The year 2022 had many positives for the Nigerian Islamic finance industry, as players and regulators strived to ensure that the industry continued its growth trajectory. The achievements are commendable in light of the difficult macroeconomic terrain that characterized most of the year. If this level of vigor continues in 2023 which is also an election year, the industry would definitely prove its resilience against the typical headwinds of a developing market.
Review of 2022
During the year, the Nigerian economy experienced a shift in investment appetite as investors fled risky assets for safety in the wake of the spike in fixed income yields. This was as a result of rising inflation, which was stirred in part by the global impact of Russia’s invasion of Ukraine, as well as significant exchange rate pressure caused by historically low oil-export earnings. The impact of these events reverberated in the financial system, which compelled the Central Bank of Nigeria to raise the benchmark lending rate thrice within a five-month period, to the highest level in 16 years.
A few state governments which anticipated rising rates at the beginning of the year were quick to enter the debt markets and successfully issued Sukuk in the first quarter. This came on the heels of the fourth sovereign issuance which closed only after the repricing of its rental rate to compensate a demanding market.
A wider variety of issuers followed, led by the largest housing fund in sub-Saharan Africa with a US$46.5 million second series Sukuk offer. This quasi-government entity plans to deploy the proceeds from the issue toward the funding of its social housing initiative of developing 500,000 affordable homes for low-income households in Nigeria. The market also saw the return of the country’s first private commodities exchange to the market in September to complete the second tranche of its Shariah compliant commercial paper, alongside a fresh Shariah compliant input financing note to facilitate the supply of inputs such as fertilizers and chemicals to farmers.
Other corporations commenced private Sukuk raises, mainly for company expansion, working capital management and real estate development. Notably, in October, Taj Bank issued the first Sukuk offer by a non-interest bank, using the Mudarabah structure, which is testament to the increased adoption of non-interest models to address corporate financing needs. However, as the market became tighter, the yields on each of these instruments equally continued to rise.
The non-interest fund management sector also received a boost with the launch of new Shariah compliant mutual funds, which increased the size of investments to US$116.3 million during the year. Islamic fund managers are also developing new products to increase their investments in sectors like real estate and commodities, to assist investors with hedging against inflation and exchange rate fluctuations.
In the Takaful sector, one of the prominent players, Noor Takaful, successfully raised additional capital through a rights issue and private placement to expand its business. This also demonstrated investor confidence in the segment.
In addition, industry operators and associations were active in creating broader awareness about the industry. The Non-interest Finance Institutions Association of Nigeria hosted the general public to quarterly webinars with discussions by seasoned Islamic finance professionals, and also met with various stakeholders including regulators.
The regulators also played their part in their bid to ensure stability and standardization of the industry. To foster understanding of Shariah interpretations on Islamic products and services, the Financial Regulation Advisory Council of Experts of the Central Bank of Nigeria issued a compendium of resolutions that provide guidance on Islamic finance contracts including Istisnah and forward Ijarah. The Securities and Exchange Commission (SEC) also issued an exposure draft rule to regulate Shariah advisors in the capital market. A major highlight within the draft is the registration requirement of individual and corporate Shariah advisors, as well as the specification of their qualifications.
Preview of 2023
Although the non-interest finance industry has thrived in spite of the current macroeconomic upheavals, it is essential for market players to become more creative in developing products that provide investors with some protection against the headwinds, competitive returns and cutting-edge technology.
In an election year like 2023, business activities are likely to slow down until its conclusion in the second quarter of the year. However, more corporates are expected to rely on Sukuk to meet their funding requirements, including the federal government of Nigeria, despite the uptick in yields.
Conclusion
The development of more liquidity management instruments for the industry should take center stage, as well as the continuation of sensitization activities to improve public knowledge and awareness on Islamic finance.
Finally, to improve Shariah governance and strengthen the market, the SEC should conclude on its framework for Shariah advisors.
Hajara Adeola is CEO/managing director of Lotus Capital. She can be contacted at [email protected].