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Nigerian Islamic Finance Industry Is Nascent but with Growth Potential- Fitch Ratings

The Islamic finance industry in Nigeria remains nascent and in its early stages of development, but there is potential for growth, Fitch Ratings says.

This view is based on Nigeria being the most populous country in Africa, with the fifth-largest Muslim population in the world, along with rising government support for the sector and large financing requirements. Outstanding sukuk issuance constitutes the largest segment of Nigeria’s Islamic finance market, followed by Islamic banks (by total assets), Islamic funds (by net asset value) and takaful (by total contributions).

Nigeria (B/Stable) has experience in tapping the international bond market. However, the Nigerian sukuk market is restricted to local-currency sovereign issuances.

We expect local-currency sukuk issuance to pick up as domestic investor appetite for such instruments is growing and the sovereign continues to seek alternative funding sources, as it faces heavy fiscal pressures due to the lower oil prices and the economic disruption caused by the coronavirus pandemic.

The sukuk market in Nigeria is in its infancy with its share of the global sukuk market at less than 0.5%, according to International Islamic Financial Market’s 2020 sukuk database.

Fitch Ratings

To support growth, Nigeria’s Securities and Exchange Commission has targeted for the non-interest capital market to contribute at least 25% to the overall capital market capitalisation by 2025, as part of their 2015-2025 Master Plan.

The Federal Government of Nigeria (FGN) issued three local-currency sovereign sukuk since 2017, with NGN362.5 billion (USD918 million) outstanding as of 30 June 2020, representing 2.3% of the country’s total domestic debt stock.

The 2020 sovereign sukuk issue was 4.4 times oversubscribed and investors included pension funds, Islamic banks, insurance companies, retails investors, and asset managers. Notably, retail investors comprise a sizeable proportion of the investor base (17.3% of the 2018 sovereign sukuk).

Islamic banking, referred to as ‘non-interest banking’ in Nigeria, is in its infancy. The total assets of the country’s two fully fledged Islamic banks reached NGN214.8 billion (USD 564 million) at end-1H20, or less than 1% of total banking industry assets, according to Islamic Financial Services Board data.

The sector’s growth has been similar to that seen in Indonesia and Turkey, countries with large Muslim population, where sovereign support helped Islamic banking to expand from a low base to a domestic market share of about 6%. The African continent’s share of the global Islamic banking and sukuk market was less than 2% at end-2019.

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We expect Nigerian banks’ asset quality to weaken over the next 12 to 18 months and Fitch has maintained a negative outlook on Nigerian banks’ operating environment. These developments are likely to delay Islamic banking progress in the country.

Nigeria’s Islamic financial architecture has seen several developments in recent years. In 2015, the Central Bank of Nigeria (CBN) set up a centralised advisory body that oversees that interest-free banking products in the country conform to sharia principles. This is likely to aid standardisation efforts. In 2016, the Nigeria Deposit Insurance Corporation introduced a Non-Interest Deposit Insurance Scheme for Islamic banks. In 2017, the CBN also introduced two lender-of-last-resort instruments for the sector.

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The takaful and the Islamic funds management industry in Nigeria also remains underdeveloped with the domestic market share of less than 2%. Given the increasing smartphone penetration and large unbanked population, Islamic fintech can be a source of industry growth.

Long-standing constraints limit the Nigerian Islamic finance industry’s growth, including low awareness of Islamic financial products, along with scepticism and a lack of confidence by significant numbers of customers in the product’s sharia-compliance. Sections of the public, including prominent non-Muslim groups, also strongly oppose the government making use of Islamic finance.