IFN Annual Islamic Guide

 

One word to describe Nigeria’s Islamic finance space so far in 2019: dynamic. This year witnessed landmark regulatory developments as even more players threw their hats into the ring to participate in the growing niche. However, considering that Nigeria hosts Africa’s second largest Muslim population, the market still seems to be scratching the surface of what many expect to be a major hub for Islamic finance.

 

2019 Review

Early in the year, Nigeria joined fifty-seven other jurisdictions to adopt IFSB standards on disclosure, capital adequacy and supervision of Islamic banks. Local players have long grappled with the gaps in domestic regulation thus the adoption of the IFSB standards was welcome. Among other things, the standards addressed key issues such as profit-sharing on investment accounts and income-smoothing practices, ultimately allowing for greater transparency.

By mid-year, the list of non-interest banks in the country got a little longer following the issuance of an operating license to TAJ Bank to operate in Nigeria’s northern region. Taj Bank is only the second full-fledged Islamic bank in the country, following Jaiz Bank which has operated for over seven years. Taj Bank plans to launch its services in November 2019 in Nigeria’s capital city, Abuja.

The takaful segment was not left behind in 2019 when the National Insurance Commission (NAICOM) granted provisional licenses to two new takaful operators, thus raising the number of players to four. The new entrants, Cornerstone Takaful Insurance Company Ltd and Salam Takaful Insurance Company Ltd will provide family and general takaful services in an attempt to carve a niche in an otherwise saturated insurance market with almost 60 players. It is worthy of note that NAICOM has started a shakeup in the insurance industry and imposed stiff capital requirements, which many believe would soon drive mergers and acquisitions. Thus, the differentiation offered by takaful products may be one way for insurance companies to ensure resilience amidst fierce competitors.

The Islamic capital market was not left out of the fray as it saw the launch of a new Shariah fixed income mutual fund. Existing funds also witnessed marked growth and data from the Securities and Exchange Commission showed that Islamic fund assets grew by circa 42% from the start of the year to October 2019. The build-up in fund assets was underpinned by increased appetite for shariah compliant assets since the last sovereign sukuk issuance. This rising appetite cut across retail and institutional investors and in the course of the year this become evident when the National Pension Commission (PenCom) released guidelines allowing pensions operators to create dedicated shariah compliant portfolios for pension contributors. Although the new PenCom guidelines are yet to take effect, pension operators have already commenced building capacity in Islamic finance in preparation for the launch.

 

2020 Preview

My firm belief is that next year will top this one. The market is primed for a third sukuk issuance by the Federal Government (FG), which should hopefully set the ball rolling. Corporate sukuk are also long overdue and there are many pointers that 2020 may be the year that ends the wait. Recently, the FG has solicited private participation in infrastructure projects in exchange for tax credits. In addition, the Central Bank has aggressively pushed for lower commercial lending rates through banking regulations. These two forces would incentivize large corporates to tap the capital market and potentially issue sukuk.

We expect the preference for Sukuk to be driven by the regulatory guideline permitting the creation of Shariah compliant pension portfolios, which should come into effect in 2020. Pensions are currently the largest asset pool in the country amounting to N9.4 trillion (US$26.1bn) and access to even a fraction of this pool will change the Islamic finance landscape.

As the market expands, we expect more entrants in the banking space as one Islamic banking window operator has already made overtures to become a standalone entity.

 

Conclusion

Overall, the Nigeria’s Islamic finance industry had a decent year in 2019 and the efforts of all participants – operators and regulators – resulted in modest market growth despite a lackluster macroeconomic backdrop. Given the markets huge potential, the road ahead is clearly much farther than the one journeyed and I expect that the industry would cover considerable distance in 2020.