02-05-18

BUSINESS A.M. FEBRUARY, MONDAY 05 - SUNDAY 11, 2018
FINANCE & INVESTMENT
13
Insurers’ investment yield below
10% on inefficient asset allocation
German Cosulate welcomes Business a.m.: Topmost diplomat at the Consulate of the Federal Republic of Germany in Lagos recently warmly
welcomed global focused Nigerian financial newspaper, Business a.m., to the world’s media market, when consul general, Ingo Herbert,
received a team from Businessnewscorp Limited, publishers of Business a.m. Picture shows ingo Herbert (second right) in a handshake
with Phillip Isakpa, executive editor; flanked by Steve Omanufeme, managing editor (left) and Iheukwumere Amadi, COO (right).
S&P sees uncertain outlook for
global Sukuk market in 2018
...as Nigeria relishes success in first attempt
Steve Omanufeme
THE FAVOURABLE outcome
of Nigeria’s tapping the Sukuk
market for the first time
in 2017 may well position the country
seeing it as a veritable financing option
going forward. However, global rating
and research firm, Standard & Poor’s
says its outlook for the market remains
uncertain in 2018, adding that issuance
volumes may moderate to between $70
billion and $80 billion from the over $97
billion recorded in 2017.
“While we believe the financing needs
of some Islamic finance core countries
will remain high, we expect that total
issuance will likely decline to $70 billion-$80
billion in 2018.”
The S&P analysts outlined three main
reasons for their expectations including a
likely tightening in global liquidity, mount-
ing geopolitical risks and slow progress on
the standardization of Islamic products.
“The outlook for sukuk in 2018 looks
uncertain. While we still foresee significant
financing needs for core Islamic finance
countries, tighter global liquidity conditions,
mounting geopolitical risks, and slow
progress on the standardization of Islamic
finance products will continue to hold the
market back from its full potential,” S&P
analysts said in their January 2018 report.
While noting that global liquidity
remained abundant in 2017, they expect
some tightening in 2018, adding that they
see the federal funds rate increasing by
75 basis points in the course of the year.
“Overall, we think that the cost of
funding for issuers will rise and that
liquidity from developed markets channeled
to the sukuk market will reduce or
become more expensive,” they noted.
The analysts also believe that geopolitical
risk considerations are weighing
heavier on the minds of some investors,
citing sanctions imposed on Qatar in
early June 2017, by a group of Arab states,
which resulted in funding outflows from
the country’s banking system that is estimated
at $21 billion as of Sept. 30, 2017.
Similarly, they see investors look unfavorably
upon recent shifts in Saudi Arabia’s
power structure and societal norms, which
could increase the risk of policy mistakes.
However, a major concern is the
slow pace of standardization of Islamic
finance products.
“The standardization agenda is progressing
slowly: Standard-setting bodies
have expended a significant amount of
energy in advancing the standardization
agenda, but we are not there yet.
“The Accounting and Auditing Organization
for the Islamic Financial Institutions
(AAOIFI) and the Islamic Financial Ser-
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Business a.m
DESPITE THE BULLISH returns
on government securities,
which impacted other
money market investments
positively, Nigeria’s insurance
industry’s estimated investment
yield is still at single
digit of about 8 percent, according
to Agusto & Co.
The foremost credit rating
and research firm says the
abysmal poor returns in the
industry are as a result of inefficient
asset allocation and weak
balance sheet management.
In a November economic
newsletter released recently,
its analysts noted that the
woes in the industry are
equally compounded by poor
regulatory enforcement, weak
corporate governance and risk
management framework, as
well as general inefficiencies.
“The net effect of the financial
condition of the industry is
its poor return on Equity (ROE)
of about 8.4 percent. With inflation
averaging 15 percent and
one-year Treasury Bill rates
at about 18 percent, investors
are losing in real returns and
can earn higher returns on alternative
risk-free assets,” they
highlighted.
This is despite the insurance
industry controlling an
investment portfolio of about
N723 billion as at FYE2016,
with about 60 percent of total
investments in money market
placements (bank placements
and government securities).
Specifically, they noted
that 16 percent of the industry’s
investments are in
real estates that continue to
record poor rental yields on
account of poor location,
poor state of the infrastructure
and significant exposure
to undeveloped land.
“Unlocking the income
potentials of these real estate
investments alone could significantly
impact the bottom
line of the Nigerian Insurance
Industry in the near term,”
they opined.
To this end Agusto & Co
recommended industry recapitalisation
through consolidation
and foreign direct
investments (FDIs).
“The full implementation
of the risk based capital framework,
which simply measures
capital adequacy in view of
underwriting risks, should
spur recapitalization in the
near term,” they argued, adding
that it could be positive for
the industry by strengthening
underwriting capacity, while
fringe players may capitulate.
The industry has undergone
two major rounds of capitalisation
in the last 15 years
leading to a drop in number of
operators to 49 from 103.
Currently, the minimum
capital requirement for life,
non-life, composite and reinsurers
are N2 billion, ₦3
billion, N5 billion and ₦10
billion respectively.
At this level, it is clear that
capitalization remains inadequate
and a significant amount
of risks are insured overseas as
the capital base of most insurers
cannot carry the risks of
insuring assets in key sectors
such as oil & gas and aviation.
This has led to the consortia
of insurance companies pooling
funds together to underwrite
significantly large risks.
“In our view, there could
be major consolidations
within the Nigerian Insurance
Industry, driven by
recapitalisation which would
separate the wheat from the
chaff,” they stressed.
Tax seen major constraint on SMEs growth in Nigeria
Business a.m.
NIGERIA’S current
rules for
taxation, which
subject profitmaking
companies to multiple
taxations in their first
three years of commencement,
are increasing the risk
of failures of small and medium
enterprises, according
to Ani Chizoba, manager
tax & regulatory services at
Deloitte & Touche
In an article “Tax policy
on SMEs in Nigeria – How
fair?” published in Deloitte’s
newsletter, December 4,
2017, Ani argued that the exemption
of companies with
at least 25 percent imported
equity from minimum tax is
discriminatory to Nigerian
owned businesses.
“More notably, it discourages
investment and
increases the risk of failure
for companies in periods of
little or no profitability in the
case of SMEs. In the same
vein, a good number of SMEs
are not able to adequately
benefit from tax incentives
due to the small size of their
operations,” she stated.
Ani, maintained that
small and medium enterprises
(SMEs) are the
bedrock of the Nigerian
economy and there is need
to create a favourable business
and regulatory environment
for them to thrive.
“In order for SMEs to
thrive, there is need to create
a favourable business
and regulatory environment.
Most large companies
have their roots in SMEs. In
other words, the future large
corporations in developing
countries like Nigeria are
present day SMEs that need
to be nurtured.”
She noted that the absence
of harmonized tax regime
increases the strain on
cash flow and other limited
resources of SMEs when
compared to large corporations.
“In Nigeria, SMEs are
subjected to multiple taxes
by the different tiers of
government, each with its
own rigorous process and
significant compliance cost.
“Considering the size of
their operations, the absence
of harmonized tax
regime increases the strain
on cash flow and other limited
resources of SMEs when
compared to large corporations,”
she pointed out,
adding that SMEs are also
regulated by several government
agencies; thereby leading
to significant regulatory
compliance cost, which in
most cases are duplicated.
She however highlighted
that though, there are
numerous incentives and
support facilities available
to SMEs in Nigeria (e.g.
the Federal Government
Special Intervention Fund
for MSMEs, Bank of Industry
and the Central Bank
of Nigeria’s Intervention
Fund, etc.), access by SMEs
to such incentives and facilities
seems to have been
hampered by bottlenecks.
She also maintain that
lack of awareness of these
government funds and ab-
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