Friday, September 04, 2020 / 1:00 PM /
Bukola Akinyele for WebTV / Header Image Credit: WebTV
Going by the pace of Islamic finance development in Nigeria, and the enthusiasm with which the Nigerian investment community has received past Sukuk issuances, financial analysts are confident that a retail Sukuk issuance will thrive.
This claim was made by Mr. Mustapha Ishaq-Akinlaso in a recent interview on WebTV's weekly Islamic Finance programme.
He was of the view that while there is more to be done in the country observing that Nigeria had an enabling environment for retail Sukuk issuance.
According to him "An important reason for this resolution is on the policy side, where Nigeria's financial inclusion policy is aimed at growing a cadre of retail investors in government bonds and Sukuk. And some proof can be drawn from the growth in the portion of retail investors in the past Sukuk issuances. For instance, the retail investors accounted for just under 5% of the subscription to the debut N100bn Sukuk in 2008. Still, this figure increased substantially for the second N100bn Sukuk in December 2018, to 17.33% of the total allotment. This indicates that ordinary people are interested in having a stake in the economic development of their country".
Speaking further he believed Nigeria had a legal framework in place that regulates the issuance of Sukuk; this includes the Investments and Securities Act (ISA) 2007, and the Securities and Exchange Commission Rules and Regulations, 2013.
According to him what is needed at the present would be to embark on more projects and discuss with financial stakeholders on a policy. This can be done through investment seminars and roadshows as well as the positive media coverage of issuance and listings.
On the role of Islamic Finance in driving Infrastructure development in emerging and frontier markets like Nigeria, he described the nation as the 27th largest economy in the world by output capacity. Yet, its financial pocket is only a fraction of its economic size.
"A country like ours, whose largest national budget ever only amounted to about six percent of GDP, is without a doubt in need of additional sources of capital, domestic or foreign, for its infrastructure investment. The government is already on course in this regard, to attract private capital. from different sources However, there are concerns about the associated debt burden due to our weak economic fundamentals. These concerns are genuine as they impact the nation's fiscal sustainability" he said.
Providing further insight he noted that Islamic finance, on the other hand, has proven to address this concern in a variety of ways. First, Islamic finance presents a multitude of financing instruments that are suitable for various financing needs in different circumstances depending on sector and projects. An Islamic financing instrument can be debt-based, equity-based, charity-based or a hybrid combination of any financing instrument.
Giving context to Nigeria, he said a debt-based financing instrument may not be ideal at this period, given its fragile fiscal condition that is underlined by weak economic fundamentals. As the deficit of the GDP is currently about 2.3%, Islamic Finance as an equity-based instrument would be a viable option for infrastructure development.
He further stated that to make it better, we could have a hybrid of debt and equity, Islamic quasi-equity instruments would attract private capital irrespective of the investor's risk appetite.
Also, depending on the sector and type of infrastructure Project, the Islamic charity-based financing instrument can be embedded in the package of the financing instrument. According to him a recent study report from the IsDB revealed that the Zakat collection in different countries ranged from 2% of GDP to 5% of GDP. One percent of Nigeria's GDP is $3billion, and that's significantly huge in this context for any infrastructure.
"Islamic finance also offers an alternative pool of capital from faith-based investors around the globe whose funding is only deployed for projects using shariah-compliant investment vehicles. As of 2018, this pool invested $120 billion on infrastructure projects globally. Nigeria deserves a good slice of that and given the demand for infrastructure service, and it'll also be a win for the investors who might be looking into Nigeria or looking into infrastructure projects" he said.
Looking at the Central Bank of Nigeria intervention program, he said the NGN50 billion (US$128.78 million) that has been earmarked to provide Islamic financing and refinancing to MSMEs certainly strengthens Nigeria's Islamic finance ecosystem. The capital injection does cater to the financially excluded Nigerians who will not take the interest-bearing interventions. According to him, the intervention will also encourage new companies to consider the non-interest option as it comes with an attractive value proposition. Islamic Finance has deep in the road sector
He added that the "CBN non-interest intervention does not only add to the Islamic banking assets, but it also will spill to the Takaful companies (Islamic insurance), Sukuk and capital market activities and also the Islamic fintech initiative are coming up as companies take on shariah-compliant financing, they will also be interested in a shariah-compliant insurance policy. As transaction increase, on a macro-scale, this interaction becomes spread across the entire ecosystem. The intervention is to galvanize activities in the Islamic finance ecosystem".