February 23, 2020 / 1.00PM / Bukola Akinyele for WebTV / Header Image Credit: WebTV
One of the opportunities the Non-Interest Finance market brings to emerging economies like Nigeria is the ability to catalyze socio-economic development. Dr. Bashir Oshodi, Group Head, Non-Interest Banking, Sterling Bank Plc, explained this in a recent interview with WebTV's Islamic Finance Weekly.
Speaking from the sidelines of the Non-Interest Finance Executive Forum hosted by Sterling Alternative Finance, Dr. Oshodi expressed the belief that areas like housing and SME development provide opportunities for local investors to channel resources into alternative investment markets that could have a major impact on socio-economic development.
Giving additional perspective to the housing and real estate market, Oshodi was of the view that Non-Interest finance could support the development of the industry, as the mortgage market contributes about 0.5% to the Gross Domestic Product, GDP of the country.
He called for a shift from the formal to the informal sector, which he described as a critical mass for the local Nigerian economy.
Oshodi stressed the need for Non-Interest banks to change the contract terms and rules of engagement that allow for mortgages that cover two to three decades as is the practice in more developed economies.
The housing deficit in Nigeria is currently put at 22 million units and requires a robust financing strategy to address the challenge.
In the Non-Interest Finance market, he mentioned the "Musharaka" structure which is a partnership structure that combines equity and lease such that after five (5) years of paying for the finance or mortgages, and the customer is unable to pay at some point, the individual can allow the bank to sell the assets and provide his/her share of the equity. He noted that the returns to get back from the asset sold is the present value of the stated asset.
The Islamic Finance expert giving an illustration on present value said the returns in Musharaka would be higher than standard returns. At the moment, he said what the Non-Interest banks do most of the time is leases. Under the lease structure, the banks take ownership under the right compliance framework.
He made a strong case for the informal sector to gain top priority and the need for changes in underlying contracts to make it more client-friendly.
Looking at the Small Medium Enterprises (SMEs), Oshodi said, creating equity investments as part of the ways to boost small businesses was important.
Oshodi said the idea now is how NIBs can scale financing to 500,000 people to provide access through mobile phones to get the required funding to boost their businesses.
"What is important to Sterling Bank is how to allocate a lot more, considering the fact that we are not going to lose money. Yet, 70% may go bad but this is small compared to our total portfolio. We will make loan approvals digital and as fast as possible", he said.
The Aquat Model
Speaking further, Sterling Bank's NIB specialist noted that in Pakistan, the Aquat model has served to fund projects with great socio-economic importance. The "Aquat" model maintains low borrowing costs and gives funds to those at the lower end of the borrowing pyramid through community centres and religious places. A lot of people living below the poverty line in Pakistan use this model.
He believed it was a bankable concept, that can be digitized and reach out to Nigerians regardless of faith. On the other hand, he stated that there was a need to create more equity investments for SMEs, which is a lovely initiative.
According to him, technology, for example, widely adopted by millennials, will help to broaden the ability of Non-Interest Banks to support SMEs. He charged non-interest banks to look beyond profit and align with the principle of Islamic Finance, which is impacting people's lives.
For Agribusiness, especially the commodities exchange, he said the great thing about Islamic finance is that you can take equity positions in companies or projects. Sterling Bank on its part, has done a couple of them and has taken an equity position in such commodity outfits.
"We are part of it, patient enough to allow those businesses to mature and show profitability over time, and we are willing to do a lot more," Oshodi said.
On the other hand, he noted that Sterling Bank was willing and happy to go to the rural areas to aggregate farmers and their products and involve them in the commodity exchange quickly.
He noted that the risk is high, but experts have employed to mitigate whatever risks exist in the commodities market. In response to the equity-type financial asset in Islamic finance and how local investors in Nigeria can tap into them, he said the concept of Islamic finance is equity-based.
For him, the rule in Islamic finance is equity, which is a core principle for the alternative finance market. Islamic finance institutions and Islamic banks in Nigeria and globally are focused on investing directly in any business or ethical project.