An opportunity amidst a crisis

IFN Monthly Article on Nigeria

An opportunity amidst a crisis


Following the outbreak of the novel coronavirus disease, the crude oil market has witnessed unprecedented downturn in demand. The accompanying plunge in prices has upended the public budgets of many oil producing nations. For Nigeria, proceeds from the sale of crude oil are a major source of public revenue and foreign exchange earnings and the collapse in prices has not only widened the budget deficit but has also forced a devaluation of the naira.

Besides the government, businesses are also faced with immense financial pressure in the wake of this pandemic. The government-imposed lockdown on key commercial centers of Lagos, Abuja and Ogun (collectively 45% of the nation’s GDP) has severely curtailed economic activities and heightened banks’ exposure to credit risk. As banks seek to restructure their loan facilities, this situation is especially precarious for Islamic banks due to their heavy weighting in Murabaha and Ijara contracts. Rental payments on Ijara contracts may need to be suspended as some financed assets will be non-operational this period. Furthermore, Islamic banks cannot earn returns following an extension of Murabaha repayments. This will ultimately affect the returns for their depositors given that the prominent deposit product among Nigerian Islamic banks is based on the Mudharaba contract. Furthermore, the concept of customary Hibah is frowned upon by local Islamic scholars.

For me, this unfortunate turn of events highlights the need for improved public-private sector partnership led by Islamic finance operators. Already, corporate Nigeria has been front and centre in the response to COVID-19. Firms in the Islamic finance space have joined others in the donation of medical supplies and cash to the authorities while also providing direct succor to the most vulnerable via distribution of food items.

Can this partnership also be extended to public finance? I’d say yes. At this time, there is an urgent need to ramp up public health spending to combat COVID-19 and other devastating diseases including malaria and Lassa fever. Furthermore, dwindling public revenue has made it imperative that authorities seek alternative means of funding infrastructure projects. I believe Sukuk can offer a perfect handshake between these challenges and it would help us weather this storm. In a crisis response, investors and donors want transparency around their contributions. Sukuk offer this.

Through Sukuk issuance, Nigeria’s large Muslim population and other investors can mobilize funding for the construction and rehabilitation of hospitals and the provision of medical supplies and so on. In addition, tapping the local Sukuk market will reduce the government’s risk of currency mismatch between its obligations and revenues. I recall that as oil prices cratered in March, the Nigerian government was forced to pull back from issuing a Eurobond, mindful of its waning dollar-earning potential.

Furthermore, the issuance of Sukuk and other Shariah compliant instruments will enable Islamic banks rebuild their asset portfolios to deliver better returns.

I believe Islamic finance operators will need to move swiftly not to miss this opportunity to demonstrate the unique purpose and effectiveness of Islamic finance. It is our moral duty.