Now that important issuance and regulation milestones have been passed, Nigeria is well placed to succeed in its aim to become Africa’s Islamic banking hub. Kit Gillet reports.

Sterling Bank

While Islamic finance has grown to become a global $2000bn industry, it has yet to fully take off in Africa, despite the continent’s 250 million-strong Muslim population. However, this is slowly changing, and countries such as Nigeria are now vying for the role of Islamic finance hub for the region.

“Nigeria’s ambition for Islamic banking is to become the regional hub for west Africa initially and eventually the hub of Islamic finance for Africa,” says Isaac Okorafor, a spokesman for the Central Bank of Nigeria.

In the past few years Nigeria has made great strides towards this goal, putting in place key aspects of a regulatory framework and issuing its first sovereign sukuk in September. This follows the opening of the country’s first fully fledged Islamic bank in 2012.

Nigeria currently has one Islamic bank, Jaiz Bank, as well as two banks with Islamic windows, Sterling Bank and Stanbic IBTC, the latter of which is part of South Africa’s Standard Bank, and a handful of takaful players. At least one more Islamic window is set to open in the near future, after SunTrust Bank Nigeria and the Islamic Corporation for the Development of the Private Sector signed an agreement in May to establish a non-interest banking window.

Period of consultation

It is, however, in the area of regulatory change that Nigeria has seen the most important developments. The initial framework for the regulation and supervision of the non-interest financial sector was published in June 2011. This followed consultation with international organisations such as the Islamic Finance Standard Board, the Accounting and Auditing Organization of Islamic Financial Institutions and the Islamic Development Bank, in order to benefit from the experience of other countries further along in their Islamic finance journey.

In 2015, the country’s central bank issued guidelines for a centralised advisory body to oversee Islamic banking and ensure that products designated as Islamic conform to sharia principles, seen as a key step for the industry. In August this year it set up two financial instruments to provide liquidity support to non-interest-paying lenders.

“If we compare Nigeria with much more developed Islamic finance markets such as Malaysia, there is really a lot that needs to be done regarding framework, standardisation and the legal system,” says Bashar Al Natoor, global head of Islamic finance at Fitch Ratings. “However, if you compare it with other countries in Africa, Nigeria has really hit a lot of milestones on the regulatory side that puts it in the top five countries in Africa that is trying to develop such an industry.”

Mr Al Natoor points to the recent introduction of sharia-compliant microfinance, regulations for the Islamic banking system and takaful companies, as well as regulations for fund managers and the issuance of a N100bn ($281m) sovereign sukuk. “We look at Islamic finance as having five key pillars, and Nigeria has really done something on all five: Islamic banking, sukuk, takaful companies, asset managers and corporate finance,” he says.

Market size

One advantage Nigeria has over its regional rivals is the size of its population, estimated at more than 180 million, of which more that 80 million are Muslim, making it home to the largest Muslim population in sub-Saharan Africa. According to some predictions, the country’s total population is expected to surpass the 300 million mark by 2050. A significant portion of Nigeria’s population remains unbanked, for religious as well as accessibility reasons.

Even so, Islamic banking has been slow to catch on in Nigeria, with only three lenders out of 25 commercial banks offering interest-free finance products at the end of 2015, and with total assets and deposits of the three institutions operating on sharia principles accounting for only 0.2% of total banking system assets and deposits at the beginning of 2016, according to the central bank.

Despite this, industry insiders feel that important progress is being made. “I think we’ve done much better than expected considering we were a late entry to the sector,” says Hassan Usman, managing director of Jaiz Bank.

Mr Usman points to the early challenges that the Islamic finance sector faced in the country. “The financial meltdown in 2007 and 2008 made it difficult, but more so in that there was no framework, no legislation, no instruments,” he says. “Those are the things that made it difficult for us to attract foreign capital and expertise into what we were doing. So we had to contend with just local investors and experts to roll out. We operated for five years without any instrument for liquidity management. No sukuk, no interbank.”

Public perception

This does not seem to have affected the bank’s growth. Since 2012 Jaiz Bank has increased its number of branches from three to 30 and seen its customer base soar from 2000 to more than 200,000. In the first half of 2017, the bank’s profits rose 254% year on year, from N152.8m to N540.2m, with shareholder funds hitting N15.25bn.

Markets such as Nigeria are seen as high-growth markets for Islamic finance. However, there is still a lack of awareness regarding Islamic banking in the country, and caution among a Muslim population that has long stayed clear of conventional banks due to their use of interest.

“People have just started to understand what Islamic banking is all about, but the understanding is very basic,” says Basheer Oshodi, head of non-interest banking at Sterling Bank, one of two conventional banks in Nigeria with Islamic windows. “Some people among the Muslim population have a phobia about banks; it is still difficult for many to accept that it is sharia compliant.” He adds that the first task is getting people comfortable with the financial system, and after that getting them to understand the nature of non-interest banking and finance.

Sukuk progress

Nigeria’s south-western Osun State issued a N11.4bn sukuk in 2013 for road and school construction, which was the first Islamic bond from a major economy in sub-Saharan Africa. Industry insiders see the country’s recent sovereign sukuk debut as an important milestone.

While Nigeria is not the first country in the region to issue a sovereign sukuk – Senegal issued its first in 2014, and South Africa issued the continent’s first international Islamic bond that same year – it is still an important step. Africa as a whole raised $1.3bn in 2016 through sukuks.

Mr Okorafor says the N100bn sovereign sukuk, with the funds to be used for domestic road infrastructure, was oversubscribed by N6bn. “There is no doubt that more investors will be attracted to future issuance of the sukuk bond for infrastructure and deficit sources of funding for the federal government in the near future,” he adds. 

Nigeria, however, has momentum to build upon. “What it needs to do now to further the development of Islamic finance is to do what Malaysia has done, which is make it as easy to issue a sukuk as it is to issue a conventional bond,” says Samira Mensah, a senior credit analyst at Standard & Poor’s in Johannesburg. “That makes a big difference in how you want to place or position the Islamic finance industry.”

Work to do

While the sukuk offers one investment option, market-watchers point out that Nigeria also needs to develop underlying assets for the domestic market if Islamic finance is to thrive.

“You can’t just say, let’s authorise Islamic banks and then not have assets to play the game. It’s the same for the takaful industry: where would you want them to invest their premiums?” asks Ms Mensah. “They have to invest them in a compliant way, so the only other way would be to invest them in the real estate sector or the capital markets in sharia-compliant assets. The real estate market in Nigeria isn’t a liquid market, the pricing isn’t transparent, and it is mostly a cash market.”

Despite these issues still to be resolved, those involved in Islamic finance in Nigeria feel the sector is now ready to expand. “I think the market is getting ripe for new players to be in the market,” says Jaiz Bank’s Mr Usman. “And unlike ourselves, they will come with instruments to invest in and have an orderly growth.”

Whether Nigeria can really become the Islamic banking hub for Africa is a matter for debate. Mr Al Natoor of Fitch Ratings has had similar discussions about Morocco and Algeria recently. 

“We think it’s too early to judge,” he says. “These countries need to find their own niche. The first step is having the right regulatory framework and we’ve seen some milestones passed in that regard for Nigeria.”

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