Nigeria, with a population size of about 200 million partly divided along the religious line between Muslims and Christians, is in its fifth year of Islamic finance which was introduced in 2011 with the issuance of a fully-fledged banking license. The market has grown considerably from a relatively unknown market to being one of the potential hubs of Islamic finance in Africa. The Nigerian Islamic finance market comprises most of the segments including banking, Takaful, fund management, the capital market, Sukuk and education, all of which were achieved within the last five years. Several factors account for the growth, mostly due to the large Muslim population, market size, regulatory support as well as increased awareness. The last financial year 2016 has been tremendous and is discussed in the following.
Review of 2016
As mentioned earlier, the year has been tremendous in terms of positive achievements recorded in most sectors of the Islamic finance Industry. These achievements that cut across banking, Takaful, regulatory and Sukuk markets have contributed significantly in making the whole industry stable and raised the confidence of a large number of the citizenry which have hitherto been skeptical about the Islamic banking and finance industry.
In the banking subsector, 2016 witnessed the upgrade of Jaiz Bank, the only fully-fledged bank, from a regional bank to that of a national bank. This is a remarkable achievement as it will widen the presence of the bank to all nooks and crannies of the country. It also portrays the viability of this type of banking as a suitable alternative to conventional banking in the country.
The sector also saw the emergence of an Islamic interbank product developed between the three players (Jaiz and two window operators) to take care of their liquidity needs. In addition to that, the total asset size of the Islamic banking sector in the country has reached NGN40 billion (about US$125.35 million) while deposits reached about NGN65 billion (US$203.69 million). Other developments during the year include the emergence of a group called Taj; a group of investors looking to set up a second fully-fledged non-interest banking institution.
The banking regulator; the Central Bank of Nigeria (CBN), has also done a lot in strengthening the Islamic banking (non-interest banking) subsector. To enhance Shariah compliance in products offered by banks, a stakeholders meeting was organized by the apex bank between members of the Financial Regulation Advisory Council of Experts (FRACE – the Shariah Board of the CBN) and Shariah board members of the three major players otherwise known as the Advisory Committee of Experts. Furthermore, the central bank granted Sukuk a liquidity status where the bank can consider Sukuk when calculating the liquidity ratio.
The Takaful subsector of the Islamic finance industry has recorded massive development as the regulator, the National Insurance Commission has issued licenses to two fully-fledged Takaful operators, the first time in the country. They are Noor Takaful based in Lagos, the commercial hub of the country and Jaiz Takaful based in Abuja. Although these operators are yet to roll out their products, but it is a significant milestone toward the development of the industry in Nigeria.
One very important event in 2016 was the progress made by the Debt Management Office, a body responsible for the issuance of government bonds and Sukuk. The body issued draft guidelines for the issuance of sovereign Sukuk and this has raised hope of the possibility of the federal government issuing Sukuk to raise capital for infrastructure.
Despite the decline in the economy due to falling oil prices and the dwindling exchange rate of the naira against foreign currencies, the Islamic finance industry recorded marginal growth when compared to its conventional counterpart that recorded some decline. Both sides of the balance sheet of non-interest banks in the country showed some element of growth when compared with the previous year.
Preview of 2017
Despite the fact that the country is currently in economic recession as declared by the federal government at the end of the second quarter of 2016 which affected and slowed down businesses nationwide, the Islamic financial industry will likely witness steady growth especially if the CBN grants a license to the Taj group. This will enhance competition thereby promoting growth.
The decaying infrastructure and the needs of the current government as well as dwindling oil revenues made it necessary for the government to look for funds through the capital market. One such means is through raising capital by way of sovereign Sukuk. It is expected that this will be made possible by the end of the first quarter of 2017. Non-interest banks are likely to issue Sukuk in collaboration with Lotus Capital and Nigerian Mortgage Refinancing. The Sukuk may likely use the Ijarah assets of the bank as a way of raising liquidity and promoting the Sukuk market.
It is worth noting that despite the recession, Nigerians are becoming more and more interested in the Islamic finance industry. There is a rise in the number of Nigerians seeking Islamic finance certificates. There was also an increase in the number of accounts opened daily by non-interest banks in the country. All these suggest that the market will reach its peak in the next few years and Nigeria will soon compete for a leading position in the global Islamic finance industry.