This article is extracted from a lecture delivered by renowned economist and accountant, the Managing Director of CRC Credit Bureau, Lagos, Alhaji Ahmed ‘Tunde Popoola, at a programme organised to celebrate the 57th independence anniversary of Nigeria by the Nigerian Supreme Council for Islamic Affairs (NSCIA), held at the National Mosque, Abuja, on Friday, 29th September 2017.
BEFORE this current experience, the last time Nigeria was in recession was about 30 years ago. That was in 1987.
Recessions do not happen overnight. The ominous signs are always there. During the recession of the 1980s, the signs of things to come were apparent since the early 1980s when the then federal government declared ‘Austerity Measures’. The policy responses were the enactment of the Economic Stabilisation (Temporary Provisional) Act, 1982 and the introduction of the Structural Adjustment Programme (SAP) in 1986. I was among the young graduates of that time and I remember that for the first time, Nigeria started talking about graduate unemployment.
The signs of the 2016 recession were also manifested in the preceding years. Just as it was in the 1980s, Nigeria again, this time, found itself in recession partly because of the challenge of earnings from oil.
The significant simultaneous decline in daily crude oil output and price, robbed Nigeria of the growth rates we witnessed since 1999. And since we were unable to raise non-oil revenues during the period, the country faced huge budget financing constraints and foreign exchange volatility, putting pressure on our foreign exchange rate. This led to multiple exchange rates with creating confusion, arbitraging and corrupt practices.
Like any other recession, the effects soon became pervasive, spreading like wild fire. A recession is typically characterised by high unemployment, falling average incomes, increased inequality and high government borrowing. Apart from the apparent declines in foreign reserves and negative GDP growth, rising inflation and depreciation of the national currency, other issues manifest in forms of loss of jobs, closure of factories, and erosion of purchasing power, etc. Nigeria’s situation has not been an exception to these. In fact, Nigeria’s situation was aggravated by the fact that we had not saved during the ‘time of plenty’ neither had we built new infrastructure or adequately maintained existing ones. The recession manifested in stagflation (inflation accompanied with lack of economic growth), rising unemployment, foreign exchange scarcity, decline in purchasing power and rise in misery index.
Overcoming the recession and getting set for real growth and development
Now that we are officially out of recession with a fragile GDP growth of 0.55% in quarter 2, 2017, we need to go back to address the building blocks of sustainable, inclusive and rapid economic growth and development. We need to get people out of poverty; we need to get people to work again by creating jobs. We need to increase and improve productivity. There is the need to mitigate foreign exchange shortfalls and stabilise the foreign exchange rate. We need to provide the required infrastructure and close the gap in infrastructure deficiency. Businesses need to get back to business. The economy needs to be stimulated. In other words, we need to set the agenda for inclusive growth and development.
The Economic Recovery and Growth Plan (ERGP) is the blue-print of the present administration to address the fundamental challenges we face and put us on the path of sustainable growth and development. As the government formulates plans and policies to grow the economy on a path of inclusiveness and sustainability after the recession, there is a lot to adopt from Islamic economics and principles. The primary objectives of Islamic principles and economic system are equitable distribution of wealth and social justice. Islamic fiscal policy is used to achieve the objectives of economic stability, growth and acceptable distribution of wealth. Islam establishes a high degree of economic equality and conscious avoidance of wealth concentration. Secondly, since Islam prohibits payment of interest on loans, it implies that interest rate cannot be manipulated or become the instrument to achieve equilibrium in the money market. Islamic economic principles can help and they are worth considering.
Providing and funding public infrastructure
Economic literature has identified reflation through government spending and restoring production and consumption capacities to the private sector and households as the way out of recession. Governments have resorted to borrowing from the local and international financial institutions and multilateral agencies and governments. However, servicing the debt becomes a challenge, especially when they are foreign currency denominated.
Islamic finance is an alternative option worth exploring to raise funds for public works and to support the private sector’s access to finance. Worldwide, Islamic finance is no more peripheral to conventional finance. It is being operated in over 75 countries, including the western nations. The United Kingdom issued its first sukuk on 2nd July, 2014 for the sum of £200 million to build residential homes [A sukuk is an Islamic financial certificate, similar to a bond in Western finance, which complies with Sharia]. Hong Kong and South Africa are among nations that have issued sukuk in the past. South Africa’s US$500 million sukuk was four times over-subscribed. Part of the objectives of the UK for the issuance was to position itself as an international hub for Islamic finance and tap Sharia-compliant investors. South Africa’s motive was to become Africa’s Islamic finance hub.
Islamic financial system is based on justice for the parties. Rather than Islamic banking dealing with borrowers and lenders, the system is based on buyers and sellers. Conventional banking is biased in favour of the seller, whereas Islamic finance attempts to level the ethics between the two parties. Besides, Islamic finance system does not allow investment that harm people or the environment, thereby promoting sustainable finance. The fantastic options that Islamic finance offer for funding both public infrastructure and empowering small businesses should be explored to achieve sustainable development.
As we raise funds from international markets to invest in public works and infrastructure, sukuk comes highly recommended to various governments. Sukuk is like bonds but its benefits outweigh those of bonds. Sukuk are backed by tangible assets rather than debt. While bond indicates a debt obligation, sukuk holders are asset owners. The country will benefit from application of funds to specific projects rather than the situations where we have debts piling up on assets that may not be substantiated. Sukuk can be used to finance projects such as road, rail, housing, power and energy, agriculture irrigation systems, etc. without falling into interest-based debt.
I am glad to see that the Federal Government has embraced the issuance of sukuk. Just this month, the Federal Government issued a seven-year N100 billion FGN Sovereign Sukuk due in 2024.
It is worthy of commendation by all Nigerians because Nigeria as a country will reap bountifully all the benefits associated with sukuk. With this, the Federal Government has further diversified the sources of government funding, as it is offering opportunity not just to Muslims, but to all ethical investors to invest in government-issued securities. This important milestone is capable of helping to position Nigeria as a financial hub for sub-Sahara Africa. We cannot aim to become a financial hub if we are hostile to a particular form of investment option for local and international investors.
The greatest benefit, as far as I am concerned, is the expansion of the financial landscape to achieve a higher level of financial inclusion. Before now, investment opportunities in government securities were limited only to interest rate-priced products such as Treasury Bonds, Treasury Bills and Certificates. A significant number of Nigerian Muslims have long been excluded from the investment opportunities as it violates their religious beliefs and injunctions.
In addition, often, the projects to which the proceeds of such government securities are deployed are not disclosed and this makes some ethical investors to also abstain. The N100 billion sukuk was raised for the construction and rehabilitation of sections of specifically named key economic roads across Nigeria
Muslims and indeed all Nigerians and international investors seized the opportunity and invested in the sukuk. It is gratifying to learn that it was over-subscribed by the time it closed.
Promoting free enterprise
Islam encourages commerce and frown at usury; it grants dignity to professionals and labourers. Adults should be enabled to find it easy to work and run their business. We should all commend the initiatives of this government in the practical support for agriculture and with the creation of the Presidential Enabling Business Environment Council (PEBEC). There is no doubt that agriculture is receiving attention through various initiatives, especially the Anchor Borrowers’ Programme, the Rice revolution with the possibility that we may no longer import rice by 2018 and the boost in exports for cash crops, especially cocoa and cashew.
State governments should support SMEs by establishing enterprise agencies or in collaboration with private entities to address non-finance issues confronting micro and small businesses. Governments should support SMEs by encouraging the special vehicles created to introduce non-interest products such as Murabaha (trade with mark-up or cost-plus sale), Ijarah (operational and financial leasing contracts), Mudaraba (trustee financing contracts), Musharaka (equity participation contract) and deferred payment and deferred delivery sales. Banks such as the Bank of Industry, Bank of Agriculture and the newly established Development Bank of Nigeria should be encouraged to develop Islamic or interest-free finance products to increase access to finance and help wealth creation, especially among those who do not believe in interest-based loans, no matter the level of concessions. It is thus a veritable strategy of enhancing financial inclusion and equitable availability of funds.