With the recent statement by the UK Prime Minister, Mr. David Cameron, to make London the global hub of Islamic finance, Obinna Chima writes that the financial system may be entering a new era
The pallid state of infrastructure in Nigeria remains a major source of concern to everybody in the country. According to the African Development Bank (AfDB), Nigeria has an infrastructure deficit of $360 billion.
The inadequate physical infrastructure in the country has been identified as one of the major constraints to sustained and broad-based strong economic growth.
Addressing these challenges will require a substantially larger annual level of investment in infrastructure, a significant increase in annual allocations for routine and periodic maintenance to ensure reliable infrastructure services, and increased attention to the institutional arrangements that support the infrastructure network of the country and the related services.
A report by the AfDB also indicated that if Nigeria’s infrastructure are given a facelift, it could boost the country’s gross domestic product (GDP) growth by about four per cent. Some of the sectors that require attention in the country include power, road, rail, information and communications technology (ICT) and transportation.
However, access to finance, to fund the development of most of these critical sectors has remained a challenge.
With Nigeria’s total debt stock at N8.32 trillion as at September 30, 2013, analysts have warned that the growing domestic debt might result to a debt crisis if not checked. Others have advised the government to look for cheaper alternatives to finance infrastructure development. One of the cheaper alternatives today is Islamic finance, which is interest free.
While regular bonds are essentially debts to be repaid at a future date, with Islamic bonds, that is not the case.
In essence, Islamic finance can be described as finance under Islamic law. Islamic finance being an emerging sector of the overall economic system is rapidly expanding and is now considered to be worth over $1.2 trillion globally. The Islamic model uses money as a measuring tool for value and not as an asset in itself, so income is not received from money as this is seen as exploitative and usurious. Investment vehicles through the Islamic finance structure are based on shared business risk.
The growth of Islamic finance globally also means there is an increasing demand for new ways of identifying Islamic-compliant business activities. Presently, the London Stock Exchange is working on the creation of new indices. This means the creation of a new way of identifying Islamic finance opportunities - a world-leading Islamic market index.
Lessons from London
Speaking at the recently-concluded World Islamic Economic Forum, the Prime Minister of the United Kingdom, Mr. David Cameron, expressed his desire for London to be one of the greatest capital of Islamic finance
According to Cameron, steps had already been taken to open up London for more Islamic financing activities.
“Already London is the biggest centre for Islamic finance outside the Islamic world. But today our ambition is to go further still. I want London to stand alongside Dubai and Kuala Lumpur as one of the great capitals of Islamic finance anywhere in the world.
“And we are already taking big steps to open up the City of London to more Islamic finance. Today, we have more banks compliant with the principles of Islamic finance than any other Western country.
“We have over 25 law firms supplying services in Islamic finance and 16 universities or business schools offering MBAs or similar qualifications in Islamic finance, including the new programme for senior executives announced by Cambridge University last week,” he explained.
He pointed out the move was to attract more investment into London. The UK prime minister noted Islamic finance was growing 50 per cent faster than traditional banking, adding that global Islamic investment was set to grow to £1.3 trillion by 2014. As a result of this, he expressed his preparedness to make sure that a big proportion of that investment would be in Britain. He revealed that some of the infrastructure in Britain were developed through Islamic finance.
Cameron added: “Britain is a country ready to welcome your investment, a country that values your friendship and a country which will never exclude anyone because of their race, religion, colour or creed. But if investing in London is good for you, then opening up London to your investment is just as vital for our own success here in Britain.
“We are backing our businesses, seeking new markets and banging the drum for Britain to show we are a first class destination for trade and investment. Islamic investment is already fundamental to our success.”
He said further: “But we're not going to sit here and rest on our laurels. We know there is much more to do for London to reach its full potential as a great world centre of Islamic finance.
“This government wants Britain to become the first sovereign outside the Islamic world to issue an Islamic bond. So the Treasury is working on the practicalities of issuing a bond-like sukuk worth around £200 million and we very much welcome the involvement of industry in developing this initiative which we hope to launch as early as next year.”
Prospect in Nigeria
The use of Islamic finance in Africa could grow further as several north and sub-Saharan African countries including Morocco, Tunisia, South Africa and Kenya are laying the legal groundwork to be able to issue sukuk, an Islamic finance bond.
In Nigeria, Osun State recently floated the country’s first Islamic bond, taking a major step towards developing an Islamic finance industry in the country. Analysts said the Nigerian Sharia-compliant bond issued by Osun State while relatively small at $62 million, signalled the start of a trend.
Also, the Islamic Development Bank is also lending $150 million through Sharia-compliant facilities for the new Lekki port in Lagos.
To the Governor of the Central Bank of Nigeria (CBN), Mallam Sanusi Lamido Sanusi, Islamic finance products also have the capacity for ensuring financial inclusion of significant segment of the population.
Sanusi stated that when properly harnessed, Islamic finance could contribute significantly in turning Nigeria into a major international financial centre.
The CBN governor explained: “Islamic finance has shown its potential in achieving financial inclusion in many economies by bringing in large under bank populations, especially Muslims into the urbanised financial sector.
“We have so far registered Jaiz bank, and we have given a licence to Stanbic IBTC Bank to operate some window.
“We have given an approval in principle to Sterling Bank to operate an Islamic window and a microfinance bank that has applied for Islamic banking licence.
“This is in addition to the work being done by National Insurance Commission to promote Takaful, an Islamic insurance product.”
Sanusi said many Islamic financial markets had established their presence in all the major financial centres and were playing key roles in deepening the financial markets with products across the globe.
“In the face of the growing interconnectedness of the global financial system and its integration, it is thus unrealistic for any existing or aspiring financial centre to be oblivious of this development.
“Prime Minister David Cameron announced his government’s plan to make London a capital for Islamic finance to the Western world. He said it would stand alongside Dubai and Kuala Lumpur as one of the great capital of Islamic finance. The UK is embarking on this plan, despite the fact that it is a non-Islamic country,” Sanusi argued.
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