We Need To Structure Non-Interest Products Around Commodities - Ayodeji Balogun

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Sunday, April 05, 2020 / 01.00PM / Bukola Akinyele for WebTV / Header Image Credit: @AFEXNigeria


 

The MD/CEO of AFEX Commodities Exchange Limited Mr. Ayodeji Balogun has called for the development of Non-Interest products targeted at the Commodities Market in Nigeria.


Mr. Balogun mentioned this as a guest on the WebTV Program Islamic Finance Weekly.


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He said that there were several ways to explore how to structure a non-interest product around commodities in the country.

 

According to him, the commodities market is a very large part of the country's asset classes.  He said over 32% of the Nigerian economy is tied to commodities when agriculture, commodities and minerals are combined.  

 

Looking at the risk around commodity trading, Balogun stressed that  fundamentally, the tradable assets had physical attributes that were fungible, and which were well-preserved in terms of the integrity of the underlying assets.

 

In terms of pricing AFEX CEO noted that it was very easy to determine because it had a natural reset every year. 

 

On the characteristics of the commodity market, he said it has lower risks compared to the other asset classes due to the physical shelf life, that can be converted to cash at any point in time.

 

"Price volatility is fairly predictable in terms of direction. There is the derivative product which would help moderate price volatility and give a minimum secured sectoral asset class return" he said.

 

He explained further that there were several ways and dimensions to a non-interest fund that looking at investing in agriculture. The AFEX boss said exchange rate commodities can be explored through an Exchange type X-fund that held a basket of commodities and could track the price which would make the underlying assets, compliant with non -interest funds.

 

Giving additional insight Balogun noted that AFEX was the only active commodity exchange in the country, which started five years ago to unlock securitized transactions and achieve scale in the market, thereby creating new products that serve as investment bridges.


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On the role that Non-Interest banking can play in the commodities market, he stated  that it fundamentally aligns with a lot of principles around commodities trade.

 

Balogun said, "Fundamentally, one of the core principles of Islamic banking is to have a physical product you are trading which is where commodities tick one of the major boxes and also have different structures where you would be able to ride on price appreciation without necessary holding the commodity itself".

 

He also added that a lot has been discussed with non-interest banks in the country on how they can provide additional liquidity for the green side of trade, and also provide liquidity for farmers that are interested in getting non-interest loans for their produce activities.

 

"Most of their products including fixed income products are tied around coupon payment or interest-bearing instrument". He concluded that fixed income instruments are product that can actually be looked into by non-interest investors.  

 

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