Nigeria, Africa’s second-largest economy and home to 75 million Muslims, plans to sell its first Islamic debt within 12 months as part of a bid to become the continent’s center for Shariah-compliant financing.

“Nigeria will be the Islamic hub by 2020,” central bank Governor Lamido Sanusi said in a Sept. 24 telephone interview from the capital, Abuja. The government has yet to decide on a size for the sukuk sale, he said.

The West African country, which holds the eighth-highest crude oil reserves among OPEC members, is seeking to diversify the economy by developing its finance industry. Gross domestic product may grow 7.78 percent in 2010, accelerating from 6.96 percent last year, driven by non-oil industries such as agriculture, Sanusi said Sept. 21.

The central bank bailed out 10 banks last year with 620 billion naira ($4.1 billion) to prevent a collapse of the financial system, and is now pushing for the takeover of some banks and the merger of others. Global assets held by Shariah-compliant financial institutions may climb to $1.6 trillion in 2012 from about $1 trillion today, the Islamic Financial Services Board said in April.

International sales of Islamic debt, which comply with the religion’s ban on interest by paying asset-based returns, declined 24 percent to $10.7 billion so far this year, according to data compiled by Bloomberg. Issuance is rebounding after Dubai World, one of the emirates’ three main state-controlled holding companies, reached an agreement this month with creditors to change terms on $24.9 billion of debt.

Yield Spreads

The spread between the average yield for global sukuk and the London interbank offered rate shrank 67 basis points to 376 this quarter, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. Shariah-compliant bonds returned 4.9 percent in the period, according to the index. Debt in developing markets gained 7.5 percent, JPMorgan Chase & Co.’s EMBI Global Diversified Index shows.

The extra yield investors demand to hold Dubai’s dollar sukuk rather than Malaysia’s 3.928 percent Islamic note due June 2015 has narrowed 34 basis points to 378 this month, according to data compiled by Bloomberg. The yield on Dubai’s 6.396 percent sukuk maturing in November 2014 rose 1 basis point to 6.43 percent today, the data show.

‘Backward-Mentality’

Nigeria’s population, which is 50 percent Muslim, “remains largely unbanked,” Razia Khan, head of Africa research at Standard Chartered Bank Plc in London, wrote in an e-mailed response to questions yesterday. “So yes, Nigeria has the right demographics to emerge as a hub for Islamic banking in Sub-Saharan Africa.”

Nigeria’s efforts contrast with those of Egypt, which, with 71 million, also has one of the biggest Muslim populations in Africa, according to the CIA World Factbook. The Egyptian Financial Supervisory Authority plans to issue regulations that will allow companies to issue Sukuk by the end of the year, Chairman Ziad Bahaa El-Din said in a telephone interview in Cairo today.

Youssef Ibrahim, director of Al-Azhar University’s Saleh Kamel Center for Islamic Finance in Cairo said Egypt’s government hasn’t encouraged investment in the sector.

“We have a backward-mentality when it comes to Islamic finance,” he said in a telephone interview yesterday.

Bank Guidelines

Nigeria, which drafted Islamic banking guidelines last year, has lowered the initial capital requirement for national Islamic banks to 10 billion naira from 25 billion naira. It also granted a license to Nigeria’s first Islamic bank, Jaiz International Bank. The bank may begin operations in the fourth quarter, Sanusi said last week. He expects the nation to have as many as three Islamic banks by the end of 2011.

The country in a “few weeks” will issue guidelines to allow conventional banks to open so-called Islamic windows and subsidiaries, Sanusi said. “There is a very strong desire among the population for Islamic financial products.”

Nigeria is rated B+, the fourth-highest non-investment grade, by Standard and Poor’s and has a BB- from Fitch Ratings.

Nigeria’s bond “will generate some interest among Persian Gulf investors because of a lack of sovereign borrowers in the sukuk market,” Naji Nabaa, a Dubai-based associate director of fixed-income sales for the Middle East and North Africa at Exotix Ltd., an investment bank specializing in illiquid assets, said by telephone yesterday. “Nigeria isn’t a country Middle Eastern investors know much about, but they’d be interested in buying it if the yields and price are attractive enough.”