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

(The following statement was released by the rating agency)
Fitch Ratings-Dubai-25 January 2021: 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. 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.
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. 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.
Contact: Bashar Al Natoor Senior Director, Global Head of Islamic Finance +971
4 424 1242 Fitch Ratings - Dubai Branch The Offices 3, One Central Office 321
& 323 Sheikh Zayed Road Saif Shawqi, CFA Senior Analyst, Islamic Finance +971
4 424 1247 The above article originally appeared as a post on the Fitch Wire
credit market commentary page. The original article can be accessed at
www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

Media Relations: Ammaarah Hafezi, London, Tel: +44 20 3530 1137, Email:
ammaarah.hafezi@thefitchgroup.com
Louisa Williams, London, Tel: +44 20 3530 2452, Email:
louisa.williams@thefitchgroup.com

Additional information is available on www.fitchratings.com


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