IFN Monthly Article on Nigeria: March 2018 Issue

Three Nigerian Lenders clinch ICD’s $50mn On-lending facility

 

The month of March ended on an eventful note for Nigeria’s Islamic finance industry as the country’s commercial centre, Lagos, hosted the third edition of the African Islamic Finance Forum, organised by the Islamic Corporation for the Development of the Private Sector (ICD). The event was graced by a wide array of industry operators, regulators and budding professionals with renewed interest in Islamic finance following the success of the country’s debut sovereign sukuk. A major highlight of the event was the execution of a Memorandum of Understanding between the ICD and three Nigerian banks to extend a $50 million facility to small and medium sized enterprises (SMEs) in select sectors including health, technology, manufacturing and agriculture. The participating institutions include Jaiz Bank, the only full-fledged Islamic bank in Nigeria, which obtained $20million. The two other institutions were conventional banks; Suntrust Bank ($10million) and Wema Bank ($20million).

Nigeria’s SME sector is widely recognized for its potential for job creation and poverty reduction. There are over 37 million SMEs in Nigeria that contribute almost half of the country’s gross domestic product. However, SMEs are currently disadvantaged by their limited access to credit due to banks’ low risk appetite and preference for blue chip corporates and government debt. The Nigerian government has made several efforts to encourage lending to the sector and it recently created a forum for direct engagement between SMEs and Federal Agencies including the Bank of Agriculture (BOA), Bank of Industry (BOI) and Industrial Training Fund (ITF) to provide advisory services and capacity building to SMEs. Despite these efforts, conventional lending to the sector has remained meagre.

The ICD’s intervention could not have come at a better time considering the growing awareness of Islamic finance and the huge potential of Nigerian SMEs. Unlike its conventional counterpart, Islamic finance models have shown that they are more attuned to SME financing given their openness to risk sharing arrangements. Furthermore, Islamic debt models such as Ijara and Murabaha are often less stringent in events of extended repayment, which is an endearing feature. We especially consider the ICD’s choice of participating banks to be strategic given the institutions’ wide dispersion across the country, which should allow for deep penetration of the funds. Jaiz Bank has significant presence in Nigeria’s northern region, which is predominant for agriculture, while Wema Bank and Suntrust Bank have strong footings in the south west region where technology, manufacturing and private health care services are predominant.

In our view, the partnership demonstrates broad acknowledgement of the effectiveness of Islamic finance in addressing the funding challenges of small and medium sized enterprises. The partnership is yet another milestone in Nigeria’s Islamic finance journey as it shows the willingness of conventional institutions to embrace Islamic finance models. One of the beneficiaries, Sun Trust Bank is well rooted in financial technology and has already applied to the Central Bank of Nigeria to operate an Islamic Banking window.

We expect the effective utilization of the facility by the participating institutions to provide further credence to Islamic finance and the Nigerian growth story. We also expect the Nigeran private sector to receive increased attention from foreign Islamic financial institutions, following the confidence demonstrated by the ICD. We note that foreign investors were erstwhile concerned about exchange rate stability in Nigeria. However, the ICD’s investment shows improved sentiment on the Nigerian exchange rate environment given the country’s higher export earnings and more flexible exchange rate policies.