Lagos — The Stock Exchange officially launches the NSE Lotus Islamic Index (NSE LII) which consists of companies whose business practices are in conformity with the principles of Shari'ah. Sunday Trust looks at the necessity of the index.
In a bid to attract Sharia/ethical investors to Nigeria's budding stock market, Islamic wealth manager Lotus Capital and the Nigerian Stock Exchange (NSE) on Monday launched a debut index of NSE-listed companies that comply with Islamic investment principles.
This is one of the many steps the exchange has taken to bring to fruition its vision of becoming the gateway to African markets.
The Islamic Equity Index known as the "NSE Lotus Islamic Index" (with the code NSE LII) consists of companies in conformity with the principles of Shari'ah. The NSE LII, which is the first index created to track the performance of Shari'ah compliant equities on the floor of the exchange will increase the breadth of the market and create an important benchmark for investments as the alternative non-interest investment space widens.
The Islamic Index can serve as a general benchmark for 'ethical' funds and can be seen as a basis for creating Mirror Funds, Index Funds, Exchange Traded Funds, Index options etc., which will broaden the range of financial instruments traded on the NSE.
The NSE Lotus Islamic index, covered 15 equities with combined market capitalisation of around N2.87 billion, excluding banks, companies with high debt or leverage and other stocks that conflict with Islamic principles.
The index is designed to encourage more investments from the Middle East and weighted towards fast moving consumer goods, cement, oil marketing and manufacturing sectors.
According to Lotus, no sector will be allowed to account for more than 40 percent of the index which will be reviewed bi-annually.
The asset manager also disclosed that it had a buffer of 30 firms to consider for the inclusion at any one point but that stock liquidity, keeping to the Islamic principle is key.
On debt, it said total debt as a percentage of the firm's total value should not be more than 33 percent for it to qualify.
According to analysts, global Islamic banking assets exceed $1 trillion and can reach $4 trillion by 2020. There is also an estimated $50 billion in managed funds invested according to Islamic principles in equities.
About half of Nigeria's population is Muslims. This underlies the potential market Islamic investment has in Africa's second largest economy, and according to an Islamic banking analyst, "Islamic products are new in Nigeria but the uptake is growing in double-digits."
The NSE LII comprises of 15 stocks listed on the floor of the exchange namely: Okomo Oil Plc, PZ Plc, Unilever Nigeria Plc, Nigerian Aviation Handling Company Plc, GlaxoSmithKline Plc, Japaul Oil Plc, Cadbury Nigeria Plc, Dangote Flour Plc, Honeywell Flour Nigeria Plc, National Salt Company of Nigeria Plc, Nestle Nigeria Plc, Ashaka Cement Plc, Cement Company of Northern Nigerian Plc, Dangote Cement Plc and Lafarge WAPCO Plc.
NSE LII is certified by an internationally recognized Shari'ah Advisory Board comprised of renowned Islamic scholars among them are Professor Dr. Monzer Kahf a professor of Islamic finance at the MSC programme in the Qatar Faculty of Islamic Studies and Professor Muhammed Bashar head of the department of economics, Usman Dan Fodio University, Sokoto.
Speaking about the launch, the NSE Project Manager for the NSE LII launch, Mr Osahon Aire explained that investment instruments like Exchange Traded Funds (ETFs) can be built on the Index which investors with a preference for ethical/Shari'ah compliant investments can invest in.
He added that the launch will tactically aid the development of the market.
Osahon noted: "The NSE Lotus Islamic Index will further illuminate the massive investment opportunities available to ethically minded investors, both in Nigeria and overseas. All the companies that will appear on the Index have been thoroughly screened by Lotus Capital Halal Investment in accordance with a methodology approved by an internationally recognized Shari'ah Advisory Board comprising of renowned Islamic scholars."
He explained that the launch of the Index is an exciting development that is in line with the NSE's mandate of broadening and deepening the Nigerian capital market.
The index will provide a reliable benchmark for Islamic and other ethical investments. It can serve as an important diversification tool for ethically minded investors and portfolio managers both locally and from around the world, who seek to profitably invest in emerging African equities market. It will also reduce the research cost and time required by an investor to independently create Shari'ah compliant equity portfolio.
Speaking during the unveiling of the index, the Managing Director of Lotus Capital, Mrs Hajarat Adeola said the index was created to track the performance of Shari'ah compliant equities trading on the floor of the NSE.
Giving details of the index, Adeola explained that each stock in the index had undergone a two-stage screening process, adding that those companies that passed the initial test are evaluated on the basis of Islamic financial screens to eliminate those with unacceptable levels of debt, cash and interest income.
According to her, "Only companies that pass the second stage will be considered for further analysis", pointing out that other criteria such as liquidity and market capitalisation of the equities are also taken into account. "Each sector weight is capped at 40 percent and each component stock is capped at 30 percent and the index is rescreened, rebalanced and reviewed bi-annually on the first business day in January and July of every year," she said.