To magnify their assets size and make liquidity flow in the system, Islamic financial institutions will have to harness their resources, even if it requires collaborating with conventional banks as they seek common risk appetite.
Stakeholders, who gathered at the Non-Executive Finance Forum organised by Sterling Alternative Finance unanimously agreed some existing assets could be converted into Sharia-compliant assets.
As at the end of 2018, the cumulative assets of Islamic banks stood at N160 billion, which is 0.40 percent of the total banking industry figure, and 0.69 percent of the bond market, according to data from the Central Bank of Nigeria (CBN).
“For us to get to 3 percent of the market we need to add another N700 billion to maintain the Sukuk,” said Bashir Oshodi, head, non-interest banking, Sterling Alternative Finance.
“We need an organised body that will help to propel these assets. We can create some kind of securitisation or off balance sheet structure like the Sukuk. Over the past few years we have been creating risky asset. Now, we have to create whole new asset where you have other players – because that enhances the credit and it makes investors more comfortable,” said Oshodi.
Experts say it will be difficult for the industry to expand if beleaguered with dearth of knowledge.
Islamic banking, also known as non-interest banking, is a system based on the principles of Islamic or Sharia law and guided by Islamic economics.
Islamic banks make a profit through equity participation which requires a borrower to give the bank a share in their profits rather than paying interest.
A sukuk is an Islamic financial certificate, similar to a bond in Western finance, that complies with Islamic religious law commonly known as Sharia. Sukuk involves asset ownership while bonds are debt obligations. Both sukuk and bonds provide investors with payment streams.
Hajara Adeola, chief excutive officer, Lotus Capital Limited, said that Islamic Finance could help provide funding for infrastructure and that sukuk could be used to build real projects.
Ijara can be used for road construction and it is traded in the secondary market. It is very flexible and it gives people returns before the project is completed.
The good thing is that the market has matured and now has an ecosystem that supports sukuk, analysts say.
The ijara contract involves providing products or services on a lease or rental basis.
In 2013, the Osun State government issued an N11.4 billion, seven-year Sukuk instrument used to finance the construction and rehabilitation of 27 roads.
In a bid to address the infrastructure challenge bedevilling the country, the Federal Government through the Debt Management Office (DMO) had floated over N100 billion third Sukuk Bond last year.
Nigeria alone needs to invest between $30 billion and $40 billion in infrastructure, Lagos-based Chapel Hill Denham Limited estimates, yet the national infrastructure budget has never surpassed $2 billion each year.
The country’s problems are made worse by the rapid growth of its population, which is expected to jump to 400 million by 2050.
Siadu Babayo, group head, non-interest banking, SunTrust Bank Nigeria Limited, said most Sukuk are financed by giant investment houses in the world and Nigerian Islamic banks would have to develop the mechanism to take care of the foreign exchange risk given the high volatility in naira.
“For us to give investors confidence, a lot has to be done. There are many investors looking for where to put their money. We need a lot of risk analysis to bolster investor confidence,” said Babayo.
BALA AUGIE
