The Islamic finance industry in Nigeria recorded another year of progress in 2021 with operators and regulators alike taking steps to place the sector on a firmer footing. Looking back at how these participants have exerted themselves for the good of the industry over the last 12 months, I posit that 2022 will shape up to be even more positive for the sector.
Review of 2021
Beginning in the banking sector, the Islamic finance industry welcomed a new entrant — Lotus Bank — which opened its doors in July to become Nigeria’s third stand-alone non-interest bank. Thereafter, Sterling Bank secured in-principle approval from the Central Bank of Nigeria to spin off its Islamic window into a fourth stand-alone non-interest bank which is to be called the Alternative Bank. The growth of the banking space is being driven by increased awareness and demand for Islamic banking products particularly among the growing mass-affluent demographic.
In July, the National Pension Commission (PENCOM) gave pension managers the go-ahead to begin the operation of the dedicated non-interest pension fund category dubbed Fund VI. Subsequently, five pension managers which make up more than half of the industry’s assets, as at the time of publication, have launched Islamic pension funds.
As the demand side expanded, so did the appetite for Islamic instruments such as Sukuk. It was particularly gratifying to see a wider variety of issuers deploy the instrument for a broader range of purposes. 2021 marked the first corporate green Sukuk to finance the acquisition of renewable energy assets. A government housing agency also issued Sukuk to fund mass residential property developments.
In addition, state governments raised Sukuk through private debt markets to fund infrastructure projects. Just as the year was rounding up, the federal government launched its fourth Sukuk issuance in as many years. The sovereign Sukuk adopted the forward Ijarah structure which has become the favorite flavor in the market. The Sukuk facility has a 10-year tenor and a rental rate of 13%.
Still in the fixed income space, Nigeria witnessed its first Shariah compliant commercial paper to provide agricultural raw materials to processing companies on the basis of Murabahah. The issue was sponsored by the AFEX Commodities Exchange which currently operates 97 warehouses across the country and has made significant strides to improve domestic food security.
2021 also marked a year for capacity-building with the introduction of non-interest finance Master’s and postgraduate diploma programs at the prominent University of Lagos. Similar courses are on offer in other federal universities such as the Bayero University in Kano.
In addition, the Securities and Exchange Commission and PENCOM organized knowledge-sharing and capacity development sessions for Islamic capital market operators and pension fund managers as the latter begin their foray into non-interest investment management. On their part, industry operators did not relent on public sensitization. The Non-interest Finance Institutions Association of Nigeria hosted the general public to a webinar that highlighted the role of Islamic finance in boosting financial inclusion in Nigeria.
The country also hosted the 5th edition of the Africa International Conference on Islamic Finance which explored avenues through which Islamic finance could aid infrastructure financing and sustainable development.
Preview of 2022
Nigeria’s Islamic finance landscape is like a snowball building momentum, gradually growing bigger and bolder. Besides the prospect of yet another sovereign Sukuk, a number of states have also indicated plans to come to the market. Lagos, the most active debt issuer among subnationals, purports to issue what it terms will be the largest non-sovereign Sukuk issuance in sub-Saharan Africa in 2022.
Similarly, I am aware that another state in Nigeria’s northwest has made overtures to institutional investors on the possible issuance of up to NGN35 billion (US$84.68 million)-worth of Sukuk. I expect more issuers to tap into this market in 2022.
As Nigeria completes a return to economic recovery post-pandemic, I believe that the potential of the Islamic finance sector is immense. One new space to watch is Islamic fintech which is gearing up to leverage technology in improving the digital experience of the growing profile of customers and operators. The market is warming up and we remain fascinated participants and observers of this market development.