Nigeria Houses Largest Sukuk Market in Africa –Report

Nigeria houses the largest Sukuk market in Africa with an outstanding issuance of N755.5 billion (USD1.6 billion), albeit small by global comparison, according to a Fitch report, adding that the amount is small in relation to global record.

According to Fitch, the Nigerian Islamic finance industry will continue its growth trajectory in 2023-2024 on the back of government Sukuk issuance and policy push but is still likely to remain nascent in the medium term.

Islamic banking – referred to as non-interest banking in Nigeria – is also growing swiftly from a low base on the back of a strong financing push, a growing capital base, and government’s more lax prudential requirements compared with conventional banks.

Meanwhile, the report indicates that challenges include a limited Islamic banking footprint and low public awareness of Islamic products.

“The size of the Nigerian Islamic finance industry is estimated at USD2.9 billion at the end of 2022, with outstanding Sukuk being the largest segment at 57%, followed by Islamic banks at 42% (total assets), and the remaining 1% between Islamic funds (total assets) and takaful (total contributions)”.

The long-term potential is significant as Nigeria has the largest Muslim population in Africa with a large unbanked population, Fitch Ratings said. In 2022, the Federal Government of Nigeria issued a seven-year Sukuk raising N130 billion or USD282 million, its fifth issuance since 2017 with above 1.6x subscription.

The Securities and Exchange Commission (SEC) aims to make Nigeria a hub in Africa for Islamic capital-market products as part of the government’s ‘Revised Plan 2021-2025’. SEC targets 50 listings of sharia-compliant products with a market capitalisation of at least N5 trillion or USD11 billion by 2025.

Last year also saw Taj Bank Limited’s launch of a N100 billion or USD222 million mudaraba sukuk programme to raise tier 2 capital in a bid to shore up its market position.

In the first half of 2022, Islamic banking assets in Nigeria increased 71% year-on-year. However, it held only a 0.8% market share by total industry assets, Fitch stated.

According to the rating agency, only three full-fledged Islamic banks and two Islamic windows are operating in Nigeria with all having small capital bases and a limited distribution network.

Islamic banks’ deposit collection was limited with a 0.4% share of industry deposits, while the financing share was higher at 0.7% of industry loans. Fitch rates Jaiz Bank, which holds above a 60% domestic Islamic-banking market share.

The bank’s shareholders are committed to supporting its strong growth through further capital injections. More favourable prudential requirements are supporting Islamic banking growth.

The regulator, the Central Bank of Nigeria (CBN), has set the regulatory liquidity ratio for Islamic banks (10%) much lower than for conventional banks (30%).

CBN also grants Islamic banks a 50% “alpha factor” which is a discount in the calculation of risk-weighted assets, but none for conventional banks.

This provides a sizable uplift to Islamic banks’ capital ratios and allows Islamic banks to capture market share with less capital constraint on growth. For example, Jaiz Bank received a capital ratio uplift of 570bp at end of Q1-2022 due to this discount. Islamic liquidity-management infrastructure is developing, it said.

In 2022, the CBN introduced a funding-for-liquidity facility and an intra-day facility for Islamic banks. However, Fitch said no Islamic alternatives to government treasury bills, commercial papers or promissory notes exist.

The takaful share of total insurance sector premiums in 2022 was estimated at less than 1%. Insurance penetration in general was also very low at 0.4% in 2021. Meanwhile, the report added that the overall Nigerian banking sector outlook is deteriorating.

“We expect real GDP growth to remain robust in 2023 but operating conditions will weaken due to higher inflation, rising interest rates and hard-currency shortages”.

It added that earnings will receive a boost from higher interest rates but a material naira devaluation would have a negative effect on capitalisation, and continued hard-currency shortages will lead to tighter US dollar liquidity in 2023. #Nigeria Houses Largest Sukuk Market in Africa – Report.