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Legal and Financial Regulatory Framework of Mozambique: The Possible Inclusion of Islamic Banking and Finance

ByCarino Modan and Rusni Hassan

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1. Background

2. Mozambique: Banking Laws and Legal Framework - Scope and Findings.

3. Conclusion and suggested way Forward

Agenda

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Background

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Mozambique accepted assistance from IDB to facilitate the establishment of the necessaryframework for the institution of Islamic Finance in the country.

Based on Islamic Finance principals, a review of the current financial system legal and regulatoryframework of Mozambique, including the court and arbitration system.

Findings of this research aim to assist decision-makers, regulators and other stakeholders to:

Understand the level of inclusion of IF or to what extent it can be practiced; and

If changes are required, highlight the conflicting legal aspects; and

Suggest a way forward.

Background

Motivation and expected outcome

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Financial Sector considered to be underdeveloped18 commercial banks holding 95% of the total assets of which 85% goes to 03 major banksSource: 2014 - African Economic Outlook

166 institutions registered at the Central Bank as microfinance (MFI) or micro banking, but only 65 are active and majority of them located in the rural areas. Source: 2015 – Central Bank Website

Mozambican stock Exchange, BVM, currently lists only 3private institutions though they represent 3% of the GDP.

Background

Mozambique: Current Financial Sector

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Background

Islamic Finance in the Region

Out of 49 Sub-Saharan Africa countries, by end-2012, only 09 have implemented Islamic Banking.

SADC Region: South-Africa (1989) - Al Baraka Bank/First National Bank (FNB), Absa Bank and HBZ Bank house – Takaful (Yes); Capital Market (2014); Mauritius (1998) - Century Banking Corporation (CBC) / Islamic cooperative credit Union, Al Barakah Cooperative Society Limited, HSBC Bank Mauritius – Takaful (Yes); Botswana (2007) - First National Bank in Botswana (FNBB) – “window”;Takaful (Yes); Tanzania (2008) - Kenya Commercial Bank (KCB) and, later, 04 Banks joined - People Bank of Zanzibar, National Bank of Commerce, Stanbic Bank and Amana Bank. More Recently, Zambia (30/12/2014) launched the IBF Guidelines (30/12/2014)

Source: IMF - WP/14/149

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Background

Legal Framework – Brief Overview

The Mozambican legal system experienced several reforms 1975, 1990 and 2004 - with revision ranging from changes in theparty system (from single to multiparty system) to reinforcement of the individual rights and independence of courts;

Mozambique's civil framework is largely based upon Portuguese-Roman law.

The Legal system is made of Administrative Court, the Constitutional Council and the Judicial Courts;

Lower courts – 1st and 2nd class at district level and province level and can hear both criminal and civil matters;

The size of the claim is what determines where the civil matter will be heard - claims above approximately - US$ 15,000 (100times above the min. salary) will be usually heard in the Provincial Courts.

Dispute regarding a breach of contract can take over two years before a judgment is obtained from the Mozambican courtsand the use of arbitration is a better approach to overcome that.

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Mozambique: Financial Institutions laws and Regulations

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1. Central Level1. Nature, objectives and role of the Central Bank Law (Law no. 1/92 of 03-Jan)

2. Law of credit and financial institutions (Law no. 15/99 of 01-Nov)

3. Regulation of the deposit guarantee fund (Enactment 49/2010 of 11-Nov)

2. Activity Level1. Regulation of Credit Institutions and Financial institutions (Enactment 56/2004 of 10-Dec)

2. Establishment and operation of investment funds (Enactment 54/99 of 8-Sep)

3. Establishment and operation of venture capital investment funds (Enactment 56/1999 of 8-Sep)

4. Microfinance regulation (Enactment 57/2004 of 10-Dec)

3. Other1. Primary law governing arbitration in Mozambique - The Law on Arbitration, Conciliation and Mediation (Law no.

11/99 of 8-Jul)

Mozambique: Financial Institutions laws and Regulations

Review Scope

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Mozambique: Financial Institutions laws and Regulations

Findings

1. Conflicting and inconsistency of terminologies:Remuneration or Interest – the use of terminologies such as “remuneration”, “interest”, “profit” or “at cost” to

refer to proceedings resulting from a financial transaction (be it the FI side or Customer side);

Nature, objectives and role of the Central Bank Law (Law no. 1/92 of 03-Jan)Article 21-27 – Central Bank can “Designate the interest rate, commissions and other remuneration alternatives for

operations performed by the financial institutions”

Law of credit and financial institutions (Law no. 15/99 of 01-Nov)• Article 4: “Credit: Act by which an entity, with expectation of a remuneration, places or promises to make funds

available to another entity against the promise…”• Article 4: “Deposit: contract by which an entity receives funds from another funds and has the the right to dispose

for their business and taking responsibility to repay as much, with or without interest…• Article 44: section L, chapter VI – rules of conduct,–”…the Bank of Mozambique is who defines the interest rates

regime, commissions and any other form of remuneration for operations carried out by credit institutions andfinancial companies”

Central Level

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Mozambique: Financial Institutions laws and Regulations

Findings

1. Conflicting and inconsistency of terminologies:

The word remuneration is more inclusive and can accommodate for the alternatives proposed by IF;

If approved by the Central Bank, Financial institutions can introduce other alternative forms of remuneration;

The concept of loan (credit) – among other features, from the conventional perspective of loan – remunerationand due date, are characteristics of loan as set by the religion of Islam.

The terminology for loan should be changed to a broader (inclusive) term – e.g. financing - that supports theexisting conventional practices and can also incorporate the financing alternatives brought by Islamic finance.

Central Level

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Mozambique: Financial Institutions laws and Regulations

Findings

2. Source and destination of funds

Islamic financial institutions must assure that the source of funds as well as their investment are fully compliant withIslamic principals

The Regulation of the Deposit Guarantee Fund (Enactment 49/2010 of 11-Nov), where, in article 10, section IV theresources for the fund can originate from:

a) “Income from investment of resources” - It may include interest;

b) “Donations” - The sources of donations may not be limited to sharï’ah compliant;

c) “Fines” – It can include penalty interest due to delay on payment ; and

d) “Amounts from other sources, not prohibited by law” – Which may not be limited to sharï’ah compliant

Suggestion: Under maslahah (public benefit/interest), exception should be given to IFI and allowed to participatewithout taking any interest and, gradually, in conjunction with the regulator, implement alternatives that best suitthem.

Central Level

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Mozambique: Financial Institutions laws and Regulations

Findings

3. Financial activities versus sharï’ah principals:

Operations such as leasing , investment funds or venture capital are defined in a manner that do notcontradict with the sharï’ah principals.

Microfinance Regulation

Cooperatives must create a reserve for mutual aid.

Mutual aid fund ties directly with the Islamic concept of ta’awun (mutual assistance) that many other practicesof Islamic Finance derive including takaful (Islamic insurance).

Activity Level

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Mozambique: Financial Institutions laws and Regulations

Findings

4. Dispute resolution alternatives

Modern arbitration system and, although it has only one arbitration center, it allows the creation of anotherlocal arbitration that can be privately owned.

In addition, resolutions from the local arbitrator are binding as court judgments.

Enabling factor considering that studies carried out in civil law countries proven that changes to the statutorylaw would be a lengthy and a costly process.

Due lack of comprehensive competence to deal with disputes arising from Islamic transactions, even if partiesagree to use Islamic contracts the laws and courts might not be able to understand and enforce them.

Other

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Mozambique: Financial Institutions laws and Regulations

Findings

4. Dispute resolution alternatives

Suggest the following:

- In Islamic contracts, parties must agree and make reference to an arbitration center, local or international, thatunderstands Islamic Finance features and are capable of dealing with related disputes;

- Creation of an Islamic Alternative Dispute and Reconciliation Centre (IADRC) should be explored .

- Sharï’ah advisory board should be allowed to act as an arbitrator for investors or shareholders but limited tomodest amounts (e.g. up to USD 100.000,00);

- Make reference in contracts to well-known and recognized Islamic Standards.

Other

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Conclusion and Way forward...

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Conclusion and Way forward

Conclusion

This article represents a limited perspective, it certainly paves the way for more studies and initiatives to arise and to assistthe decision-makers and policy-makers to appreciate and become more inclined towards Islamic Finance.

The study has demonstrated that while some features from the current legal and regulatory framework are conflicting withthe principals governing Islamic Finance, e.g. the definition of loans and the concept of interest, there are alsoopportunities that can immediately explored, including, deposits (with no interest), leasing operations, investment fundsor venture capital.

As a way forward, the Central Bank should establish a “task force team” comprised multi-skilled professionals frominternal areas such as supervision and licensing, local and foreign IF experts and shari’ah scholars and a representativefrom the Muslim Community. The team must have the mandate to supervise the process from the inception to the endand be the advising board for the Central Bank Board of Directors.

Contacts of the presenter Contacts of IRTI

Website: www.irti.org

Phone: +966 (0)

126466377

Fax: +966 (0) 126378927

P.O. BOX 9201 - Jeddah

21413

Kingdom of Saudi Arabia

1815 June 2015

Carino Ismael ModanMSc Islamic Banking and FinanceIIUM Institute of Islamic Banking and Finance - International Islamic University MalaysiaMZ +258843339999 / MY +60182778049E-mail: carinomodan@gmail.com

Rusni HassanAssociate ProfessorIIUM Institute of Islamic Banking and Finance - International Islamic University MalaysiaMY +60 19 289 2529e-mail: hrusni@iium.edu.my

1915 June 2015