IFN Monthly Article on Nigeria: December 2017 Issue

Resurgence of Commodities Exchanges to Lift Islamic Finance

 

Despite an endowment of vast arable land and a large labour force, Nigeria’s agro-commodities market is yet to play a pivotal role in solving the liquidity management challenges of Islamic finance operators. Following decades of neglect, the country’s agricultural sector is underdeveloped due to scant storage facilities, low level of mechanisation and poor access to finance. These challenges have erstwhile made it difficult for the evolution of a structured commodities market to support the development of Islamic liquidity management products. For instance, Nigeria is among the top five producers of crude palm oil alongside major players like Indonesia and Malaysia, however, the country is yet to replicate Malaysian-style, palm oil commodity murabaha products largely due to the fragmented nature of the agriculture value chain.

However, since oil prices came crashing in 2014, investors have trickled into the country’s non-oil sector, gradually creating a platform that could serve as a spring board for Islamic finance.

In December 2017, the Association of Stockbroking Houses in Nigeria (ASHON) unveiled plans to establish a N50bn commodities exchange in collaboration with the Nigerian Stock Exchange by the third quarter of 2018. ASHON are not the first movers in this space – in August 2017, a group of Nigerian investors, incorporated the ‘Integrated Produce City’, a $135 million commodities exchange in the southern part of the country popular for the production of Cocoa, Palm oil, rubber and cassava. Still earlier in the year, the Nigeria Sovereign Investment Authority (NSIA) with over $1.25 billion under management, commenced arrangements to acquire and turnaround the Nigeria Commodity Exchange (NCX) (formerly the Abuja Commodity and Securities Exchange). These new investors will complement the activities of another recent entrant, the Africa Commodities Exchange (AFEX), which currently operates a tradable electronic receipt system for agro-commodities across its integrated storage system in the north-west and north-eastern parts of the country.

The commodities exchanges are expected to benefit from a broad recovery in the agriculture sector following renewed focus from the Federal Government through credit extension to farmers and restrictions on imported substitutes. As at November 2017, the Nigerian Government had reportedly disbursed over N45 billion to 218,000 farmers cultivating nine commodities across 30 states of the country under its Anchor Borrowers’ Programme. The International Monetary Fund has acknowledged the interventions in the agriculture sector, which it expects to be a key driver of Nigeria’s economic growth in 2018. With a vibrant agriculture sector and organised commodities exchanges, Islamic finance operators will be better positioned to develop more short-term liquidity management products to effectively utilize their excess cash reserves. The high yields on commodity trading will also enable operators compete effectively with conventional financial institutions who are more advantaged in Nigeria’s high interest rate environment.

The turn of fortune in Nigeria’s oil sector has undoubtedly bred opportunity for agro-commodity exchanges, which are a proven natural fit for Islamic finance institutions. In our view, 2018 is definitely set to be an interesting year.