A Risk-Based Supervisory Framework for Islamic Banks in Nigeria

Dalhatu, Suleiman Sani; Sharofiddin, Ashurov

The objective of this research is to propose a new bespoke risk-based supervisory framework (RBSF) for Islamic banks in Nigeria, that accommodates their specificities in terms of the “unique inherent risks” and “unique risk management control functions” of the Islamic banking business model. Current conventional banking based RBSFs fail to capture these specificities, which this new RBSF aims to bridge. The fast-growing systemic importance of the Islamic banking industry in various jurisdictions around the globe warrants effective supervision that recognises their specificities. The new RBSF gives a more accurate assessment of Islamic banks’ health (risk profile) which ensures more effective risk-based supervision of Islamic banks in a bid to improving their safety and soundness to promote overall financial system stability. The methodology adopted has been a qualitative approach through both content analysis of the current RBSF in Nigeria to identify gaps and a semi-structured interview (analysed with Atlas ti-8) to obtain expert recommendations on developing the new RBSF tailored for Islamic banks in Nigeria. The expected contribution of the Framework proposed by this study is that Islamic banks will be better supervised by regulators which will lead to safer Islamic banks and in turn promote the safety and soundness of the financial system at large. The study will also aid Islamic banks to better understand and manage the unique risks inherent in their line of business (Islamic banking). This paper also contributes to alleviating the current shortage of academic literature on the crucial regulatory subject of risk-based supervision in the Islamic finance industry.