Islamic Finance: Alternatives, challenges and policy direction – Daily Trust

Despite its growing acceptability around the world, there are untapped opportunities that can be accessed through Islamic finance in Nigeria. The opportunities are however threatened by some challenges that have to become so that huge benefits can translate to additions to Nigerias economy.

According to the Islamic Financial Services Board (IFSB), the industrys total worth across its three main sectors (banking, capital markets and takaful) is estimated at USD 2.19 trillion in 2018, the share of Islamic banking assets accounts for about 72 percent of the total assets. The sector is growing at about 6.9% per cent and estimated to reach USD 3.8 trillion by the year 2022 based on estimate by Thompson Reuters. However, it is often assumed that the market performs far below its true potential. Equally, the concepts of Islamic finance are not well explained, especially in the areas of socio-economic development, financial inclusion and public policy.

Islamic finance in Nigeria

Following an amendment to the Banks and Other Financial Institutions Act (BOFIA, 1991) which recognised profit and loss sharing banks, the Central Bank of Nigeria (CBN) granted approval to the defunct Habib bank limited to operate an Islamic banking service window. The attempt did not register a significant success but it kick started a new dawn on ethical banking model based on Islamic principles that can cater for the financial needs of Nigerians.

Ever since, the sector has grown geometrically, from two (2) participants in 2011 to seven (7) in 2019. This rapid growth reflects both supply-push and demand-pull factors, including strong economic growth in core markets, regulatory advancements, and facilitative environment provided by the Central Bank of Nigeria.

The success so far is multisectoral as other Regulatory and Supervisory Authorities (RSA) in Nigeria equally play a vital role in developing a responsible ecosystem for Islamic finance by rolling out initiatives that promote a responsible ecosystem for Islamic Finance. The initiatives include Issuance of Operational Guidelines for Takaful Insurance in 2013 and equally setting up a Shariah Takaful Advisory Council (TAC) by the National Insurance Commission (NAICOM). The commission had licensed two Takaful companies and 3 windows of a conventional insurance companies.

The Securities and Exchange Commission (SEC) being the apex regulatory body in the Nigerian capital market has issued Rules on Islamic Fund Management and Sukuk Issuance. Similarly, the Nigerian Stock Exchange (NSE) and Lotus capital have developed an Islamic capital market Index designed to track the performance of Shariah compliant equities trading on the floor of the NSE.

The National Pension Commission (PENCOM) had in 2019 issued Regulation on Investment of Pension Fund Assets which recognised Government Sukuk as one of the accepted classes of assets for pension funds investment.

The Nigeria Deposit Insurance Corporation (NDIC) introduced a Non-Interest Deposit Insurance Scheme for NIFIs based on Kafalah bil Ujur (Fee-based guarantee) Shariah contract.

In all, the Nigeria Islamic Finance Industry is fairly backed by regulations, sound supervisory structure and fragmented legal framework. Legal provisions relevant for Islamic finance are in many cases diffused in multiple pieces of legislation and the coverage of issues is generally not comprehensive.

Borrowing to finance infrastructure is central to the recently launched Federal Governments Economic Recovery and Growth Plan (ERGP) 2017. As part of the domestic borrowing, Sukuk represents a promising instrument in Nigerias drive for infrastructure development. Sukuk often referred to as Islamic (sharia-compliant) bonds merely confer ownership of an asset, along with the commensurate cash flows and risk to the investor. Investors have the right to receive a share of profits from sukuks underlying asset.

The inaugural issue of the debut N100 billion Sovereign Sukuk in September 2017 epitomises Nigerias willingness to lead in the Sub-Saharan sukuk market. The launch showcases the countrys dedication towards the development of Islamic finance sector. The proceeds were deployed to 25 key economic road projects across the country in order to stimulate socio-economic growth.

Again, in 2018, the Federal Government issued another Sovereign Sukuk for N100 billion for the same purpose. The 2017 and 2018 were all over-subscribed and the Debt Management Office (DMO) is now set to issue additional N150 billion Sukuk as part of the domestic borrowing requirement in the 2020 Appropriation Act.

There is no gainsaying that the Sukuk issuance has enormous benefits to the Nigerian economy as it has significantly assisted in deepening the capital market, and has created the yield curve for the industry as well as provide government with alternative funds for critical infrastructural development. Better still, most of the subscribers of the Sukuk are not just Islamic but conventional investors attracted by the yield, diversification and risk profile.

Although, sukuk issuance accounts is less than 2% of the FG domestic debt stock, its growth depends on the availability of a good market infrastructure. Developing a framework for an efficient money market that can facilitate trading, price transparency, efficient clearing and settlement of transactions, tools to support risk management will be imperative. Equally, diversifying sukuk issuance and linking sukuk returns to the performance of the underlying assets will be important.

The Islamic Finance Industry in Nigeria has witnessed a modest growth. This is largely fueled by initiatives that strengthen regulation and promotes financial inclusion. Yet, despite the improvement, the industry has been dogged by many challenges such as liquidity management, dearth of knowledge, low public awareness, regulatory/tax reforms and lack of Shariah compliant benchmarks.

Overall, lack of coordination has been a persistent drag on the industrys development. It is therefore imperative to develop a national strategy for the Islamic finance industry in Nigeria that can take it out of its current niche status. The strategic roadmap should chart an extensive agenda ranging from asset growth to enlightenment programmes. It should also address issues of shortage in human resources, enhance coordination with various stakeholders and harmonise Islamic financial policies and regulations. In essence, a good road map may create a sustainable Islamic finance Industry that can achieve its full potentials in Nigeria.

Shettima, PhD, contributed this from Abuja via [email protected]

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