Net Asset Value of Shariah-Compliant Funds in Nigeria Grew by 174% between 2019 and 2021

The Net Asset Value (NAV) of Sharia-Compliant Funds in Nigeria grew by 174 % between December 2019 and August 2021. Mr. Chidi Uzo, Head, Investment Strategy & Research at CitiTrust Asset Management Limited, made this point while speaking on “Dynamics of Portfolio Investment in Non-Interest Finance”. According to him, there are about nine ethical funds in the market, and 78% of them are Islamic funds, while 22% are ethical funds.

He stressed that the fixed income funds entail Sukuk, Ijarah contract, Mudarabah and several other contracts used in structured finance. The instruments create liquidity, especially for funds with short-term investment cycles. Another factor for the Shariah fixed-income funds, he noted,  is that the minimum return in that segment is that all those funds are doing over 4% returns. As at August 2021, about 4 Shariah fixed income funds delivered decent returns which the highest of them is doing about 8.4%, and the lowest return of them is doing about 4%. These will provide decent opportunities for Halal investors who want to key into non-interest investments.

Speaking on people’s understanding of what inflation does in depleting the value of stored cash, he said different people have their concepts on the meaning of inflation. Generally, people understand inflation only as a rise in the general cost of living without being aware of its eroding effect on their funds. Also, few people realize that inflation has a depreciating impact on the value of money. Explaining inflation further, Uzo noted that as individuals, if incomes do not increase over a period by at least the inflation rate, then the purchasing power would fall, eroding their wealth.

He said that keeping large amounts of cash is not a wise investment option, especially in places with high inflation. The current headline inflation rate in Nigeria for August 2021 was 17.01%; in other words, between September 2020 and August 2021, general prices of goods and services have increased by 17%. Explaining how people tend to invest in either large-cap stocks or properties exclusively, he noted a

Giving further insight on investments, he explained that it is essential for all investors to understand the risk and return approach in analyzing investments before making decisions. He said it is vital for investors to take a risk and return approach when deciding investments. He added that it is impossible to expect 0% risk and 100% return, but the best practice is for an individual to understand the risk appetite. Uzo noted that risk appetite measures one’s willingness to bear financial risks, which will inform the security selection and eventual asset allocation.

He believed that large caps equities are more volatile in their returns than real estate investments which provide less volatility but greater illiquidity over the short term. The analyst said no investment opportunity has 0% risk; investors must bear the risk and accept returns. Therefore, “Returns are the investor’s due compensation for the risk borne, which means riskier investment opportunities promise higher potential returns”, He added.

Concerning the value Exchange-traded funds possess compared to Mutual funds, Uzo explained that many people do not understand ETFs. He said they are securities that track the performance of an index, commodity, or a basket of securities, and trade on an exchange just like a company’s equity. Explaining the difference between an ETF and a Mutual Fund, he said the former offer cheaper fees and are typically more tax-efficient than mutual funds.

Considering Sharia-Compliant Venture Capital opportunities in Nigeria, he noted that VC is a form of private equity that allows investors to finance start-up companies or small businesses in their early or growth phase. Uzo observed that “VC companies must be able to provide high growth potentials in the long run and showcase that it can metamorphose into something huge in terms of profitability. There is an opportunity for Nigeria with a large and growing population”.

He highlighted the VC opportunities in the Nigerian market, including: Technology, Agriculture, Agri-tech, Real estate development, Pharmaceuticals, and drug production and Manufacturing  Speaking on Sharia-Compliant assets and his expectation, taking the rise on the supply side into consideration, Uzo said that Islamic finance was pivotal in driving socially responsible economic growth and was crucial to economic sustainability.

He was optimistic that with the Securities and Exchange Commission (SEC)  emphasizing its commitment to driving the development of the non-interest capital market in Nigeria, market forces would come into play with the proper structures in place, leading to an eventual demand-supply equilibrium.