#1ISLAMIC FINANCE: The Answer to Financial Inclusion In Nigeria Lotus Capital ETHICAL INVESTMENTS BY HAJARA ADEOLA MANAGING DIRECTOR / CEO LOTUS CAPITAL LIMITED A PRESENTATION AT EFINA Conference JULY, 2009 1#2Outline The Lotus Capital Story The World Economy Today • Why Islamic Finance in Nigeria? •Classical Contracts in Islamic Finance What Are The Access To Finance Statistics? •What Is Being Done In Islamic Finance? •The Islamic Finance Solutions To Access To Finance In Nigeria •Sukuk: Alternative Budget Deficit Financing •Benefits Of Sukuk •Conclusion Lotus Capital ETHICAL INVESTMENTS 2#3. • ● . The Lotus Capital Story Lotus Capital is the pioneer Islamic financial institution in Nigeria and registered with the Securities & Exchange Commission Our mission 'to provide alternative ethical investment solutions' Lotus Capital launched the 1st Shari' ah compliant mutual fund in Nigeria in February 2008 (The Lotus Capital Halal Fund). Lotus Capital Halal Fund was the best performing fund in Nigeria 2008 and year to date 2009 The Halal Fund is the 1st Shari'ah complaint fund approved for memorandum listing on the Nigerian Stock Exchange Lotus Capital ETHICAL INVESTMENTS 3#40.20 31-Dec-07 0.40 0.60 0.80 31-Jan-08 1.00 1.20 29-Feb-08 Lotus Capital ETHICAL INVESTMENTS 1.40 Nigerian Stock Exchange All-Share Index and Lotus Capital Halal Fund 2008 31-Mar-08 30-Apr-08 31-May-08 30-Jun-08 31-Jul-08 31-Aug-08 Lotus Capital Halal Fund NSE All-Share Index 30-Sep-08 31-Oct-08 30-Nov-08 31-Dec-08 4#5Nigerian Stock Exchange All-Share Index and Lotus Capital Halal Fund YTD 2009 10.00 5.00 -5.00 -10.00 -15.00 -20.00 -25.00 -30.00 -35.00 -40.00 02/01/2009 16/01/2009 30/01/2009 Lotus Capital ETHICAL INVESTMENTS 13/02/2009 27/02/2009 13/03/2009 27/03/2009 Lotus Capital Halal Fund 10/04/2009 24/04/2009 08/05/2009 NSE All Share Index 22/05/2009 05/06/2009 19/06/2009 03/07/2009 17/07/2009 5#6The World Economy Today Conventional finance has exhibited weaknesses in recent times The global financial crisis has led to a re-evaluation of economic and financial models Islamic Financial Institutions have demonstrated resilience in the face. of the global financial crisis relative to their conventional counterparts Islamic finance is considered a viable alternative to the conventional interest-based system. Islamic Finance is no longer considered a Muslim only alternative Islamic Finance is the fastest growing financial sector in the world (15% per annum) - IMF Lotus Capital ETHICAL INVESTMENTS 6#7• Why Islamic Finance in Nigeria? Nigeria has the largest population in Africa with estimated figure of 140m At least 50% (70m) of the total population in Nigeria are Muslims. Compare this with the Muslim populations of the UK (2m), the US (6- 10m) and South Africa (1.5m). Surveys show that 30% of Muslims desire Shari'ah compliant financial products and another 50-60% will use them if they are price competitive (representing between 21-60 million people) The West African region and specifically Nigeria represents an exciting growth market that should not be ignored. Lotus Capital ETHICAL INVESTMENTS 7#8Classical Contracts in Islamic finance Bases of Islamic Financial Contracts Sharing Sale Lease Lotus Capital ETHICAL INVESTMENTS 8#9Classical Contracts in Islamic finance Debts Equity Murabaha Mudaraba Lotus Capital ETHICAL INVESTMENTS Ijarah Musharaka 9#10Account / Finance Type Deferred payment sale Islamic Product Murabaha Applications Mortgage Working capital & trade finance Interbank deposits Current account Mudaraba & Wakala deposits Savings account Personal finance products & Short term deposit Retail current account Retail savings account Commodity finance facility Future delivery financing Murabaha Simple account Tawarruq Salam Working capital / construction Istisna'a Lease finance Partnership/Equity Fund Management Islamic bonds Structured products Lotus Capital ETHICAL INVESTMENTS Ijara/ljara wa Iktina/ Mawsufah fi al Dhimma Musharaka Musharaka Mudaraba Sukuk Various Diminishing corporate finance Trade finance & hedging Property development & project finance Property, motor vehicle, aircraft, ships project finance Direct investment Mortgage finance Multi asset funds Government/Corporate funding Hedging & Derivatives 10#11What are the Access to Finance Statistics? . According to EFINA's recent survey on Access to Financial Services in Nigeria (2008): 74% (approximately 68 million people) of the adult population in Nigeria are unbanked . Only 21% (18 million people) are currently banked 5% (4 million people) are previously banked, but have left the banking system Lotus Capital ETHICAL INVESTMENTS 11#12What are the Access to Finance Statistics? Use of financial products in Nigeria Islamic Loan 1% Islamic Financing Investment 1% Vehicle finance 2% An Overdraft 2% Mortgage or Housing Loan 2% Loan from a Bank 3% Valu card 7% Fixed Deposit Account 11% Credit Card 12% Debit Card 16% Current Account ATM Card Savings Account Source: Access to Financial Services in Nigeria; National Survey 2008 (EFINA) 37% 64% 192% Lotus Capital ETHICAL INVESTMENTS 12#1380 Northern and Southern Nigeria population of financially excluded 10 70 60 60 50 40 40 30 30 20 20 10 0 68% 23% Financial Exclusion 45% North West South West Source: Access to Financial Services in Nigeria; National Survey 2008 (EFINA) Lotus Capital ETHICAL INVESTMENTS 13#14• ● What is being DONE in Islamic Finance? Central Bank of Nigeria recently issued a draft framework for Islamic Banking which is currently being reviewed Approximately 6 out of the 24 banks in Nigeria have applied to the Central Bank for Islamic Banking licenses (Islamic bank branches) A commercial bank in Nigeria has acquired Arab Gambian Islamic Bank The Insurance Act in Nigeria is currently under review for the inclusion of Takaful and Re-takaful • Jaiz Bank is in formation Lotus Capital is offering Islamic investment products Lotus Capital ETHICAL INVESTMENTS 14#15The Islamic Finance Solutions to Access To Finance NON-INTEREST BANKING ISLAMIC MICROFINANCE TAKAFUL: Islamic Insurance ISLAMIC ASSET MANAGEMENT ■ SUKUK: Islamic Bonds Lotus Capital ETHICAL INVESTMENTS 15#16Sukuk- Alternative Budget Deficit Financing SUKUK: The contracts mentioned can be used to structure Sukuks (Bonds) to finance developmental projects. Definition: Lotus Capital ETHICAL INVESTMENTS Sukuk is representation of assets in negotiable securities - Islamic Bond. "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" AAOIFI 16#17. • • Benefits of Sukuk Islamic Bonds (Sukuk) can reduce the fiscal deficit even if revenue receipts decline and expenditures increase. The revenue generating Sukuks, such as Transportation, IPP etc can be financed without burden to Government. Financing by Sukuk is tied to real and permissible Assets/Projects, thus it increases development & economic activities Sukuks attract both local and Foreign Direct Investments, especially in the Arab/gulf region which is not ordinarily available to interest-based bonds. Increased marketability of the Sukuk relative to conventional bonds Sovereign Sukuks are succeeding where conventional bond auctions are failing Sukuks are required for the success of Islamic Financial institutions Lotus Capital ETHICAL INVESTMENTS 17#18Sukuk - Bond Who can issue Sukuks 1. Government (Municipals/States/FG) 2. Corporate Organizations Assets for Sukuks 1. Developmental Projects - Housing, Schools, Hospitals, 1 2. Revenue Projects – IPP, Toll Roads, Transport, Markets, etc 3. Services - Sewage collection, Postal, Tel etc Lotus Capital ETHICAL INVESTMENTS 18#19Federal Government Sukuk Case Study Ijarah Sukuk for Power Plant 1. Federal Government Mandate for Sukuk 2. Arrange the Sukuk structure and get Shari'ah board certification 3. Sukuk certificates sold to investors (Local & Foreign) 4. From proceeds, Power Plant is constructed & delivered 5. Sukuk is listed on the NSE to provide liquidity 6. Sukuk holders are paid back from concession, revenue generated from the Plant and/or government revenue 1. Result is Federal Government delivered its project; the budget deficit is financed and investors get a profitable shari'ah compliant investment 19 Lotus Capital ETHICAL INVESTMENTS#20Federal Government Sukuk Case Study Structure of Ijarah Sukuk For the Proceeds 4. Agency to Build 1. 2. Subscription SPV/Issuer Sukuk Holders UNITY AND FATHEACE AND PROGR 6. Offer Asset for Usage 3. Certificate 5. Construct Asset As Agent 7. Usage as Beneficiary Asset 1. 2. 3. Creation of SPV who will issue Sukuk for Subscription Receive Subscription Proceeds for Sukuk Holders SPV/Issuer Issues Sukuk Certificate to Sukuk Holders 4. Agency Agreement signed by Government and SPV 5. Agent (Government) construct (Make to Construct) the Assets 6. SPV Offers Asset to Government for usage 7. Government uses the asset. Lotus Capital ETHICAL INVESTMENTS 20 20#21Federal government Sukuk Case Study Structure of Ijarah Sukuk For the Return on Investment 2. Remitting Rentals 3. Rentals: Principal SPV/Issuer Sukuk Holders and Return UNITY AND FATETEACE AND PROGRESS/ 4. Transfer of asset 1. Payment of Rentals Asset 1. Government (as agent) receives Rentals from usage of Usufructs, periodically 2. 3. Government remit the rentals to the SPV SPV pays Sukuk Holders, the rentals which comprise the portion of Principal and the Profit Margin until fully paid within tenure. 4. SPV Transfer the Asset to the Government as Beneficiary Lotus Capital ETHICAL INVESTMENTS 21#22Demonstrating the global investors' appetite for Sukuk • Emirates Airport Sukuk, Dubai • Zam Zam Towers Sukuk in Mecca • Chelsea Barracks, London, UK (£2.5 billion) First ever Sovereign Sukuk issued in Indonesia in April 2009 . The initial offer size was US$650 million • The Sukuk was 723% subscribed (US$4.7 b) • Subscription to the Sukuk by region was: Asia 32% • US 19% Middle East 30% Europe 11% Domestic Indonesian investors 8% This deal occurred in the same period that UK Treasury auctions were unsuccessful Lotus Capital ETHICAL INVESTMENTS 22#23Conclusion Islamic Finance promotes economic growth through its developmental & social benefit focus and more equitable contracts Islamic Finance present an opportunity to harness the money held outside the financial system due to the avoidance of interest Islamic finance is a major factor required to bridge the access to finance gap in Nigeria Lotus Capital ETHICAL INVESTMENTS 23#24Thank you for listening Lotus Capital ETHICAL INVESTMENTS 24 24#25Contact Us Lotus Capital Limited 1b Udi Street Osborne Foreshore Estate Osborne Road Ikoyi, Lagos Nigeria Tel: +234-1-271-3280-2 16c Murtala Muhammed Way Kano, Nigeria Tel: +234-64-890546 [email protected] www.lotuscapitallimited.com Lotus Capital ETHICAL INVESTMENTS 45 25