F inanc ia l Inc lus ion and the ro le o f I s l amic F inance By

Hajara Adeo la Lotus Cap i ta l L imi ted

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Who is Lotus Capital Limited

Lotus Capital Limited was incorporated in June 2004 and is duly registered with the Nigerian Securities & Exchange Commission (SEC)

Lotus Capital is the pioneer ethical investment management company in Nigeria with expertise spanning across Financial Advisory Services, Issuing House Services, Asset Management, Private Wealth Management

Lotus Capital was the lead Issuing House to the first sub-sovereign Islamic Bond (Sukuk) offering in Sub-Saharan Africa

Lotus Capital is the first Nigerian company to launch an index in partnership with the Nigerian Stock Exchange (NSE Lotus Islamic Index)

Lotus Capital has the first Shar’iah compliant mutual fund listed on the floor (memorandum listing) of the Nigerian Stock Exchange

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The Context

Poverty (also called penury) is deprivation of common necessities that determine the

quality of life, including food, clothing, shelter and safe drinking water, and may also include the deprivation of opportunities to learn, to obtain better employment to escape poverty, and/or to enjoy the respect of fellow citizens.

According to Mollie Orshansky who developed the poverty measurements used by the U.S. government, "to be poor is to be deprived of those goods and services and pleasures which others around us take for granted."[1]

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Introduction

Financial inclusion is a state in which all people have access to a suite of quality financial services, provided at affordable prices, in a convenient manner, and with dignity for the clients (Centre for Financial Inclusion)

89% of people in high-income countries have an account at a financial institution

compared to 24% in low-income countries (Centre for Financial Inclusion) 11% of people in low-income countries save money at a financial institution (Centre for Financial

Inclusion)

23% of adults in Africa have accounts with a formal financial service while 24% of Adults in Sub-Sahara Africa have accounts with formal financial institution (Demirguc-Kunt and Klapper,

2012)

Islamic Finance is one of the most rapidly growing segments of the global financial system with global assets of US1.7triliion in 2013 growing at 17.6% over the last 4 years (World Islamic

Banking Competitiveness Report 2013–14,EY)

Islamic Finance is a critical component of the financial inclusion strategy for Africa

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Financial Inclusion In Nigeria

Adult

Population

Profile

71% Rural

51.8% Male

48.2% Female

64% Has a

mobile phone

27.1%

Farming

50% Under

33 years

26.5%

Have

no education

The total adult population is 87.9 million

Nigeria has a large rural (71%)

population 50% of the adult population is under 33

years 35.5% of rural adults are farmers Mobile phone ownership is 84.9% in

urban areas and 55.6% in rural areas 8.1% of adults have some form of

tertiary education Source: EFInA Access to Financial Services in Nigeria 2012 survey

Demographic Profile

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Financial Inclusion In Nigeria

Nigeria’s rate of financial exclusion is currently at 39.7% (EFIna, 2012)

Formally banked All adults who have access to or use a deposit money bank in addition to having/using a traditional banking product

Formal other All adults who have access to or use other formal institutions and financial products not supplied by deposit money banks

Informal only All adults who do not have any banked or formal other products, but have access to or use only informal services and products

Financially Excluded Adults without formal or informal financial products

Source: EFInA Access to Financial Services in Nigeria 2012 survey

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Involuntary & Voluntary Financial Exclusion

Financial exclusion can be caused by voluntary and involuntary factors • Involuntary exclusion is due to supply side constraints like lack of collateral and high

cost of operations.

• Voluntary exclusion is due to religious reasons. Most Muslims do not opt for interest based modes of saving and financing. This is where Islamic finance proffers a financial inclusion solution

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Involuntary Factors– High Cost of Operations & Crowding Out

• Commercial banks look to serve bigger clients by offering large credit lines on long term basis to reduce cost per fresh loan

• At the bottom of the pyramid, the fixed cost of administering a small loan is usually high.

• Government crowds out private sector borrowers and finances its deficit at high domestic interest rates.

• Domestic interest rates have to be kept higher by the central bank to control inflation fueled by indirect taxes, currency depreciation and monetization of public debt.

• When better yields are offered to commercial banks on the purchase of sovereign securities, the high-risk high-return based consumer or microfinance remains much less of an attraction.

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Financial Inclusion – A look at the Strategy In Nigeria

Nigeria, through her Maya Declaration is committed to reduce her rate of financial exclusion from 39.7 per cent in 2012 to 20.0 per cent of the population by 2020 through the implementation of seven key interventions: Simplified KYC Framework

Agent Banking Regulatory Framework

National Financial Literacy Framework

Consumer Protection Framework

Mobile-Payments and “Cash-less” Policy Initiative

Establishing Linkages between government, DFIs, DMBs and MFBs / MFIs

Introduction of Credit Enhancement Schemes and Programme – MSMEDF, NIRSAL and EDCs

Source: Central Bank of Nigeria (CBN)

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Financial Inclusion Strategy In Nigeria

Nigeria Financial Inclusion Target.

Source: National Financial Inclusion Strategy, CBN

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Islamic Finance- A critical strategy for Financial Inclusion

Nigeria Financial Inclusion Target

“According to statistics, a total of 39.2 million adult Nigerians (46.3% of the adult population) were financially excluded in 2010. Further analysis revealed that 54.4% of the excluded population was women, 73.8% were younger than 45 years, 34.0% had no formal education, and 80.4% resided in rural areas.” “Northern Nigeria is particularly disadvantaged, with 68% of adults excluded in both the North-East and North-West regions. Formal inclusion rates range from 49% in the South-West region to only 19% in the North-West region. The “informally included”, primarily live in the North-Central region, where 23% of adults have access to only informal services.” Source: National Financial Inclusion Strategy, CBN

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Why Islamic finance?

• The answer to voluntary exclusion

• Islamic Banking & Finance is an alternative asset class and not a replacement of

the conventional system

• To serve ethically-inclined people, clients seeking alternatives to the conventional system as well as the un-banked population.

• Islamic banks are created to run parallel to conventional banks as practiced in the United kingdom, South Africa, Kenya, Gambia, Malaysia e.t.c.

• It is about financial inclusion NOT exclusion

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Shared values of the Abrahamic faiths (Christianity, Islam, Judaism)

• Deutoronomy (5th book of the Torah)23:19:”Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of anything that is lent upon usury.”

• Psalm 15:1,2,5:”Lord, who shall abide in thy tabernacle? Who shall dwell in thy holy hill? He that walketh uprightly and worketh righteousness, and speaketh the truth in his heart. He that putteth not out his money to usury, nor taketh reward against the innocent. He that doeth these things shall never be moved.”

• Quran 2: 278-279: “O you who believe: fear Allah and forgo what remains of usury (riba) if you are believers. If you will not, then know of a certain declaration of war (against you ) from Allah and his Messenger. But if you turn back, you shall have your capital sums: Deal not unjustly and you shall not be dealt with unjustly.”

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Islamic Finance Principle

Concept & Principle

Ethical screen (alcohol, gambling, porn, pork, interest, tobacco)

Sharing Sale Lease

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Islamic Finance in Nigeria

Islamic Finance in Nigeria has grown substantially over the last 4 years in terms of awareness and establishment of an appropriate policy framework from regulators.

CBN has licenced 2 commercial banks to operate a non-interest banking window and a full fledged non-interest bank

The first sub-sovereign Islamic bond (N11.4billion Osun Sukuk) in Sub-saharan Africa was issued by the State Government of Osun arranged by Lotus Capital Limited and was honoured with the award of “Islamic Finance deal of the Year 2013” by IFN in 2014

Guidelines for the issuance of Takaful (Islamic Insurance) has been issued and a few insurance operators offer the service as a window

Lotus Capital Limited in partnership with the Nigeria Stock Exchange (NSE) established the first Islamic index (NSE Lotus Islamic Index) in sub-saharan Africa in 2012.

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Conclusion

World Bank Statistics 2013 indicate that 2.5 billion people or half of the world’s adult population are unbanked. The target is universal financial access to all working age adult by 2020

‘’whether you are a public sector financial regulator or a private sector bank, it is in your interest to get everyone access to financial services. This is good for the world and will help us end poverty.” World Bank group Press release 2013

It has been observed that religion and educational background have hindered certain segment in our society from being financially included. Islamic finance is assumed to be the most preferred option in modern times to accommodate these segments

Islamic finance promotes broader economic participation the proceeds of which contribute to tax revenue and create additional liquidity for government to deliver socio economic infrastructure which is paramount to sustainable development

Islamic financial inclusion structures create additional liquidity for asset backed transactions which ensures a more stable and efficient use of asset allocation

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Lotus Capital Ltd 1b Udi Street Osborne Foreshore Estate Osborne Road, Ikoyi, Lagos Nigeria

T1: +234-1-271 3280-2 F: +234-1-271 3284 M: +234-

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T1: +234-1-064 890546 T2: +234 -0702 805 9001

Abuja Office: Lotus Capital Ltd Ground Floor 2 Malanje Street Wuse Zone 4, Abuja T1: +234-9-875933306 www.lotuscapitallimited.com

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