LONDON: Within the next two years the Islamic finance sector in Nigeria will be “very vibrant” with huge opportunities in virtually every asset class, according to Mohammed Lawal Shuaibu, area manager of Diamond Bank, one of the largest in the country.
This follows the introduction of the Law Governing the Operation of Islamic Banks by the Central Bank of Nigeria in mid-March 2009 thus bringing the authorization of Islamic financial institutions on par with the same provisions relating to conventional banks. “Until last month some institutions were doing Islamic deals on an ad hoc basis. Now that the law has been passed, we will see a rapid growth of such products because the demand is there and the market has been bereft of Islamic products so the starting base is low,” explains Shuaibu.
Some 65 percent of Nigeria’s estimated 150 million population is Muslim. Thanks to the oil price windfall, there is huge disposable income in the country, albeit that the oil wealth is still largely concentrated in the hands of the elite few.
Africa as a continent has been slow to take to or attract Islamic finance at the same scale say as the GCC (Gulf Cooperation Council) countries, Turkey or Malaysia. South Africa was the first sub-Saharan African country, excluding Sudan, to start Islamic banking in earnest in the 1990s with the establishment of Albaraka Bank (SA), part of the Bahrain-based Albaraka Banking Group. Since then local banks such as First National, ABSA and Nedbank are all offering Islamic products; while asset managers such as Sanlam and Oasis Group are offering Shariah-compliant equity and pension products.
Kenya at the same time last year authorized two Islamic banks — Gulf Arab Bank and First Community Bank following the introduction of an Islamic banking law. Egypt, Algeria, Tunisia, Senegal, Gambia and Djibouti have all got the odd one or two Islamic financial institutions, but in general they are ineffective because the regulatory and financial environment in which they operate are not friendly to Islamic finance. Sudan is the only country where Islamic banking is well established but the scale and scope is parochial and there has been evidence in the past of governments exploiting the sector for its own fiscal and monetary policy aims.
Nigeria, one of the richest and largest African economies was the exception in that Islamic finance like anything Islamic until recently remains a potentially sensitive issue. But in an era of globalization, as Shuaibu stresses, “If the UK can have Islamic banks, and the US and EU are contemplating similar institutions, why can’t Nigeria have Islamic banking. We cannot afford to be left behind as a country?”
Diamond Bank, which is a fully-fledged commercial bank and is capitalized at 25 billion naira, is in the process of establishing a dedicated Islamic banking window, “since there is now a legal framework that governs Islamic banking.”
The Central Bank of Nigeria has given another entity, Jaiz International, a temporary Islamic banking license on the condition that it would get full authorization if it gets the full capitalization of 25 billion naira, which according to Shuaibu, it has thus far failed to do.
The Central Bank of Nigeria has also set up a National Shariah Advisory Board for Islamic finance and is also in the process of convening an Islamic finance advisory group comprising market players and other interested parties to advise and deliberate issues relating to the sector.
Muhammadu Sani Jada, special assistant to Gov. Murtala H. Nyako of Adamawa State in the northeast, is similarly confident that “the federal government has opened the market for the Islamic finance industry. It is up to the investors, financial institutions and other interested parties to come and take up the challenge of establishing Islamic banking in Nigeria.”
Jada sees huge potential for Islamic finance in the real economy in Nigeria especially in Adamawa State, which is the breadbasket of the country. “We are interested in investments and partnerships based on Musharaka and Mudaraba in order to accomplish people-oriented development projects and infrastructure. We are going to look at all the Islamic financing options.”
The main problem for Nigeria is the perception of its country risk and the rampant corruption. Both Jada and Shuaibu stress, that no market is free of risk as the current financial crisis has proven. On the contrary, the Nigerian economy has improved tremendously over the last few years and return on investment in most sectors is very attractive. Nigeria, they stress, “is a goldmine for those who want to come in and have patience.”
They urge any investors or Islamic banks interested in doing business in Nigeria to do their due diligence and tie-up with reputable local entities as a first step. But there is a further recourse to risk mitigation. The IDB (Islamic Development Bank) Group through its export credit and investment insurance entity ICIEC (Islamic Corporation for the Insurance of Investment and Export Credit), following discussions with Diamond Bank, is ready to provide country risk insurance for those who need extra comfort.
