeal, Abuja, Nigeria, text of interview, Wednesday 18 October, 2017. NB: All respondents interviewed in this research agree to be identified. 14. Head, Drafting and Litigation Unit, Legal Department, Jaiz Bank Plc. (Nigeria), text of interview, Wednesday 18 October 2017. 15. Executive Director (Legal and Compliance) and General Counsel, International Islamic Liquidity Management Corporation (IILM), Advocate and Solicitor Supreme Court of Nigeria, text of interview Wednesday 6 September 2017. 16. An Islamic finance consultant, formerly Sharīʿah scholar at ISRA, member Advisory Committee of Experts (ACE) Sterling Alternative Finance, an Islamic window of Sterling Bank Plc, Nigeria, text of interview Thursday 5 October 2017. 17. Issued via Circular FPR/DIR/CIR/GEN/01/010B on June 2011, pursuant to CBN’s general regulatory powers under section 33(1)(b) of the CBN Act 2007. 18. By regulation in Nigeria, corporate affairs shall not appear to have religious, ethnic, regional affiliations. Thus, under section 39(1) Banks and Other Financial Institutions Act (BOFIA) 2004 (as amended), it is provided that no corporate entity shall bear the word ‘Islam’or ‘Islamic’or ‘Shariah’among others in its corporate name. Accordingly, Islamic bank and financial institutions in Nigeria are referred to as non-interest banks and financial institutions and they are officially so registered and licenced. See Central Bank of Nigeria (CBN) Guidelines on Shariah Governance for Non-interest Financial Institutions in Nigeria, 2010. 19. Issued via Circular No. FPR/DIR/CIR/GEN/01/010 in January 2011, pursuant to CBN’s general regulatory powers under section 33(1)(b) of the CBN Act 2007 and sections 23(1) 52; 55(2); 59(1)(a); 61 BOFIA 2004 (as amended). 20. The Executive Director ISRA, international Sharīʿah scholar and member of FRACE, text of interview, Wednesday 27 September 2017. 21. The Executive Director (Legal and Compliance) IILM, op cit. 22. The Executive Director, ISRA, op cit. 23. Introducing Islamic banking and finance and their governance are initiatives of economic and public interest; the responsibility of protecting investments therein, their legal safety and Sharīʿah compliance rests with the government and its relevant organ such as the legislature (Nigeria National Assembly). It is an initiative that cannot be left to just a regulatory agency (the CBN in the case at hand) to handle. 24. A university academician and member of FRACE, text of interview, Tuesday 17 October 2017. 25. Sections 18 and 28 of IFSA 2013. 26. Section 28 of IFSA 2013 states in part “(1) that an institution shall at all times ensure its aims and operations, business, affairs and activities are in compliance with Shariah; (2) that a compliance by an institution with any ruling of the BNM’s Shariah Advisory Council on any of the institution’s aims and operations, business, affair or activity, shall be deemed to be in compliance IJIF 11,2 222 with Shariah; and (3) that any person who contravenes the Shariah compliance duty commits an offence and shall, on conviction, be liable to imprisonment for a term not exceeding eight years or to a fine not exceeding twenty-five million ringgit or to both”. References Ahmed, H. 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(2016), “Sharīʿah non-compliance risk and its effects on Islamic financial institutions”,AlShajarah, Vol. 21 No. 3, pp. 21-39. Sambo, A.O. and Abdulkadir, B.A. (2013), “Sharīʿah, constitution and adjudication of Islamic finance disputes in Nigeria”, in Dandago, K.I., Muhammad, D. and Oseni, U.A. (Eds), Essentials of Islamic Banking and Finance in Nigeria, Benchmark Publishers Limited, Kano, pp. 120-132. Soludo, C.C. (2007), “Nigeria’sfinancial system strategy 2020 plan: our dream”, paper presented at the Financial System Strategy 2020 [FSS2020] International Conference Abuja, 18-20 June, Abuja, Nigeria, available at: www.cbn.gov.ng/fss/mon/Nigeria’s%20Financial%20System% 20Strategy%202020%20Plan%20-%20OUR%20DREAM_Prof.%20Soludo.pdf (accessed 24 July 2018). Sulayman, H.I. (2015), “Growth and sustainability of Islamic finance practice in the financial system of Tanzania: challenges and prospects”,Procedia Economics and Finance, Vol. 31, pp. 361-366. Tan Sri Abdul Khalid Ibrahim v. Bank Islam Malaysia Bhd (2012), available at: www. kehakiman.gov.my/judgment/file/W-02(IM)-3019-12-2011.pdf (accessed 28 January 2018). Yatim, H. (2019), “Federal court: Bank Negara’s SAC findings on Islamic finance binding on civil courts”, The Edge Markets, 10 April, available at: www.theedgemarkets.com/article/banknegaras-sac-findings-islamic-finance-binding-civil-courts (accessed 8 May 2019). IJIF 11,2 224 About the authors Zakariya Mustapha is currently pursuing his PhD at the Faculty of Law, University of Malaya, Malaysia. Zakariya practiced law in Nigeria where he is an advocate and solicitor of Nigeria’s Supreme Court since 2008. He has published numerous articles and has presented research papers in national and international conferences. Sherin Kunhibava, PhD, is a Senior Lecturer at the Faculty of Law, University of Malaya. She has published in numerous journals locally and internationally. Dr Khunibava’s area of research includes Islamic fintech, sustainable financing and dispute resolution. Sherin Kunhibava is the corresponding author and can be contacted at: [email protected] Aishath Muneeza, PhD, is an Associate Professor at the International Centre for Education in Islamic Finance (INCEIF), Kuala Lumpur, Malaysia. She sits in various Sharīʿah advisory bodies nationally and internationally and is Chairman for many of these Sharīʿah advisory bodies including the apex Sharīʿah Advisory Council for the capital market in the Maldives. For instructions on how to order reprints of this article, please visit our website: www.emeraldgrouppublishing.com/licensing/reprints.htm Or contact us for further details: [email protected] Court referral and FRACE 225