Understanding FRC’s Role in Non-Interest Finance Regulation  

Dike Onwuamaeze

Non-interest finance has become a significant driver of financial inclusion, economic growth, and investment diversification across the world. From Southeast Asia to the Middle East, financial systems are increasingly embracing structures that do not rely on traditional interest-based lending. Investors, corporations, and regulators alike are recognising the benefits of ethical, risk-sharing, and transparent financial solutions that open new avenues for capital deployment and risk management.

Nigeria, with its growing economy and dynamic financial landscape, is no exception. The sector has expanded rapidly over the past decade, attracting both local and international participants eager to leverage alternatives to conventional lending. As this market matures, the need for clear oversight, robust frameworks, and regulatory guidance becomes increasingly urgent to protect stakeholders and ensure sustainable growth.

The Financial Reporting Council (FRC) has emerged as a key player in shaping this evolving financial ecosystem. By setting reporting standards, ensuring compliance, and guiding market participants, the FRC plays a pivotal role in fostering transparency, accountability, and investor confidence. Its work helps bridge the gap between global best practices and local market realities, ensuring that Nigeria’s non-interest financial sector develops on a solid foundation.

As the world continues to pivot toward diverse financial models, understanding the role of regulatory institutions in safeguarding these systems becomes essential. Strong regulation not only promotes confidence among investors and clients but also ensures that non-interest financial solutions remain resilient, competitive, and aligned with international standards.

Precisely, non-interest finance refers to a system of financial activities that operate in line with established ethical and commercial principles, including the prohibition of interest, the use of profit and loss sharing arrangements, asset-backed financing, leasing, and partnership-based investments.

Non-Interest Finance is not new to Nigeria. It has been part of the country’s financial system since 2011, following the licencing of Islamic banks, thereafter, takaful insurance operators, and other capital market operators, including the introduction of Sukuk bonds.

Over the years, non-Interest finance has made measurable contributions to Nigeria’s economic development. Sovereign Sukuk issuances have funded major national infrastructure projects, including roads and bridges across multiple states.

Takaful insurance has expanded access to ethical insurance solutions for individuals and businesses, while Islamic banks and finance institutions have supported small and medium-sized enterprises through partnership-based financing structures.

Today, the Non-Interest Finance industry in Nigeria is valued at over N2.5 trillion in 2023 and continues to grow as demand for alternative and ethical finance increases.

As the sector expanded, the FRC identified a critical reporting challenge. When non-interest finance transactions are presented strictly under conventional IFRS standards, significant inconsistencies arise. Profit-sharing arrangements, asset-backed structures, lease-based financing, and risk-sharing mechanisms do not always fit neatly into interest-based accounting models.

This can result in financial statements that do not fully reflect the economic substance of transactions, potentially affecting credibility, transparency, comparability, and investor decision-making.

In line with its statutory mandate under the Financial Reporting Council of Nigeria Act 2011, as amended, to develop, adopt, and enforce accounting and financial reporting standards in the public interest entities, the Council reviewed global best practices for Non-Interest reporting.

Following this review, the Council determined that the standards issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) provide the most appropriate framework to address these gaps for Non-Interest Finance Operators in Nigeria.

These institutions operate on principles that are fundamentally different from conventional finance, particularly in the areas of interest prohibition, risk sharing, asset backing, and ethical investment. The distinct features require specialised financial reporting, governance, and disclosure standards that faithfully represent the substance of such transactions.

AAOIFI standards are internationally recognised and widely applied in jurisdictions with developed Non-Interest Finance markets, providing guidance on financial accounting and reporting, governance, auditing and assurance, and ethical and professional conduct.

The integration of AAOIFI standards into Nigeria’s financial reporting framework is a technical and regulatory initiative designed to improve transparency, consistency, and investor protection within the Non-Interest Finance sector. It will also enhance the credibility and cross-border acceptability of Nigerian Non-Interest Finance products, support financial inclusion, and strengthen market discipline.

This approach is consistent with global practice. Many multi-religious and secular countries, including the United States, the United Kingdom, Turkey, Switzerland, Malaysia, South Africa, and the United Arab Emirates, have adopted regulatory and reporting frameworks that accommodate Non-Interest Finance alongside conventional financial systems. These frameworks exist to reflect economic realities, attract capital, and maintain high standards of financial reporting without altering national identity or governance structures.

Globally, Non-Interest Finance represents a multi-trillion-dollar market. By aligning with internationally accepted standards, Nigeria positions itself to attract increased foreign direct investment into key sectors of the economy, including infrastructure, manufacturing, and enterprise development. Clear and credible reporting standards reduce uncertainty, enhance investor confidence, and support sustainable economic growth.

The FRC has continued to express its commitment to transparency, stakeholder engagement, and national cohesion.

The adoption of AAOIFI standards is not ideological or aligned with any intention. It is a professional, market-driven response to the growth of the industry in Nigeria. It is aimed solely at strengthening financial reporting and protecting investors.

In this context, the FRC’s oversight is more than a procedural necessity, but a strategic enabler for the future of Nigeria’s financial markets. As the global financial landscape continues to embrace alternatives to conventional interest-based models, the importance of robust oversight cannot be overstated. The FRC’s role in regulating and guiding non-interest financial institutions ensures that Nigeria remains aligned with international best practices while protecting investors, promoting transparency, and fostering sustainable growth. Its work is crucial in building trust, enhancing market stability, and positioning Nigeria as a competitive player in the evolving global financial ecosystem.

Looking ahead, the future of Nigeria’s non-interest financial sector depends not only on innovative products and market participation but also on the depth of regulatory foresight and enforcement. By setting clear standards, ensuring compliance, and promoting accountability, the FRC enables this sector to thrive responsibly. In doing so, it transforms regulatory oversight from a mere administrative function into a strategic driver for long-term economic development, investor confidence, and inclusive financial growth.