Download Category: Industry Reports

Nigerian Insurance Industry Outlook (August 2024)

• Despite lingering macroeconomic challenges, the Nigerian insurance industry is expected to remain resilient, with a 15%-20% growth in insurance revenue projected in 2024, supported by the growing acceptance of insurance products. Nonetheless, insurance penetration is expected to remain constrained at less than 1% (2023: 0.5%) of Gross Domestic Product (GDP) in the short term, underperforming peer regional hubs, due to low base effects.
• The industry’s earnings and capital management could improve over the medium term, with the benefits from the transition to IFRS 17 accounting standards, effective from January 1, 2023, likely to outweigh the risks posed by high inflation on total underwriting expenses. The Central Bank of Nigeria’s contractionary monetary policy is expected to boost investment income, mitigating earnings risk.
• We project liquidity within a strong range sustained by the industry’s relatively conservative asset allocation, with the bulk of the investment portfolio in near cash and highly liquid investment securities.
• Our assessment of the Nigerian insurance sector risk score is likely to remain unchanged at '3.25', reflecting minimal improvements in insurance penetration, ongoing regulatory reforms, and a balance of positive and negative factors. However, the combined effect of IFRS 17 and a risk-based regulatory regime is expected to close the gap with peers, potentially improving the industry's risk assessment in the short to medium term. Meanwhile, the deepening of insurance markets could serve as the industry's medium to long-term strategy for achieving parity with close peers.

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Outlook for Islamic Finance in Nigeria (Jul 2024)

Key highlights of the research are:

  • Islamic finance is at the early stages of development in Nigeria. Although considerable growth has been registered over the years, the industry’s position remains well below its potential. Nigeria is a NGN234 trillion (USD147.7 billion) economy[1] with the largest Muslim population in Africa (c.53% of an estimated 200 million Nigerians is Muslim) and a significant percentage of unbanked populace at 40%. The country also has a large infrastructure deficit that requires very substantial financing to bridge over the long term.
  • Major challenges that have constrained growth of Islamic finance in Nigeria include limited knowledge and expertise, slow acceptance by Nigerians and the lack of depth in terms of product and service offerings.
  • As of 31 December 2023, Nigeria’s Islamic finance industry held assets of NGN2.2 trillion (USD1.4 billion), dominated by outstanding sukuk issuances and Islamic banking (known as non-interest banking) assets which jointly accounted for about 97% of the industry’s total assets.
  • Over the next 12-18 months, we expect the industry’s growth trajectory to be sustained, especially in the non-interest banking and Islamic funds segments. While the market share of non-interest banks may continue lag behind larger traditional banks, capitalisation is expected to strengthen on the back of good earnings retention and equity capital injection. We anticipate that the funding structure and liquidity profile would remain stable. However, asset quality metrics could weaken across the entire banking sector due to lingering macroeconomic headwinds. Demand for Shariah-compliant investments and infrastructure funding, as well as the high interest rate environment may drive the establishment of new funds within the Islamic funds and Sukuk issuances segments.
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Multilateral Development Banks’ callable capital integration into capital adequacy frameworks (Jun 2024)

Callable capital is a crucial component in the Capital Adequacy Frameworks (CAFs) of Multilateral Development Banks (MDBs). It acts as a financial safety net, enhancing creditworthiness and providing leverage capacity. Callable capital refers to the portion of a MDB’s subscribed capital that can be called upon from member countries if required to meet financial obligations. It is not paid in but serves as a commitment to back the MDB’s borrowing and lending activities in the event that additional capital is required.
Despite its importance, callable capital faces challenges in terms of availability, operational flexibility, and prompt execution due to the complex and time-consuming processes involved in capital calls. Recent reviews and reports by major MDBs highlighted the following challenges:

• Delayed Access: Callable capital is not immediately available, requiring formal calls and potentially facing delays
• Credit Perception: Calling capital might be perceived as a sign of distress
• Operational Constraints: Limited utility in day-to-day operations due to conditional nature

While callable capital is valuable, maintaining substantial paid-in capital and financial guarantees remains essential for MDBs to ensure robust and flexible financial operations. The focus on enhancing callable capital policies is ongoing, aiming to maximise investment capacities and ensure long-term sustainability.

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GCR Nigeria Corporate Sector Risk Scores (21 Jun 2024)

GCR utilises the sector risk score in conjunction with the country risk score, to determine the operating environment risk score for each individual sector within the Nigerian environment. The following sector risk scores are intended to provide users with an overview of the major factors that impact GCR’s assessment of the relative risk of each sector in the local economy. The following list is not a comprehensive list of all sectors of the economy, but largely covers GCR’s Nigerian corporate rating entities. Additional sector risk scores will be introduced as necessary.
GCR will continue to monitor trends in the sectors contained in this publication and will update sector risk scores as the underlying factors shift. To find out more about GCR sector risk scores please visit our website: https://gcrratings.com/risk-scores/.

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Corporate Social Responsibility versus Environmental, Social and Governance (Jun 2024)

In response to the growing investor interest around corporate sustainability, confusion exists in our key markets regarding the distinction between traditional Corporate Social Responsibility (CSR) actions and reporting versus adherence to relatively new Environmental Social and Governance (ESG) factors.

GCR view CSR to be predominantly voluntary internal initiatives within a corporation, typically fulfilling a corporate purpose and often linked to philanthropy. In contrast, ESG is an evaluation of performance around Environmental, Social and Governance factors often based on an external set of criteria, encompassing international frameworks and standards.

CSR will typically have no positive or negative ratings impact unless it materially aids an entity’s franchise or access to capital. Conversely, GCR fully integrates ESG factors into our rating assessments. Firstly, by measuring the impact that environmental or social factors or change could have on a rated entity. Secondly, by assessing how the rated entity governs and manages itself and its impact.

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Outlook for the Nigerian Funds Market (Jun 2024)

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The Nigerian Funds Market has grown significantly on the back of increasing retail investor awareness, the entry of new players, rising interest rates, and an expanding and diversified product base, with notable emphasis on alternative assets.
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According to data from the Securities and Exchange Commission (SEC) which regulates the non-pension funds market in Nigeria, the net asset value (NAV) of listed mutual funds and alternative funds registered at NGN2.2 trillion (USD2.5 billion) and NGN105.2 billion (USD123.9 million) respectively in 2023. Our estimate of privately managed funds in the same year was over NGN 2 trillion. Therefore, the Nigeria non-pension funds market had a NAV of over NGN4 trillion (USD4.7 billion) in 2023, according to our estimates.
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Currently, GCR rates major fund managers, including Stanbic IBTC Asset Management Limited(AA+(NG)) and SFS Capital (A-(NG)), which collectively manage the majority of all investments in Nigerian mutual funds as of Dec 2023.
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The Central Bank of Nigeria’s (CBN) contractionary monetary policies aimed at curbing inflationary pressures and achieving exchange rate stability have elevated interest rates and yields on government securities. This is expected to support growth in the Nigerian funds market, especially fixed-income funds. The high inflation rate also makes alternative assets such as infrastructure funds an attractive asset class.
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Our outlook for the funds market in Nigeria is stable. While the CBN embarks on a contractionary monetary policy stance, we do not foresee a quick moderation in the inflation rate, largely because of structural challenges that contribute to rising inflation and the transition channels that need to be strengthened. Based on our expectations, the increasing desire to invest should result in a considerable level of growth in the funds market over the next 12-18 months. However, growth will be balanced against expected fair value movements (realised and unrealised) in the reporting of some financial assets as yields are higher. We also expect fluctuations in dollar-dominated mutual funds owing to the current volatility in the exchange rate.

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