How Ethical Funds Create Wealth and Economic Value in Nigeria


Friday, January  21, 2021 / 11:00 AM / Bukola Akinyele-Yisau for WebTV / Header Image Credit: WebTV

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Ethical funds are catalysts for wealth creation and economic value for investors, especially in frontier markets like Nigeria. Dr. Yusuf Adeneye, Senior Lecturer, Universiti Malaysia Kelantan, made this point while explaining "Ethical Funds, Economic Growth and Public Goods from a Shariah Perspective."

According to Dr. Adeneye, a mutual fund is a vehicle or an avenue for investments and an indirect way of investing in the equities market instruments. They serve as a pool of securities where investors come together to endure that the fund performs better than the market index.

He provided further insight into the significance of mutual funds to government issuance. He said it is about competitive conditions and yields in terms of higher dividend per share offered to investors than retail banking in terms of the interest on savings.

The scholar noted that it was low compared to the yields given by mutual funds, which is one-way mutual funds have been effective in government issuance.

From the regulation side, Dr. Yusuf believed it has been less restrictive and favourable to mutual funds in terms of easy access to the capital market.

Also, he stressed that there had been an increase in the movement of funds from retail banking to mutual funds, with retail investors diverting their savings from conventional banks to mutual funds that bring a pool of resources in terms of capital to invest in government securities.     

They are looking at the activities of the government and how it could take advantage of the enormous funds mobilized by ethical funds in 2022. Adeneye said ethical funds rely on moral and investment considerations, as investors align with ethical rules before investing.

He identified the issuance of Sukuk as one way the government can harness ethical funds or raise Shariah-compliant instruments. He said the ethical fund could be invested in government green bonds or Sukuk.

"Capital can be moved from ethical funds to support the government as they invest in infrastructure projects, instead of going for international investment flows that have interest rates compounded," Adeneye added.

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He restated the need for the government to look locally by issuing the ethical funds through Sukuk, which will help reduce the stress of implementing and carrying out public projects like infrastructure, etc.

Speaking further, he said the government should look at investors' behaviour and their appetite for ethical investments guided by rules and regulation to provide enabling policies that address production rather than waste.

"They need to manage their policies in a way that will encourage more ethical investors to participate in the financial/capital market."

According to him, many corporations invest in SRI products and projects. Another way SRI could drive economic growth is for the government to look at tax policy incentives to enhance economic growth.

Another area he cited as practicable was deploying the concept of social and infrastructural upliftment. He advocated for investments in local communities through responsible investments. 

He pointed out that leveraging renewable energy investments as a source of alternative power can improve people's standard of living and boost financial inclusion. Providing local communities with socially responsible investments can enhance economic growth.  

The liquidity of the Shariah-compliant instruments has performed well, and there are different assets to invest in the market. 

Looking at the likely drivers of activities in the ethical funds' space in 2022, he said the pre-election year and build-up to 2023 general elections and political movements will trigger some risks.

He added, "First thing we might see would be an increase in management fees as fund managers will want to charge more due to the expected market risk they will face, while investment managers will want to put their money in ethical funds due to its performance in the last few years. Retail investors will be pulling their capital from conventional banks to ethical funds, which may face high costs due to the upcoming political activities".

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