Dubai: The Nigerian Islamic finance industry will continue its growth trajectory in 2023-2024 on the back of government sukuk issuance and policy push but is still likely to remain nascent in the medium term, says Fitch Ratings. Nigeria houses the largest sukuk market in Africa with an outstanding issuance of NGN755.5 billion (USD1.6 billion), albeit small by global comparison.

Islamic banking - referred to as non-interest banking in Nigeria - is also growing swiftly from a low base on the back of strong financing push (including from newly-established Islamic banks), a growing capital base, and government’s more lax prudential requirements compared with conventional banks’. Challenges include a limited Islamic banking footprint and low public awareness of Islamic products.

The size of the Nigerian Islamic finance industry is estimated at USD2.9 billion at end-2022, with outstanding sukuk being the largest segment at 57%, followed by Islamic banks at 42% (total assets), and the remaining 1% between Islamic funds (total assets) and takaful (total contributions). The long-term potential is significant as Nigeria has the largest Muslim population in Africa with a large unbanked population.

In 2022, the Federal Government of Nigeria issued seven-year sukuk raising NGN130 billion (USD282 million), its fifth issuance since 2017 with above 1.6x subscription. The Securities and Exchange Commission (SEC) is aiming to make Nigeria a hub in Africa for Islamic capital-market products as part of the government’s ‘Revised Plan 2021-2025’. SEC targets 50 listings of sharia-compliant products with market capitalisation of at least NGN5 trillion (USD11 billion) by 2025. Last year also saw Taj Bank Limited’s launch of a NGN100 billion (USD222 million) mudaraba sukuk programme in 2022 to raise tier 2 capital.

Islamic banking assets increased 71% year-on-year in 1H22. However, it held only a 0.8% market share by total industry assets. Only three full-fledged Islamic banks and two Islamic windows are operating in Nigeria with all having small capital bases and a limited distribution network. Islamic banks’ deposit collection was limited with a 0.4% share of industry deposits, while the financing share was higher at 0.7% of industry loans. Fitch rates Jaiz Bank (B-/Stable), which holds above a 60% domestic Islamic-banking market share. The bank’s shareholders are committed to supporting its strong growth through further capital injections.

More favourable prudential requirements are supporting Islamic banking growth. The regulator, the Central Bank of Nigeria (CBN), has set the regulatory liquidity ratio for Islamic banks (10%) much lower than for conventional banks (30%). CBN also grants Islamic banks a 50% “alpha-factor” which is a discount in the calculation of risk-weighted assets, but none for conventional banks. This provides a sizable uplift to Islamic banks’ capital ratios, and allows Islamic banks to capture market share with less capital constraint on growth. For example, Jaiz Bank received a capital ratio uplift of 570bp at end-1Q22 due to this discount.

Islamic liquidity-management infrastructure is developing. In 2022, the CBN introduced a funding-for-liquidity facility and an intra-day facility for Islamic banks. However, no Islamic alternatives to government treasury bills, commercial papers or promissory notes exist. The takaful share of total insurance sector premiums in 2022 was estimated at less than 1%. Insurance penetration in general was also very low at 0.4% in 2021.

Meanwhile the overall Nigerian banking sector outlook is deteriorating. We expect real GDP growth to remain robust in 2023 but operating conditions will weaken due to higher inflation, rising interest rates and hard-currency shortages. Earnings will receive a boost from higher interest rates but a material naira devaluation would have a negative effect on capitalisation, and continued hard-currency shortages will lead to tighter US dollar liquidity in 2023.


Matt Pearson
Communications Associate, Corporate Communications
Fitch Group
30 North Colonnade
E14 5GN