A Strategic Approach to Islamic Financing for Infrastructure Development



By Chinedu Okoye 

Summary:

• Nigeria faces liquidity challenges and growing deficit funding needs. However it's access to global financial market access are limited as institutional investors lose appetite for Nigerian Eurobonds.

• Highlighting the President’s pursuit of infrastructure funding from the Islamic Development Bank (IDB) in Saudi Arabia, an emphasis is placed on the importance of an efficient policy framework.

• The risk-sharing approach of Islamic Finance helps to allocate funds practically and enhance value for both the Federal Government and the IDB, considering the investments’ profitability.

• A business-minded approach by government is necessary, in leveraging Islamic finance to stimulate economic stability and growth.

• Adopting Islamic financing instruments and exploring economic partnerships with Saudi Arabia can strategically address Nigeria’s infrastructure needs.


Background and Introduction:

Over two weeks ago, economists at Zero Analytics, upon realizing the liquidity challenges faced by Nigerian businesses and the government, penned an article titled "Islamic Finance for Sustainable Development and Growth."

The article emphasized the government's deficit funding needs, highlighting the tight fiscal space and limited access to financial markets. Nigerian Eurobonds fail to attract interest-based institutional investors such as pension funds and ETFs.

On November 14, 2023, Nairametrics reported that the President is seeking infrastructure funding from the Islamic Development Bank in Saudi Arabia, a multilateral development finance institution leveraging Islamic financing for infrastructure development.


Efficient Policy Framework:

The innovative move by the President demands careful consideration of modalities to allocate funds in a practical, effective, and efficient manner. This enhances value creation for both the Federal Government (borrower) and the Islamic Development Bank (lender), as credit quality is evaluated based on investment profitability prospects.

While Islamic finance strengthens business partnerships through debt, diversifying credit sources remains crucial. Zero Analytics' lead economist offers thoughts and suggestions to improve the marginal efficiency of capital, safeguarding the interests of both borrower and lender in the proposed IDB deal and other financing instruments.


A Business-Minded Approach:

Contracts, investments, and plans for fund recoupment should be made with utmost consideration. 

Islamic financing, such as Sukuk Bonds, emphasizes the profitability of investments when appraising credit, compelling the Nigerian government to adopt a more business-minded approach.

This is because, the sought funds from the Islamic Development Bank are earmarked for infrastructure development.


Suggested Infrastructure:

The facility is to be distributed to fund a "portfolio of infrastructure projects" as reported by Caleb Obiowo of Nairametrics. The plethora of projects include; port infrastructure, power infrastructure, and agro-allied facilities. 

At Zero Analytics, we see Refineries, and transportation in addition to port and power infrastructure mentioned above as equally if not more important considerations because of their revenue generating potential. 

Refineries: Enhancing refining capacity is pivotal for economic stability and growth, reducing dependence on imported PMS, stabilizing the Naira, and creating avenues for revenue from potential PMS exports to West African countries.

Transportation Network: Improving road, rail and air transportation connections between commercial and industrial cities facilitates goods' flow within the country, creating opportunities for the government to recoup investments over time, e.g., through toll gates like the Lekki - Epe highway.


Suggested Instruments:

1. Sukuk Bonds and Cash-for-Commodity Loans: Utilize Sukuk Bonds and cash-for-commodity loans to tap into the Middle Eastern region's financial industry. The risk-sharing in Sukuk Bonds can bring unlimited upside to the multilateral lender when funds are allocated to suggested infrastructure projects.

2. Cash-for-Commodity Deals: Explore economic partnerships with Saudi Arabia through trade and investment deals. Leveraging Nigeria's rich non-oil resources can contribute to the Kingdom's industrial development goals through cash-for-commodity agreements.


Final Remarks:

Adopting Islamic financing instruments like Sukuk Bonds and exploring cash-for-commodity deals with Saudi Arabia and other oil rich nations presents a strategic avenue for the Nigerian government to address infrastructure needs.

If approached and implemented right, it could foster economic growth and stability while aligning interests between both parties.

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