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Deepening Islamic Capital Market for Economic Growth

Goddy Egene writes that effort by the Securities and Exchange Commission to strengthen the non-interest segment of the nation’s capital market is timely and will result in economic growth
The Nigerian capital market has been a source of funding for governments and corporate bodies over the years. Federal, states and local governments have raised trillions of naira from the capital market to finance infrastructural projects through bonds. Similarly, corporate bodies have raised long-term equity and debt capital to fund expansion and other aspects of their operations.
In all of these fund raising exercises, the non-interest segment of the capital market, otherwise known as Islamic capital market, has not been used. However, the Securities and Exchange Commission (SEC) has stepped up efforts to deepen that segment of the market so that its potential can be unleashed on the economy.
As part of strategies to make the non-interest capital market active in Nigeria, SEC last week organised a regional round table in Kano themed: “Financing Development through Islamic Capital Market – A Viable Alternative. ”
According to the Director General of SEC, Mounir Gwarzo, investors worldwide are increasingly allocating their resources into Islamic a finance products, disclosing that by the end of 2014, total assets under management in the global Islamic finance industry surpassed $2 trillion.
He said: “Our focus for this roundtable is on Sukuk, one of the most important components of the Islamic financial system. The global sukuk market continues to witness remarkable growth since after the 2008 global financial crisis as annual issuances have grown from $15 billion in 2008 to almost $120 billion in 2014. In fact, last year is widely considered a landmark year for Islamic finance, especially with landmark debut sukuk issuances by countries such as the United Kingdom, Hong Kong, Senegal, South Africa, and Luxemburg. Of course the year witnessed continued strong interest from key markets of Malaysia, Saudi Arabia and the United Arab Emirates (UAE) and emerging markets like Turkey and Indonesia. There is no doubt that the sukuk market is emerging on a global scale as a viable alternative source of funding,” he said.
In the Nigerian capital market, it is only Osun State that has so raised funds through Sukuk.
But while describing Malaysia, Saudi Arabia, UAE, Kuwait and Qatar as the top five largest Islamic finance markets in the world as they account for the highest sukuk issuances and contribute more than half of the total assets under management in the industry, Gwarzo said that with Nigeria’s population which is far more than all five countries put together, the country should be a major market for global Islamic finance market.
Origin of Islamic Finance/Capital Market
Modern Islamic finance began with the emergence of Islamic banking, where products and services are not based on riba (interest). However, as the industry grew, many other financial products in the capital markets and insurance sectors were adapted to incorporate Shariah compliant aspects. Products innovation has been significant in the Islamic financial services industry over the last decade, resulting in a wide array of Islamic instruments being introduced in the market. In a number of jurisdictions, Shariah compliant rules have been developed for equity, debt and even securitisation products and some are in the process of extending rules to structured products and other forms of derivatives.
Islamic financial products represent a class of investment products, which appeal to those looking for socially responsible or ethical investments and at the same time they represent a potential source of attracting otherwise idle investible funds into the formal sector of the economy with particular emphasis on the capital market.
Though the Islamic banking segment is globally the most developed within the Islamic Financial system, there is also a great potential for Islamic capital market as it become increasingly clear that both Islamic Banking and Islamic Insurance (Takaful) could not exist in isolation without the support of an Islamic capital market based on the need to address liquidity management for Islamic banks and Takaful operations.Hence Islamic capital market is now gaining momentum to grow into a vibrant market place especially for emerging market of Middle East, Asia and North Africa. The volume of Islamic Investment with reference to Shariah complaint instruments have grown to form a critical mass that can support a well functioning and efficient capital market.
Benefits of Islamic Capital Market
Islamic capital market has many benefits including the creating a conducive environment. Excess and shortage of liquidity can be addressed if Islamic options are available at the primary and/or secondary market level. Others are: establishing a level playing field through reasonable profit-taking and equitable bargaining power; maintaining stability by removing business operations based on speculative ends, promoting sustainable business and investment activities that entail positive results with stable future prospects and the welfare of the societies at large; reduction in uncertainty and in leverage levels in the business community; linking capital markets to real economic activities;real asset investment securitisation for the purpose of onward Sukuk issuance is permissible within parameters of Islamic capital market.
Improving Islamic Capital Market
In order to improve the nternational Islamic capital markets, in 2002, the International Organisation of Securities Commission (IOSCO) set up a Committee on Islamic capital market chaired by the Malaysian Securities Commission. Other members of the Committee were: Nigeria, Indonesia, Jordan, Thailand, Turkey, South Africa, Italy, United Kingdom and the United States. Clearly, some of the members were G-8 countries, which although non-Islamic countries, had witnessed impressive growth in Islamic finance in their jurisdictions with the participation of major financial institutions such as HSBC, Citibank, Deutsche Bank, ABN-AMRO and BNP Paribas. There is also a growing interest by the International Monetary Fund (IMF) the World Bank, and Dow Jones, which has developed an Islamic index to track performance of the market.
Domestic Efforts
Before now, SEC has been making efforts towards developing this segment of the market. For instance, 2004 the Commission set up an in-house committee for the introduction of Islamic capital market products/services in Nigeria. The in-house Committee conducted public enlightenment programme in all the geo-political regions of the country. As a result of the Commission’s effort three ethical/ Shariah complaints funds were introduced as at then IBTC-ethical fund, Lotus Halal Fund and Zenith Ethical Funds).
Also, in 2004, SEC encouraged the proposed non-interest bank (Jaiz International Plc) to access the capital market to raise the required minimum capital. The bank raised N2.5 billion via an Initial public offering. The SEC has in 2010 approved rules on Islamic fund management. In July 2012, in addition, the Nigeria Stock Exchange launched the NSE Lotus Islamic Index to track select shari’ah compliant equities in the market.
The commission also in 2013 developed a regulatory framework for Sukuk Issuance. This was to encourage issuers (corporate, sub-nationals and supra-nationals) to issue Sukuk. This effort led to the landmark issuance of Sukuk in Nigeria initiated by the Osun State Government with the issuance of Sukuk worth N11.4 billion, yielding 14.75 per cent in 2013.
Besides, SEC in conjunction with other stakeholders under the auspices of a non-governmental organization, Enhancing Financial Inclusion in Nigeria(EFINA), worked on a master-deck to address all the regulatory issues in order to enhance the smooth take off of Islamic finance in Nigeria.
The commission has put in place continuous capacity building programme for staff and market operators and has equally created a Non-interest Division under Market Development Department.
Non-Interest Capital Market Masterplan
In order to further deepen the non-interest capital market, the SEC has last year set up an industry committee to design a 10-year capital market master plan part of which the recommendation was the non-interest capital market products as a strategy for financial inclusion.
The plan is intended to firmly establish the Islamic capital market segment of Nigeria’s capital market and to provide its strategic direction over the next 10 years by articulating the vision, objectives and strategic initiatives to be implemented going forward.
It also seeks to address prevailing gaps in the Islamic capital market and to position it to play an effective role in financial intermediation.
The master plan covers such aspect as building a strong regulatory foundation for Islamic capital market, encouraging the development of market stakeholders, encouraging the development of products and creating a regional Islamic capital market hub.
It was envisaged that Nigeria has a significant potential to develop Islamic capital market that can contribute about 25 per cent of the overall capital market capitalisation within the next 10 years.
“Islamic finance is not simply just an interest free system but entails the promotion of entrepreneurship, safeguarding of property rights, transparent transaction, and honouring of contractual obligations. It is not about promoting the interest of one group of people at the cost of others but rather providing a level playing field for the varied investors’ interest. The SEC is willing to support this kind of initiative towards further deepening the Nigeria capital market and the overall economy,” Gwarzo said.

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