12/10/2024
Sam. Caulcrick writes about the just concluded: "South-West Regional Air Transportation Summit (SWRATS) 2024, organized by the Nigeria Civil Aviation Authority (NCAA)".... A read
I listened to the beautiful presentations and what captivated most of my attention was the alternative banking to finance aviation in Nigeria. What's the catch in zero-interest financing and why are the most successful enterprises not using it?
A financial friend explained the following:
Islamic banking and going public (through stock issuance) share similarities in profit-sharing but differ fundamentally:
Islamic Banking:
1. Principle-based system, adhering to Shariah law.
2. Profit-sharing through Mudarabah (partnership) or Musharakah (equity participation).
3. Emphasis on risk-sharing, fairness, and transparency.
4. Investments restricted to Shariah-compliant assets.
5. Focus on long-term partnerships.
Going Public (Stock Issuance):
1. Publicly traded companies issue stocks to raise capital.
2. Shareholders receive dividends, not direct profit-sharing.
3. Ownership dilution, with shareholders holding equity.
4. Regulated by securities laws and stock exchange rules.
5. Focus on short-term gains and liquidity.
Key differences:
1. Ownership structure: Islamic banking involves partnership while going public involves ownership dilution.
2. Risk-sharing: Islamic banking emphasises shared risk, whereas stockholders bear individual risk.
3. Investment restrictions: Islamic banking adheres to Shariah-compliant assets, whereas public companies invest in various assets.
4. Time horizon: Islamic banking focuses on long-term partnerships, whereas public companies prioritize short-term gains.
5. Regulatory frameworks: Islamic banking follows Shariah law, whereas public companies follow securities laws.
Similarities:
1. Profit-sharing: Both involve distributing profits to stakeholders.
2. Financial inclusion: Both provide access to capital.
Hybrid Models:
1. Sukuk (Islamic bonds): Combine elements of Islamic banking and conventional bonds.
2. Islamic REITs (Real Estate Investment Trusts): Blend Islamic principles with conventional REITs.
How does that fit into our inability to separate ownership from management in Nigeria’s aviation industry to raise funds? Some have tried going public but could not sustain operations. Would going Sukuk succeed where the public offering failed?
Or could we try another structured approach?
Below is another well-structured approach to address the Nigerian aviation industry's financing challenges.
I base it on believing there has to be government intervention for the sector to access low-cost capital:
Government interventions:
1. Sovereign borrowing: The Nigerian government can access low-interest rates (6-8%) on international markets.
2. The government will then establish a national aviation development fund.
3. The government will provide guarantees or subsidies for private-sector borrowing. To qualify for low-cost capital, the aviation enterprise will, among other conditions, meet corporate governance criteria.
Funding structure:
1. Government borrows at sovereign rates.
2. Establishes a specialised aviation finance entity (e.g., Nigerian Aviation Finance Corporation).
3. Lends to private airlines, aviation leasing enterprises, or MROs, at single-digit interest rates (8-10%).
Conditions for access:
1. Corporate governance: Establish independent boards and audit committees and mandate NCAA to make corporate governance a condition of issuance of AOC to beneficiaries.
2. Separate ownership and management.
3. Transparent financial reporting.
Aircraft acquisition financing:
1. Lease financing options.
2. Asset-based financing.
3. Export credit agency financing.
Operational cost borrowing:
1. Working capital financing.
2. Revolving credit facilities.
Benefits:
1. Reduced financing costs for airlines.
2. Increased accessibility to capital.
3. Enhanced competitiveness.
International examples:
1. US EXIM Bank's aviation financing programs.
2. UK's Aviation Finance Forum.
3. African Export-Import Bank's aviation financing initiatives.
Nigerian government initiatives:
1. Nigerian Sovereign Investment Authority (NSIA).
2. Infrastructure Concession Regulatory Commission (ICRC).
3. Presidential Committee on Aviation.
Potential partners:
1. African Development Bank.
2. International Finance Corporation (IFC).
3. European Investment Bank.
Implementation roadmap:
1. Conduct feasibility studies.
2. Engage stakeholders.
3. Establish regulatory framework.
4. Secure sovereign borrowing.
5. Monitor and evaluate.
By providing low-cost capital and promoting good governance, the Nigerian government can:
1. Stimulate aviation industry growth.
2. Improve air connectivity.
3. Enhance economic development.
