IFN Monthly Article on Nigeria

Islamic Green Bonds – A green breath of fresh air?

 

Over the past 7 years, I have seen Islamic financing broaden beyond the shores of conventional financing to embrace a favourable prospect – socially responsible financing. Across the globe, investors’ appetite has been whet with the novelty of green sukuk and its implications for the Islamic finance segment.

Growing demand for alternative financing focused on renewable energy has led to a fast rising number of green bonds globally. Holding on to that thought, Malaysia’s Tadau Energy issued the world’s first green sukuk worth $59million in 2017 aimed at funding the construction of large-scale solar plants, with Indonesia soon selling the first global sovereign green sukuk in 2018. Building on that momentum, the Islamic Development Bank created what would be the first-of-its-kind Sustainable Finance Framework in November 2019, structured to exclusively fund environmental projects in member countries, including Nigeria, through Sukuk issuances.

Bringing it home, the climate change landscape has seen some interesting takes over the past 3 years. Remarkably, the Nigerian government has sold up to N25.69bn in green bonds to fund renewable energy, afforestation, and transportation. The way I see it, Nigeria’s embrace of sustainable financing should pave a smooth ride for the first Islamic green bond in the country given the high demand for sustainable energy supply. One reason would be the structure of climate bonds; at the helm of every green bond is what Sukuk has always clamored for – a ring-fenced infrastructural project with securitised future cash flows. Given Nigeria’s projected annual infrastructure gap of N36trn, its project-based nature oozes appeal to not just Islamic investors but also socially ethical investors.

Certainly, the issuance of a green Sukuk doesn’t come without challenges. On the industry front, I envisage that Nigeria’s reliance on crude oil may pose some constraints due to high carbon emission, while perceived risks arising from investing in new renewable energy technology (the underlying asset from which proceeds will be paid to investors) and the paucity of local innovative technology may lead to low growth in the green Sukuk investing space. A major advantage would be leveraging on the success of previous Sukuk issuances – Sukuk frameworks and structure, investor education, government support for diversification, improved liquidity among others – to gather the needed support for the nation’s first ethical instrument.

Similar to Middle East terrains, Islamic financing in Nigeria has enjoyed tremendous support in terms of regulatory frameworks. With the shortage of Islamic finance instruments in a liquidity-awash environment, I expect to a wave of strategic initiatives to put the nation’s first Islamic green bond on the global climate investing map.

This would serve as a breath of fresh air for investors looking for varieties away from the now familiar plain vanilla Sukuk.

Hajara Adeola

CEO/Managing Director

Lotus Capital Limited – the Pioneer Islamic Financial Institution in Nigeria