IFN Monthly Article on Nigeria: May 2019 Issue

Penetration of Islamic Mutual Funds Deepens in Nigeria

 

Since the launch of the first Shari’ah compliant mutual fund in 2008, Islamic funds in Nigeria have come a long way. Four other funds have been launched since then and a fifth is already in the works. Islamic mutual funds have enhanced capital market participation as ethically-minded investors, who have hitherto been on the sidelines, have become enthusiastic participants in the market.

Several factors have contributed to the number of funds and their subscriber base. Firstly, Nigeria is home to the largest Muslim population in Sub-Saharan Africa, with an estimated population of 200 million and roughly half being Muslim. This has spurred the introduction of Shariah compliant investment products including mutual funds, by eager fund managers seeking to tap into this large demographic. The sizable retail participation in the two sovereign sukuk issuances has confirmed the presence of this ready market.

On the supply side, the introduction of sukuk into the Nigerian market has widened the universe of investible instruments for Islamic funds, improved the quality of portfolios, enhanced risk-adjusted performance and ultimately attracted more ethical investors.

Another major development that has improved visibility of Islamic mutual funds in Nigeria is the adoption of fintech to deepen mass market penetration. Both conventional and Shari’ah compliant mutual funds are now partnering with online savings and investment platforms which cater to the growing middle class and millennials. These partnerships offer investors a range of mutual funds to choose from, while enabling the tracking of performance with a few taps on their mobile devices. Fintech adoption has also enhanced market transparency due to easier accessibility by investors to information about funds, including their size, composition and historical performance.

One key takeaway for Shari’ah compliant mutual funds leveraging on fintech is the opportunity to penetrate more rural regions where establishing a physical location may not be cost efficient or lead to logistics challenges. It is expected that the adoption of digital platforms by these investment vehicles would spur retail participation across the country.

Beyond its traditional sphere of Muslim investors, conventional investors seeking to diversify their portfolio are attracted to the competitive returns that Shari’ah compliant funds offer. This has further enhanced the mass appeal of these funds.

In spite of these progressive strides, the five non-interest mutual funds registered with the Securities and Exchange Commission currently only account for less than 10% of total fund market size. However, the huge Muslim population highlights the significant growth potential and opportunities that still lie ahead.