The year 2020 will not only be remembered for the coronavirus but also for the policy responses and market developments that evolved as a result of it. Unlike Asia, America and Europe, Africa confronted the virus with reasonable preparedness having learned lessons from abroad and previous outbreaks of the Ebola virus. While this must have played a major role in keeping the number of cases relatively low, the playbook had a significant impact on the economy.
With about 65 confirmed cases, Nigeria commenced its lockdown phase fairly early in March 2020 presumably with the realization that its weak healthcare infrastructure could not deal with a pandemic of this magnitude. Nevertheless, the lockdown was still quite disruptive given that the economy is largely comprised of SMEs and a high number of daily wage earners and merchants. The impact reverberated in the financial system mainly through a dent on business optimism which prompted a risk-averse approach. Consequently, institutions pulled back investment and lending (which were already low) and those who had it, sat on cash. This cautious posturing eventually dictated the whole of 2020.
Review of 2020
In the first quarter of the year, the Nigerian government joined other countries affected by the coronavirus to place major cities on lockdown relatively at the early stage of the virus outbreak. At the time, the country was recovering from the impact of low oil prices and first-quarter GDP growth of 1.87% was gradually returning to pre-2014 levels. The Islamic finance market was also growing and three to six months prior to lockdown, we had welcomed a new entrant into the banking space. In addition, the only fully-fledged Islamic bank in the country had turned a profit and was on course to declare its first dividend. Things were generally looking up.
However, as the lockdown began, the socioeconomic landscape of Nigeria foretold gloom. The lack of digital infrastructure and heavy dependence on direct trading contributed to the woes in the business environment. This pressured personal incomes and business profitability. Consequently, lending and investments were low due to the elevated market risk and institutional cash balances gradually built up.
Thankfully, most companies kept to their social responsibilities and provided some reprieve to vulnerable segments. Private institutions, Islamic finance institutions inclusive, sponsored feeding programs and funded the provision of healthcare equipment to hospitals, among other initiatives.
Against this backdrop, the federal government made the best of the situation and issued its third sovereign Sukuk to fund road infrastructure. The Sukuk had a tenor of seven years and a rental rate of 11.2% — lower than the 12.4% inflation rate at the time.
Notwithstanding the sub-inflation coupon, the issuance was 4.5 times oversubscribed with significant participation from pension funds, non-interest banks, asset managers and other institutional investors. Indeed, even the retail segment recorded its highest level of subscription compared to prior Sukuk offers. The performance was not only reflective of the high level of liquidity in the market but also the increased familiarity and comfort with the instrument.
The market also witnessed the launch of another Shariah compliant mutual fund to bring the number of pooled investment schemes to seven. In addition, the first Islamic REIT was issued, more than seven years after the last conventional REIT issuance. This new issuance could increase the size of the REIT market by 47%.
Over the course of the year and as the lockdown was partially lifted, the federal government made efforts to spur private sector lending. In recognition of the growing significance of Islamic finance, the Central Bank of Nigeria extended 10 of its existing intervention schemes to the sector. The schemes are aimed at providing youth, agriculture-focused businesses and SMEs, among other focus segments, with affordable non-interest financing through Islamic finance institutions. This initiative was warmly welcomed by stakeholders in the non-interest community.
Preview of 2021
Although COVID-19 still lingers, I believe the market will grow bolder in 2021. I expect that the low-yield environment will prompt corporates to finally step forward and issue Sukuk especially in the real estate and manufacturing sectors. I also expect that the market will have better appetite for corporate risk.
On the sovereign side, the federal government should return to the Sukuk market after such an overwhelming showing in its last round. As the country strives to recover from the effects of COVID-19, we could see Sukuk being applied to other critical social infrastructure such as healthcare and education.
As an operator in the arena, I expect more entrants into this sector as success is typically an invitation to competition. The welcome increase in the number of Islamic finance institutions should create more synergy among participants in the area of advocacy and product development.
Overall, and with a deep sense of gratitude, we can draw the curtains on 2020 with a sigh of relief as the impact of the pandemic has so far been better than expected or not as bad as initially feared. The efforts of all participants — regulators, operators and customers — have in many ways contributed to the recovery from the depths of COVID-19. Given the market’s huge potential, the road ahead is still much longer than the one journeyed and I expect that the industry would cover considerable distance in 2021, as we keep making the best of every situation.