Depth before dollars: Why Nigeria’s Islamic market holds the key to West Africa’s growth

Nigeria sits at the center of West Africa’s Islamic finance ambitions. While the region is attracting growing attention from Shariah compliant investors, capital deployment remains constrained less by appetite than by the shallow depth of domestic markets – a dynamic most visible in Nigeria, the region’s largest economy.

Institutional demand for Shariah compliant assets is rising rapidly within Nigeria. Pension funds, asset managers and private capital pools are actively seeking exposure, yet allocations remain limited, reflecting a market where supply has not kept pace with demand.

“The gap exists; there is no doubt about that. The demand signals are so strong,” said Zakari Ahmadu, CEO of BAS Financial Services. Nigeria’s Islamic finance industry reached NGN2.5 trillion (US$1.7 billion) in 2023, up from NGN1.5 trillion (US$1 billion) a year earlier. Yet, he noted, “significant pools of capital are chasing too few Halal instruments,” forcing investors into conventional assets. “The demand is latent rather than absent.”

This imbalance is not unique to Nigeria, but it is most acute there. Across West Africa, Islamic finance markets remain fragmented and underdeveloped, with limited product diversity and shallow secondary markets. Nigeria, by virtue of its scale, has become the clearest expression of a broader regional constraint.

Nowhere is this more evident than in Nigeria’s Sukuk market, where oversubscription has become structural.

“Today, if you want to issue a Sukuk in Nigerian markets, it will be more than 200% oversubscribed,” said Habib Abdullahi Salis, COO and product strategy lead at D’Namaz Capital. “The liquidity issue is not demand driven but supply driven.” Much of the issuance, he added, remains private and non-tradable, limiting overall market depth.

Scarcity is also distorting pricing and weakening secondary market activity. “All this pressure pushes the price of Sukuk above what is expected to be fair price,” Habib said, noting that investors tend to hold instruments to maturity due to limited reinvestment alternatives. The same constraints extend beyond Sukuk to instruments such as non-interest commercial papers.

The bottleneck lies firmly on the supply side. “It’s a problem that generates from the source – the government themselves, the corporations themselves,” Habib said, pointing to issuer hesitancy, disclosure concerns and the relative ease of conventional alternatives. Companies continue to default to bonds, which are faster and easier to structure than Sukuk, given the more stringent Shariah and regulatory requirements.

At the same time, Nigeria’s domestic institutional base remains uneven in its Islamic allocation. The country’s pension industry has grown to nearly NGN30 trillion (US$20 billion) in assets, yet “non-interest pension funds are still embryonic, mainly due to the lack of readily available instruments,” Zakari said. Takaful penetration also remains limited.

“What is missing is the product infrastructure, the distribution architecture and the investor education to convert that latency into deployed capital,” he added.

Sovereign Sukuk has played a foundational role in addressing this gap. Nigeria’s program has raised over NGN1.4 trillion (US$930 million), including a recent NGN350 billion (US$230 million) issuance that was more than 300% oversubscribed.

“Sovereign Sukuk has been indispensable in establishing proof of concept – it has normalized the instrument and built confidence among domestic investors,” Zakari said.

Yet structural constraints extend beyond Nigeria’s borders and reinforce domestic limitations. Across West Africa, regulatory divergence, currency inconvertibility and the absence of a harmonized Shariah governance framework continue to inhibit cross-border capital flows. Even where demand exists, capital cannot move efficiently between markets.

For Nigeria, this creates a reinforcing cycle: excess domestic demand cannot easily be met through regional supply, while limited regional integration reduces the ability to scale issuance beyond national boundaries.

Ultimately, the sequencing challenge is domestic, not regional.

“Sequencing matters enormously, and must favor depth first,” Zakari emphasized. “Foreign Islamic capital will only commit at scale when it sees liquid, transparent, well-regulated domestic markets with credible exit mechanisms.”

The implication is clear. West Africa’s Islamic finance ambitions will not be unlocked through regional integration alone. They will depend on the development of deep, functional domestic markets – starting with Nigeria.

Until Nigeria builds sufficient market depth, the region will remain constrained. And until the region becomes more integrated, Nigeria’s ability to intermediate excess demand will remain limited.

For now, the trajectory is clear: Nigeria is not just part of the story – it is the bottleneck through which West Africa’s Islamic capital ambitions must pass.