Nigeria is gradually opening up to Islamic finance, a move that could bring non-interest banking to over 80 million Muslims and develop one of Africa’s fastest-growing consumer and corporate banking sectors.
Home to the largest Muslim population in sub-Saharan Africa, Nigeria is trying to establish itself as the African hub for Islamic finance, which follows religious principles such as bans on interest and gambling.
In recent months, a string of regulatory initiatives have set the groundwork for products such as Islamic bonds (sukuk), insurance (takaful) and interbank lending products, although there is still only a small number of local market participants.
“The potential is there but the market is negligible in Nigeria because we have only one Islamic bank and one window – but it has potential to grow,” said Bashir Aliyu Umar, special adviser on non-interest banking to the central bank governor.
Islamic banking is currently offered by the Islamic window of Stanbic IBTC, a unit of South Africa’s Standard Bank, and Jaiz Bank, a full-fledged Islamic lender which has operated since 2012.
Abuja-based Jaiz now plans to obtain a national licence to expand operations beyond Nigeria’s north, which has been hit by an Islamist insurgency.
“That was where the security challenges started last year, that really affected the roll-out of the products,” Umar said.
Despite the challenges, Jaiz has grown its branch network to 10 from an initial three, with ambitious expansion plans calling for 100 branches by 2017.
It completed a capital raising in August, attracting investors such as the Jeddah-based Islamic Development Bank. As of June, it had total assets of 20.6 billion naira ($129 million) and capital of 10 billion naira.
Sterling Bank has been granted approval in principle for an Islamic window, while two more lenders have expressed interest in obtaining licences to operate Islamic windows, according to a central bank official.
The market needs the competition. A November report by EFINA, a Lagos-based development organisation, estimated that 34.8 percent of Nigerian adults who did not use non-interest banking products were likely to take them up if they were available.
But Nigeria’s banking sector remains underdeveloped. The same report found that over 61.6 percent of adults borrowed from family and friends, while only 5.6 percent used deposit-taking banks and 9.9 percent used co-operatives.
To service the demand, Sterling Bank plans to roll out several products including a profit-sharing account and other investment products, Basheer Oshodi, group head of non-interest banking at Sterling, told Reuters.
“We are ready to go live immediately when we get the final licence. We will pilot with 10 branches and will end up using all 165 branches across the country thereafter.
“In reality, we will be having almost all basic Islamic banking products. We have also started to structure a couple of sukuk,” he added.
Sukuk could come to the market soon, after rules for their issuance were approved in March by the Securities Commission; cocoa-producing Osun State plans the country’s first such issuance.
Nigeria’s regulators have taken steps to retain the final say on what Islamic products come to market, a centralised approach which mirrors regulation of the industry in countries such as Malaysia and Oman.
The central bank has set up an advisory committee to regulate sharia compliance, while the insurance regulator issued guidelines for takaful operators in April.
There are currently three takaful windows operating in Nigeria and up to five firms may be considering entry into the market, said Auwalu Ado, internal sharia auditor at Jaiz Bank.
“With a meager 100 million naira as the minimum capital requirement for either family or general takaful, it is expected that many players will join the train as full-fledged takaful companies,” said Ado.
Takaful would not just give Islamic lenders an opportunity to protect their assets, but also offer an avenue for Islamic banks to invest their funds actively, he added.
Nigeria’s central bank has begun developing lending products to help Islamic banks manage their short-term funding needs; a lack of such products has slowed industry growth in other countries.
“The financial market department is developing instruments that will be used between the central bank and the Islamic banks as well as on an interbank platform,” said Umar.
The central bank is a shareholder in the Malaysia-based International Islamic Liquidity Management Corp (IILM), which aims to provide cross-border options for short-term funding through a planned sukuk programme.
In December, the Nigerian central bank issued guidelines for asset-backed securities that would use IILM certificates as collateral – potentially putting Nigeria ahead of many other Islamic finance centres in developing such complex products.