The Nigerian government’s impending foray into the dollar Sukuk market will be a major leap in the right direction toward attracting international capital but local investment managers say more initiatives are needed to entice foreign investors into the domestic Islamic investments market.
Nigeria may be the region’s Islamic finance bulwark as Africa’s most prolific Sukuk issuer with a growing Halal fund sector, but the current investment pool for Shariah compliant products is primarily geared toward Nigerian investors, both domestically and the diaspora living abroad.
Beyond a limited asset universe, current finance and banking rules—such as the Central Bank of Nigeria’s foreign exchange controls—are not conducive to attracting international investors. In some cases, Islamic financial products such as Sukuk may face double taxation risks because of the way transactions are structured.
“Regulators need to understand that exchange rate volatility and capital controls can undermine investor confidence, and difficulties in repatriating investment proceeds deter offshore capital inflows,” Mubaarak Abdulhameed, a senior analyst with Marble Advisory, tells IFN Investor.
Nigeria needs to undertake liberalization measures to lure more capital into the Shariah space, which will subsequently enhance liquidity and market depth, opines Zainab Eyiowuawi, a senior investment analyst with Cordros Asset Management. “In turn, this may spark greater competition among issuers, resulting in improved product offerings and potentially higher returns for investors.”
Product diversity is paramount to this agenda, and the Federal Government’s November approval of a US$500 million Sukuk – the sovereign’s first foreign currency Sukuk offering – would be an important step to adding more flavors to Nigeria’s Halal investment pool, which is monopolized by local currency offerings as well as lower risk vehicles.
The West African nation, notes Adaku Ijaru, the managing director of Emerging Africa Asset Management, needs to work toward products of different risk profiles to appeal to foreign investors with varying risk appetites.
“Some may be ready to invest in high-growth, Shariah compliant businesses and start-ups through private equity and venture capital models. This can also foster long-term value creation and ultimately attract a broader investor base,” explains Adaku, who also observes that foreign investors have limited knowledge of Nigeria’s Islamic finance ecosystem.
Listing local Islamic investment instruments on international exchanges such as the London Stock Exchange and NASDAQ Dubai is one way to increase visibility and investor participation.
Adaku said such awareness-building initiatives are necessary as Nigeria’s Shariah compliant investment market is still in its developmental stage – with relatively low trading volumes in Islamic financial instruments limiting liquidity and investor participation.
Complementing this effort would be Nigeria taking concrete steps to ensure standardization of Shariah compliant instruments, describing this aspect as being essential – to align with global benchmarks and enhance credibility.
