Why Nigeria is seen leading Islamic finance growth in Sub-Saharan Africa

Islamic banking has made little headway in Africa despite the continent’s large Muslim populations, but Nigeria has a tendency to lead Islamic finance growth in Sub-Saharan Africa (SSA), a report by Moody’s Investor Service shows.

Muslims make up at least half of the Nigerian population at about 99 million which is larger than the combined Muslim population in South Africa, Kenya and Angola.

Source: Islamic Finance Service Board, IMF and Moody’s Investors Service

However, according to Moody, Nigeria’s Islamic finance penetration is one of the lowest among African peers at 1 percent when compared to Tunisia, Egypt, Senegal and Algeria which have 6 percent, 5 percent, 4 percent and 3 percent penetration levels respectively.

Source: Islamic Finance Service Board, IMF and Moody’s Investors Service

More so, Nigeria’s Islamic banking assets accounts for about 0.3 percent of GDP in comparison to the Gulf Cooperation Council (GCC) where the average Islamic banking assets to total banking assets is 39 percent, with Saudi Arabia at 55 percent and the UAE at 25 percent.

Moody’s report however shows that there is a potential for Nigeria’s Islamic penetration to grow robustly over the next ten years, irrespective of the current low growth base.

“We expect Islamic finance to grow robustly in Nigeria, the largest African Muslim market, over the next 10 years, although from a low base,” said Peter Mushangwe, a banking analyst at Moody’s.

Nigeria, along with Sudan, South Africa, and Senegal will lead Islamic Finance growth in Sub-Saharan Africa, as most have large Muslim populations, along with existing and rapidly evolving regulatory and supervisory structures in place to support growth, according to the report.

In fact, the organisation projects that six countries will lead growth across the continent: Egypt, Morocco, Sudan, South Africa, Nigeria and Senegal due to rapidly evolving regulatory and supervisory structures.

Source: Islamic Financial Services Board

Asides stating that Sukuk issuance (Islamic equivalent of bonds) will gradually recover as led by sovereigns, an increase in the structural demand for Islamic services in Nigeria will be driven by three overriding trends, the Moody’s report showed.

The first trend is in line with the rising awareness of Islamic banking products, and “we expect growing awareness, employment of technology and agency banking to increase penetration, given Nigeria’s large unbanked population,” stated the report.

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The report stated that “as an example, Sterling Bank uses “Altmall”, a digital platform that enables its clients to choose the assets they want to purchase and banks are also training their staff on Islamic banking, increasing awareness.

“We believe government impetus will enable the sector to grow robustly over the next 10 years, although from a low base, despite Nigeria’s presently weak economic conditions”, said Moody’s.

“Nigeria has currently only two fully fledged Islamic banks, Jaiz Bank Plc and TAJ Bank Limited. Jaiz Bank, established in 2011 as a regional Islamic bank covering the Northern parts of Nigeria, became a national bank in 2016 and offers its services to all Nigerian geographical zones.

Jaiz Bank Plc has strongly outpaced growth in the system since 2012, despite a challenging operating environment for Nigerian banks. This indicates good uptake of Islamic banking products. The bank’s total assets increased by a compounded annual growth rate (CAGR) of 42% to NGN167.3 billion as of the end of 2019 from NGN14.1 billion in 2012.

This compares very favourably to the 10% CAGR for the overall banking system assets over the same period. Deposits, although from a low base, also increased significantly by a CAGR of 75% to NGN127.2 billion over the same period, compared to a CAGR of 7.7% for system deposits”, said Moody.

Following closely is the second trend which sees growth in wealth that will support the demand for banking services.

“In general, rising per capita income creates demand for new banking products beyond savings accounts and it also increases the liquidity available for intermediation, allowing banks to expand their product suites,” stated the report.

Moody’s also pointed that “Nigeria’s per capita income increased by a CAGR of 1.2% between 2010 and 2020, and was $5,353 (purchasing power parity on current prices) at year-end 2019, but the IMF expects Nigeria’s per capita income to increase to $5,532 by 2025.”

The third trend to boost Islamic finance penetration in Nigeria is the still growing and large unbanked Muslim population in Nigeria will support demand because it provides a large pool of people who may want to align their banking services with their faith.

Moody’s report stated that “Nigeria’s unbanked adult population is estimated at about 60 million, and since nearly half of the people in the country are Muslims, the unbanked Muslim population should also be significant.”

Also, government support will play an important role in developing the sector especially since it is a medium of boosting financial inclusion according to Moody’s.

The Central Bank of Nigeria continues to improve Islamic banking regulations, thereby increasing confidence in the sector, and some conventional banks have started to offer Islamic financial services, thus further growing product awareness, according to the report.

There are however some restrictions to the development and growth of Islamic products as some Muslims may not accept products approved under a different interpretation of the Shariah law.

“Being that the Islamic banking products require more detailed due diligence and documentation to ensure the compliance of products or projects with Shariah law, we expect the current complexities around product documentation and project management processes and Shariah boards to remain,” stated the report.

Islamic banking complies with the principle of Islamic or Shariah law. Core Shariah law principles are the sharing of profit and loss, as well as the prohibition of payment and collection of interest.

Investments in businesses that provide goods and services considered contrary to Islamic principles are also prohibited.

The core principles of Islamic finance focus on tangible investment, risk sharing and the prohibition of charging interest, and as a result, tend to discourage excessive consumption-led debt.

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