Non-Interest Finance & Debt Capital Market An Overview. 28 October 2015

Transcription

1 Non-Interest Finance & Debt Capital Market An Overview 28 October 2015

2 Outline 1 Background Non-Interest Finance - Global Trend Understanding Non-Interest Finance Non Interest Finance - Nigeria Non Interest Debt Capital Market 1

3 Introduction 2 Modern Non-Interest finance (NIF) commenced in Egypt over 50 year ago and the first non-interest bond was issued years after by Shell in Malaysia (1990) Various non-interest funding structures have been developed including Banking, Insurance, Money market and Capital market products Participation in the Industry has cut across all faiths and races The NIF Industry spans all notable financial centers such as London, New York, Hong Kong and Singapore. The Industry's assets are currently estimated in excess of $2 trillion nearly the size of the economy of the United Kingdom. Africa constitutes c.3% of total assets. Outstanding volume of non-interest bonds hit $312 billion in 2014 from 587 instruments Large financial intuitions have embraced NIF; Barclays, BNP Paribus, Citi Group, Deutsche Bank etc.

4 Non-Interest Finance: Global Trend 3 Following the financial crisis of 2008, many countries have sought alternative financing structures to spread their risk. This has contributed to the growth of Non-interest finance Non-Interest Finance Assets (US$ trillion) 2015f e The global market has doubled in size within five (5) years. Source: Global Islamic Finance Report 2014 ( 3

5 Understanding Non-Interest Finance 4 What is Non-Interest Finance? The Non-interest financial system is a financial intermediation system set on the precepts of ethics and textual guidance. The basis for Non-interest finance stems from Abrahamic monotheism. Due to the nature of its modern evolution, the current system of Non-interest finance was developed by Islamic jurists mostly in countries around the Persian Gulf. In addition to the prohibition of interest, Non-interest finance emphasizes fairness, transparency and justice in financial transactions as well as risk sharing as opposed to risk transfer. The overall objective of NIF is to promote an ethical financial system that supports real economic development.

6 Understanding Non-Interest Finance 5 Key Principles: Prohibition of Interest Money is not treated as capital. Therefore, money in itself cannot yield returns (interest) Prohibition of Speculative Behavior The NIF discourages hoarding, extreme uncertainty and gambling Sanctity of Contracts Contractual obligation and disclosure of information are sacred Socially Responsible Activities NIF discourages socially irresponsible activities (alcohol, pornography and gambling)

7 Understanding Non-Interest Finance 6 Non-interest finance utilizes four (4) key contract structures These structures are the building block for developing more complex financial products/instruments Profit Sharing Partnerships Musharakah, Mudarabah Lease Arrangements Ijarah Deferred Delivery Contract Salam, Istisna Cost Plus Murabaha

8 Non-Interest Finance in Nigeria 7 Non-interest Finance in Nigeria is emerging rapidly and has cut across the entire financial industry to include; Market Commercial Banking Insurance Capital Market Non-interest finance products in Nigeria include; Saving and term deposit accounts Life and Non-life insurance policies Mutual Funds Exchange Traded Funds Non-interest Bonds Equities Index Operators Jaiz Bank Plc, Sterling Bank Plc and Stanbic IBTC Bank Plc Niger Insurance, Cornerstone Insurance, Africa Alliance Lotus Capital, Asset And Resource Management Company (ARM), Stanbic IBTC Asset Management

9 Non-Interest Finance in Nigeria 8 The NSE-Lotus Islamic Index (NSE LII) first index to track the performance of Shari ah compliant equities in Nigeria Lotus Halal Equity Exchange Traded Fund (ETF) first Shari ah compliant ETF was launched Lotus Capital Halal Investment Fund - the first Islamic mutual fund was launched Capital Market Crash CBN licenses Jaiz Bank and Stanbic IBTC Non-interest banking window ARM Ethical Fund Launch SEC registers Stanbic IBTC Iman Fund Osun State issues first noninterest bond CBN licenses Sterling Noninterest banking window

10 Non-Interest Finance in Nigeria 9 Regulator Central Bank of Nigeria Securities & Exchange Commission Nigerian Stock Exchange (NSE) National Pension Commission Nigeria Deposit Insurance National Insurance Commission Debt Management Office Contribution to NIF NIB guidelines, frameworks and formulation of FRACE - Rules Non-interest bond issuance and asset management - 10 year Master Plan for Non Interest Capital Market (NICM) Launch of a Shari ah compliant equity index Listing of first Sukuk (non-interest bond) Draft guidelines for pension funds investment in NIF products Framework for Non-interest Deposit Insurance in Nigeria Takaful Insurance guidelines The DMO Strategic Plan ( ) includes the development and implementation of models for mobilising resources through the issuance of noninterest debt-financing instruments.

11 Non-Interest Debt Capital Market 10 Non-Interest Bonds The non-interest debt capital market is the fastest growing segment of non-interest finance due to the popularity of the non-interest bond. The non-interest bond is commonly called a Sukuk (derived from the Arabic word for cheque) The Islamic Development Bank (IDB) dubs Sukuk as the Non-Interest equivalent of a bond Sukuk is a hybrid instrument in that it combines both equity (shares in ownership of underlying asset/project) and debt features (fixed periodic payments/coupon payments). The sukuk is defined as certificates of equal value representing common shares in ownership of tangible assets, usufruct and services or (in the ownership of) the assets of a particular project or a specific investment activity

12 Non-Interest Debt Capital Market 11 Sukuks Sukuk represents ownership stakes in existing and/or to be built well defined assets The underlying contract for a sukuk issuance is a permissible AAOIFI contract such as a lease The sale of a sukuk represents a sale of a share of an asset The underlying assets are socially responsible (in line with Islamic jurisprudence) Sukukholders have recourse to the sukuk assets in the event of bankruptcy Conventional Bonds Bonds represent pure debt obligations due from the issuer Bonds are loans of money and the contract is a pure debt contract The sale of a bond is basically the sale of a debt Bonds can finance any legal activity regardless of faith or morality Bondholders are usually unsecured in the event of bankruptcy

13 Non-Interest Debt Capital Market 12 Non-Interest Bond Issuance (Billion) Outstanding Sukuk Map as at 6 April f 2014e $125.0 $ $ $ $ $ $ $21.0 Source: Zawya

14 Non-Interest Debt Capital Market 13 Notable Recent Developments Issuer Offer Size Order Level Goldman Sachs was the first US conventional Bank to issue a $500m non-interest bond 2014 United Kingdom 200mn 2.3bn 11.5x The United Kingdom has issued a $200m sovereign non-interest bond Senegal issues largest non-interest bond in sub Saharan Africa ($208m) South African issues first international noninterest bond in Africa ($500m) Ivory Coast has announced plans for a noninterest sovereign bond 2015 Hong Kong $1bn $4.7bn 4.7x South Africa $500mn $2.2bn 4.4x Luxembourg 200mn 500mn 2.5x Goldman Sachs State of Osun $500mn $1.5bn 3x $63mn $72mn 1.14x In Nigeria, Osun State issued the first subsovereign sukuk to raise funds for the construction of schools

15 Non-Interest Debt Capital Market 14 Key Take Aways from the Osun Sukuk The Non Interest Capital market has the potential to contribute immensely to fund mobilisation for infrastructural development. As shown by the oversubscription levels, there is a budding investor base looking out for alternative investment instrumentssome to meet their ethical needs and others to diversify their portfolios. The regulators are ready and willing to support the development of the NICM The diverse investor base shows openness for NICM instruments by market participants, regardless of faith

16 Non-Interest Debt Capital Market 15 Benefits of the Non-Interest Debt Capital market Linking the finance sector with the real sector The principles of NIF ensure that every financial activity is backed by real economic activity. Cross-border inflows into the economy The excess liquidity in the Gulf should flow into Nigeria via the Non interest capital market Deepening Financial Inclusion Ethically biased investors will be encouraged to participate in the Noninterest Debt Capital Market. Market growth New products will attracted new participants and grow the market

17 Non-Interest Debt Capital Market 16 Growth Drivers With the efforts of regulators and various market participants at increasing awareness on the NICM, the market is poised for wider acceptance Integration with the global economy NICM Growth drivers in Nigeria Meeting Infrastructure Funding gaps As more regions embrace NIF, a rapid adoption and expansion of sukuks in Nigeria, will enable integration with the global economy. Growing Awareness Regulatory Support

18 Non-Interest Debt Capital Market 17 NICM 10 Year Master Plan In 2014, The Securities and Exchange Commission (SEC) set up a committee to work on a ten year master plan for the Non-interest capital market The key objectives of the committee are: To Increase NICM product offerings to attract both conventional and Noninterest investors Financial Inclusion Improve relevance to domestic needs and contribution to national and The regional Committee s economic Visiongrowth Non interest Capital Market sub sector to represent 25% of the overall capital market Sukuks to represent 15% of total debt issuances outstanding by 2025!

19 Non-Interest Debt Capital Market 18 Key Recommendations of the Non-Interest Capital Market Master Plan STAKEHOLDER CBN DMO SEC PENCOM FMBN & NMRC FIRS STATE GOVTs ACTION To issue non interest T-bills and other contracts to support liquidity management To issue a sovereign sukuk To facilitate the creation of a commodities exchange To fast track guidelines that permit PFA participation on noninterest finance products To issue sukuk and encourage PMBs to promote non-interest products To provide a level playing field for non-interest finance and provide clarity on tax laws To issue sukuk to support infrastructure development Exchanges To expand listing rules to accommodate non-interest finance products and support stakeholder education efforts. FMAN All Stakeholders To support stakeholder education on non-interest finance Promote investor education and collaborate at ensuring regulations from the different regulators are complementary to each other

20 19 Thank You for Listening 19

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