Nigeria, the most populous black nation in the world and the biggest economy in Africa, is slowly but steadily taking its position as the leader in the Islamic finance industry across the African continent. The country boasts one fully-fledged Islamic bank, two conventional banks operating Islamic banking on a window basis and a single fully-fledged Islamic microfinance bank. The country had a single experience of Sukuk issuance by the Osun state government and it also has three insurance companies offering Takaful products on a window basis. The success of these institutions toward the provision of Shariah compliant products have attracted the attention of many foreign investors and local players (conventional banks and conventional insurance) by making efforts in establishing one form of an Islamic or Shariah compliant company or another.
Review of 2015
The year 2015 has been a success story for the Islamic finance industry in the country. In the Islamic banking sub-industry, the country recorded huge success. Jaiz Bank, which is the only fully-fledged Islamic bank in the country, succeeded in achieving break-even by recording a profit after tax of NGN126 million (US$633,007) and had during the third quarter of the year obtained an approval in principle (AIP) to operate as a national bank from a regional bank. This will give the bank the opportunity to expand to the southern part of the country including Lagos which is the commercial center of the country. The bank has also initiated discussions with a Qatari-based investment firm for investment of about US$100 million into the bank.
In addition, Jaiz Bank has also increased its branch network from 10 in 2014 to 20 by the end of 2015. Another bank making successful inroads in the country is Sterling Bank, which has increased its balance sheet size by 300% as at October 2015 and has improved more of its non-interest alternative finance products. Likewise, the Islamic banking sub-sector witnessed efforts by some institutions at securing operating licenses for non-interest banking; among which is Key Stone Bank which is expecting AIP from the apex bank before the end of the year.
In the Takaful sub-sector, the National Insurance Commission (NAICOM), the country’s insurance watchdog, has issued AIP to a Takaful operator called Nur Takaful to operate as a fully-fledged Takaful operator while two other applications are awaiting final approval. To strengthen its effort of a successful Takaful operation in the country, NAICOM has approved an Advisory Council of Experts to guide the commission on Shariah compliance. Other areas that witnessed improvement during the year under review include the capital market where the Securities and Exchange Commission (SEC) is working round the clock to ensure that the Islamic capital market developed to its optimal level. The SEC convened a stakeholders’ forum where it unveiled its 10-year master plan for the development of the Islamic capital market.
Meanwhile, aside from the Islamic finance industry, the economy witnessed a lot of changes during the year under review which affected both the interest-based and the non-interest banks in one way or another. One major issue that affected the economy is the dwindling fall in oil prices which continued from the last quarter of 2014. The country’s income from the oil sector, which is the major source of revenue, reduced drastically while the position of the naira against the US dollar fell to its lowest-ever at NGN230 to US$1 especially in the parallel market which forced the Central Bank of Nigeria (CBN) to restrict the use of foreign currencies in certain transactions. Another policy introduced by the new government and which affected the banking industry indirectly is the Treasury Single Account which requires movement of all government-related deposits from commercial banks including non-interest banks to a single account with the Central Bank. This reduced the liquidity position of all the banks in the country from posing a challenging crisis, thanks to the quick intervention of the CBN.
Above all, the Islamic finance industry has fared well in the country but not yet to its optimal level considering the potential of the market due to the size of the economy and the Muslim population.
Preview of 2016
As previously mentioned, the market is performing below its potential. It is expected that the year 2016 will be better in terms of the increase in the market share as well as the number of industry operators. In 2016, there will be an Islamic bank with a national presence and it is likely that another bank, Keystone, will obtain a window license for its operation. The country may also witness the emergence of new fully-fledged Takaful operators in the coming year. Based on the awareness created and the level of commitment from the SEC in launching its 10-year ‘Master Plan on the Islamic Capital Market’, additional Sukuk is likely to be issued by some state governments to finance infrastructure projects. More investors are likely to explore the market potential by investing in either fully-fledged Islamic banks or Takaful operators. The CBN is likely to conclude arrangements for financial instruments that will support market players and may also release a guiding framework for Islamic microfinance in order to enhance its drive for financial inclusion.
Nigeria, a leading oil exporter with abundant human and natural resources and one of the leading economies in Africa, is always a potential market for Islamic finance. The growth rate of the existing industry players is an indication of where the country will reach in the next five or 10 years. The country can be Africa’s Islamic finance hub and compete with the leading major Islamic finance players of the world. It is expected that the present government’s efforts in curbing corruption and battling with the dwindling oil revenue may include the option of using Islamic finance instruments like sovereign Sukuk to finance development projects. With proper strategy and government support, the country stands a chance of being a world player rather than a regional player in the Islamic finance industry.