IFN Monthly Article on Nigeria: January 2019 Issue
Nigeria embraces Islamic Pension Funds
Exciting things are taking place in Nigeria’s Islamic finance market!
In December 2018, my report “Nigeria Islamic finance keeps getting better” pointed to the possible emergence of Shari’ah compliant pension funds. Only one month into the New Year, the National Pension Commission (PENCOM) has released guidelines allowing pension administrators operate Shari’ah compliant funds, effective February 2019. This will probably be the most significant event in Nigeria’s Islamic Finance space this year.
The long awaited regulatory guideline is the culmination of advocacy efforts by pension operators, non-interest finance practitioners and other regulatory agencies. Earlier, PENCOM was concerned that the domestic Islamic capital market was not deep enough to accommodate investment by pension funds. However, with the remarkable success of the Federal Government’s Sukuk issuances and rapid growth of non-interest mutual funds, coupled with the presence of an Islamic equities index, the Commission clearly believes the time is right.
Under the new guidelines, any contributor can request for his pension to be managed in accordance with Islamic finance. Upon such request, a pension fund administrator must move the contributor’s pension to a segregated Fund known as “Fund VI”, which will invest exclusively in Shari’ah complaint instruments. Fund VI covers a broad range of financial instruments, including treasury bills, domestic bonds, Eurobonds, money market instruments, equities, infrastructure, private equity funds, real estate investment trusts and mutual funds provided they are all Shari’ah complaint.
Nigeria’s pension industry has come a long way since landmark legislation established a mandatory contributory pension scheme in 2004. In the last five years, the industry assets have grown more than twofold to N8.5trillion ($23.6billion) in 2018 to become the largest asset pool in the country. The number of pension enrolees has also risen dramatically from 1.5 million people ten years ago to over 8.4 million in 2018. Yet, there are potential contributors who have stayed away from the pension industry to avoid earning interest on their retirement savings. This might explain why total pension assets, represent only 6.5% of GDP compared to 95.3% and 13.1% in South Africa and Kenya respectively.
With the new regulations, the pension industry will be more appealing to a broader contributor base which would spur higher growth. More importantly, the Islamic finance market will be the eventual recipient of the accumulated pension assets and this will not only increase demand for existing instruments but drive product innovation and development. Currently, pension assets are concentrated in conventional government bonds (52.2%), while the investment in Sukuk is almost negligible (0.28%). Riding on this regulation, we expect a massive shift in the pension industry’s structure towards Islamic finance assets particularly for private and state pension funds with a significant number of Muslim contributors.
Hello Nigeria! Shari’ah compliant instruments should brace for maximum impact.
