Nigeria’s $3.8bn Islamic finance industry holds huge growth potential: Fitch
The Islamic finance industry in Nigeria has significant potential for growth and is expected to continue to expand over 2024–2025, driven by the anticipated increase in equity issuance for banks to comply with the Central Bank of Nigeria’s (CBN) new capital requirements.
Fitch Ratings said this in a new note, pointing out that Nigeria has the largest Muslim population in Africa, and over a fifth of its population being unbanked.
“This emphasises the potential for Islamic finance to cover the financial inclusion gap,” it said.
Islamic banking in Nigeria is supported by less stringent prudential regulations than for conventional banks, with Islamic banks having a lower liquidity ratio requirement set by the CBN, according to the credit rating agency.
“Furthermore, Islamic banks have a 50% ‘alpha factor’, which effectively reduces the amount of risk-weighted assets, a benefit not extended to conventional banks. Those regulatory reliefs could enhance the capital ratios of Islamic banks, facilitating their ability to expand their market presence without being constrained by capital requirements as for conventional banks,” it said.
Nigeria’s Islamic finance industry, estimated at $3.8 billion at the end of 2023, is predominantly sukuk, at 59.3% of the total industry value, followed by non-interest banks (39.8%), and Islamic funds and takaful (together 0.9%), according to Fitch.
It said the government continued to issue domestic sukuk in 2023, with the total outstanding sukuk reaching $2.3 billion at the end of the first quarter of this year, or 2% of the country’s debt capital market.
“While Nigeria’s sukuk market is small domestically, it is the largest in Africa, with 42% of the continent’s sukuk, followed by Egypt (29%) and South Africa (20%),” it added.
Long-standing challenges include gaps in the distribution network compared to conventional banks; a smaller, but growing, capital base; low public awareness and demand for Islamic products; and segments of the public strongly opposing Islamic finance according to Fitch.
“While Islamic banks’ lower capital requirements compared to conventional banks could provide an advantage, with lower barriers to entry, we expect their market share to remain below 2% as conventional banks are likely to grow faster,” it said.
The minimum capital requirement for non-interest national banks has doubled to N20 billion.
Dutch said: “Jaiz Bank Plc (B-/Stable) recently signed a memorandum of understanding with the Islamic Corporation for the Development of the Private Sector (ICD). The parties agreed to explore investment opportunities through the introduction of additional Tier 1 capital (mudarabah capital) for the business growth of Jaiz Bank Plc, and its regional expansion through ICD’s partnership and networks. Taj Bank and Lotus Bank (both unrated) must also comply with a N20 billion minimum paid-in capital requirement. At end-2022, the capital gap was N6 billion (around $5 million using the current exchange rate) for each bank.
“Four non-interest banks operate in Nigeria, while an additional two banks operate Islamic windows. Non-interest banks’ total assets (end-2023: 1.1%), deposits (1.3%) and financing (1.0%) are a small proportion of the total banking industry.”
