Islamic Commercial Papers: A gentle introduction to the corporate sector

IFN Monthly Article on Nigeria

Islamic Commercial Papers: A gentle introduction to the corporate sector


Prior to 2014, Nigeria’s commercial paper (CP) market was dormant until regulators set out a new framework targeted at rebuilding lost investor confidence. The initiative was spearheaded by the Central Bank of Nigeria and FMDQ-OTC Securities Exchange, and it helped to improve transparency and efficiency in the market. Under this framework, the FMDQ-OTC Securities Exchange introduced strict qualification and disclosure requirements which ensured that only issuers with good credit quality approached the market thus boosting investor confidence.

Companies soon realized the cost advantage of CPs over conventional bank loans and the market attracted a diverse profile of issuers including cement producers, real estate companies, petroleum marketers, flour millers and financial institutions. Following a drop in government treasury yields, investors thronged the CP market in search of higher yielding assets and portfolio diversification. Today, barely five years after the new framework, over N1trillion ($2.8bn) has been raised through the market, and at the end of February 2018, there were 17 listed CPs with an outstanding value of N203billion ($560million). Unfortunately, none of these CPs are Shari’ah compliant, leaving the Islamic finance market once again on the side-lines.

The FMDQ-OTC Securities Exchange is yet to create rules for Islamic Commercial Papers, nevertheless, it recognizes the growing trend in Islamic finance and currently provides an active secondary market for sukuk. Even in the absence of specific rules, the market infrastructure for Islamic Commercial Papers is well developed and comprises potential issuers in Shari’ah compliant business; a regulator that supports innovation; a vibrant OTC market and most importantly; a ready pool of investors such as non-interest banks, mutual funds, takaful schemes and pension funds. Considering the success of the conventional commercial paper market and the growing demand for non-interest finance instruments, we believe the market is one step away from witnessing an Islamic Commercial Paper.

Undoubtedly, the development of Islamic Commercial Papers would deepen Nigeria’s financial market and make Islamic finance operators more competitive. It would provide faith-conscious businesses with access to additional short-term funding to meet their working capital requirements, while providing Islamic finance operators with an excellent liquidity management instrument. This would open the doors for entry of more Islamic finance operators who were erstwhile discouraged by the lack of liquidity management tools. The instrument would also broaden the appeal of Islamic finance by demonstrating its benefit to corporate issuers instead of the current focus on state-sponsored sukuk. Islamic commercial papers might just be the instrument the market has been waiting for to gently introduce the corporate sector to this alternative funding approach.