Diversification of Islamic Financial Instruments
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exclusion as the rate increased from 56% in 2014 to 70% in 2016 due mainly to the
effect of economic recessions (job losses, lower disposal income and inflation).
 Support for Small and Medium Enterprises (SMEs): In Nigeria the business model
of SMEs makes it difficult for them to obtain financing from the normal conventional
banks because of high collateral requirement as such they rely more on Microfinance
banks for financing which is dismal in spite of the contribution to the GDP. According
to the Port Harcourt Chamber of Commerce33 SMEs account for 80% of the total
number of enterprises in Nigeria, 75% of the total workforce amounting to about 31
million employees and contributed 46.5% of the GDP in 2014. Despite this impressive
statistics, the Chamber of Commerce reported that only 5% of development loans got
to SMEs and the ratio of loans to SMEs to Commercial banks’ total credit was a meager
of 0.13%. This scenario presents an abundant opportunity for Islamic banks in Nigeria
as their asset backed financing and risk sharing business model makes it compatible
with the SMEs.
 Deficit/Public Infrastructural Financing: According to the approved 2017 budget of
government, fiscal deficit is estimated at 2,321 34 billion naira (about 64.47 billion
dollar) which will be financed through a combination of foreign and domestic
borrowings. This is an ample opportunity for Islamic finance in Nigeria and that is why
the decision of government to issue a sovereign Sukuk in 2017 is apt.
 Employment generation: Employment generation is also one of the strengths of
Islamic finance in Nigeria. According to the National Bureau of Statistics, the Nigeria’s
unemployment rate rose to 14.2 per cent in the fourth quarter of 2016. The rate is
somewhat high and the growing Islamic finance sector has the potential to reduce the
rate by generating employment in the Country.
 Islamic Financial Engineering: Financial engineering is being innovative in products
development through applying complex mathematical models to develop financial
products. In contemporary times derivatives such as Options, Futures, Forwards and
Swaps are financially engineered products. These derivatives according to Al-Suwilem
(1996) are not Shariah compliant as they are mainly based on promises that end up in
a zero sum game. Financial engineering promotes product diversification as such
Islamic finance will immensely benefit from financial engineering. According to Iqbal
(1999) two different approaches could be taken to apply financial engineering in
Islamic finance. The first approach is to take an existing instrument in conventional
system and make an evaluation of each component to find the closest substitute from
the set of basic Islamic instruments while the second approach which is synonymous
with reverse engineering is to design and invent new instruments using Islamic
instruments by applying principles of financial engineering. He further said that the
result would be new array of instruments with each having unique risk-return profile
and that this approach requires deep understanding of the Islamic economic and
financial system as well as the risk-return characteristics of each basic building block
as such it is a long-term solution which requires extensive research and commitment.
For Islamic finance to effectively benefit from financial engineering, Islamic finance
332014 International Chamber of Commerce Competition: Port Harcourt Chamber of Commerce Credit Support Scheme for
SMEs. Available online at
34 Approved 2017 budget: Available a