Menu

Prospects of Islamic finance in upscaling off‑grid renewable solutions in Nigeria 17 Sep 2025

Introduction

Nigeria’s persistent energy access deficit remains one of the most pressing development challenges in Sub-Saharan Africa. Despite being Africa’s largest economy until recently, approximately 90 million Nigerians still lack access to electricity, with rural and peri-urban communities disproportionately affected. The national grid is substantially weak and continues to fall short of demand, and off-grid solutions, particularly those driven by renewable energy, have emerged as a viable alternative to bridge this gap. However, unlocking the full potential of the cleaner, off-grid renewable solutions requires significant financing that is inclusive, ethical, and sustainable.

Islamic banking, grounded in principles of risk-sharing, asset-backing, and social justice, offers a unique opportunity to mobilise long-term capital for Nigeria’s clean energy transition. As global Islamic finance continues to grow, surpassing US$3.25 trillion in assets by 2024, its integration into Nigeria’s energy strategy is both timely and strategic. This article explores how Islamic finance can bridge the financing gap for off-grid renewable solutions, drawing lessons from global success stories and offering actionable recommendations for Nigeria. The time is ripe to mainstream Islamic finance into Nigeria’s energy strategy, unlocking power, livelihoods, and long-term resilience for millions.

Understanding Off-Grid Renewable Energy

Off-grid renewable energy refers to systems that operate independently of the central or national power grid, including stand-alone solar home systems (SHS), mini grids powered by solar, biomass, hydro, or wind as well as other hybrid and decentralised energy systems serving schools, hospitals, and markets in rural areas. Off-grid solutions are especially critical in remote communities where grid extension is either economically unfeasible or technically impossible. They offer the flexibility to generate, store, and distribute electricity at a localised scale, improving energy access and reliability. For a country like Nigeria, with a vast landmass and dispersed population centres, off-grid systems are practical and necessary.

Untapped Areas and Off-Grid Potential

Nigeria’s off-grid energy market remains substantially under-exploited despite recent progress. By early 2025, an estimated 120 solar mini-grids were operational, up from about 100 in 2024, while the deployment of solar home systems (SHS) surpassed 1 million units, compared to fewer than 500,000 in mid-2024. However, this progress is still far from meeting demand. Over 30,000 rural communities remain unconnected to the national grid, and more than 23 million households are considered potential off-grid users, presenting a market valued at US$9.2 billion annually. 

Nigeria benefits from favourable renewable energy resources, including an average solar irradiation of 5.5 kWh/m²/day and over 734 megawatts of unexploited small hydropower potential. These figures underscore a significant investment opportunity in decentralised energy solutions to close the energy access gap and support inclusive, sustainable development.

Economic and Social Benefits

Access to electricity through off-grid systems delivers far-reaching economic and social benefits. Electrified communities experience increased productivity, improved education and security, as well as better healthcare services. Small businesses and agricultural processors can operate longer hours and with greater efficiency. 

For example, solar-powered cold storage has helped reduce post-harvest losses and food spoilage in rural farming regions. Women and youth, often excluded from formal employment, can engage in micro-enterprises like barbing, tailoring, and phone charging. Schools with electricity extend teaching hours, while health centres can store vaccines and operate life-saving equipment. Off-grid electrification is thus central to inclusive growth, gender empowerment, and community development.

Financing Challenges

Despite the strong potential, off-grid renewable energy faces significant financing challenges in Nigeria. Most commercial banks are reluctant to fund off-grid projects due to perceived risks associated with the rural communities, high capital intensity, and long payback periods. Developers often struggle to access working capital or affordable credit. 

Where financing is available, interest/return rates are high, and loan/facility tenors are relatively short. The reliance on imported components for solar and battery systems also exposes projects to foreign exchange volatility. Moreover, consumers in rural communities often lack credit histories or collateral, further constraining access to finance. These challenges highlight the urgent need for alternative and innovative financing mechanisms that can address the limitations of conventional banking.

Role of Islamic Banking

Islamic banking offers an ethical and practical solution to the financing gap in off-grid renewable energy. Built on principles of risk-sharing, prohibition of interest (riba), and asset-backed transactions, Islamic finance can support productive, inclusive, and environmentally responsible investments. In Nigeria, where a significant portion of the population is underserved by conventional finance, particularly those seeking Shariah-compliant solutions, Islamic banking aligns with cultural and religious values. Key Shariah-compliant instruments like Mudarabah (profit-sharing), Musharakah (equity partnership), Ijarah (leasing), and Sukuk (Islamic bonds) can be structured to finance renewable energy projects while ensuring equitable returns for both financiers and project developers.

Applicable Islamic Finance Instruments

Several Islamic finance instruments are particularly suited to off-grid energy development. Through Ijarah, financial institutions can lease solar systems or mini-grid equipment to users with flexible payment plans, promoting affordability without the burden of interest/return rate. Musharakah and Mudarabah allow banks to enter into profit-sharing arrangements with developers, enabling the co-financing of mini-grid projects and shared project risks. Green Sukuk (Shariah-compliant bonds backed by physical assets) can mobilise large-scale investment from retail and institutional investors for community-scale renewable projects. These models not only comply with Islamic ethics but also align with sustainable development goals. 

Successful Global Cases 

In several Muslim-majority countries, Islamic finance has been successfully leveraged to fund renewable energy projects. Notably, Malaysia pioneered the issuance of Green Sukuk in 2017, which financed large-scale solar farms under its Sustainable and Responsible Investment (SRI) framework. Indonesia followed with its own sovereign Green Sukuk programme, raising over US$3 billion between 2018 and 2023 for projects including clean transportation, renewable energy, and energy efficiency. 

In the United Arab Emirates, Green Sukuk have been used to fund solar parks, such as the Mohammed bin Rashid Al Maktoum Solar Park, one of the world’s largest. These models have attracted both domestic and international investors seeking ethical and environmentally sustainable portfolios. Their success is rooted in strong regulatory backing, clear green certification standards, and robust project evaluation. Nigeria can replicate and localise these approaches to unlock its off-grid potential.

Key Barriers 

Despite its promises, Islamic finance faces several hurdles in Nigeria’s energy transition. The Islamic finance sector in Nigeria is still developing, with limited institutional capacity in structuring complex project finance transactions. There is also a lack of standardised regulatory frameworks for issuing Green Sukuk and other climate-aligned Shariah instruments.

Additionally, awareness about Islamic finance solutions among renewable energy developers, policymakers, and community stakeholders remains low. These challenges can, however, be addressed through policy reforms by regulators (e.g. Debt Management Office, Ministry of Finance, and Central Bank of Nigeria) for capacity building, and targeted awareness campaigns.

Recommendations

The following recommendations provide a way forward for overcoming the financing barriers to developing off-grid energy solutions in Nigeria. 

Develop a Regulatory Framework for Green Sukuk: Nigeria should establish a dedicated framework for Green Sukuk issuance, with clear standards for Shariah compliance, green certification, and tax incentives. Countries like Malaysia and Indonesia have raised billions through such instruments to fund solar parks and climate-resilient infrastructure.

Promote Ijarah-Based Leasing Schemes: Islamic banks should implement Ijarah models that allow customers to lease solar home systems or energy appliances with flexible payments. This approach has improved off-grid energy access in rural areas of countries such as Bangladesh and Pakistan.

Establish Risk Mitigation Tools and Guarantees: A Shariah-compliant credit guarantee facility should be introduced to protect investors against default and foreign exchange risks. Similar mechanisms have encouraged investment in green infrastructure by lowering financing risks for Islamic banks. For example, since the technical ownership of assets still lies with lessor, there are possible structures that allow the owner to track and control access to the system, thereby driving responsible behaviours from the lessee.

Encourage Public-Private Collaboration: Joint financing of renewable energy between government agencies and Islamic financial institutions can reduce capital burden and fast-track rollout. Such collaborations have enabled successful deployment of solar infrastructure in sectors like health and education.

Build Technical and Institutional Capacity: Capacity-building programmes are needed for Islamic bankers and clean energy developers. Countries like Malaysia have integrated Islamic green finance into national training programmes, resulting in better project understanding and implementation.

Integrate Islamic Finance into National Energy Policy: Islamic finance should be included as a core financing option in Nigeria’s energy strategies. This policy alignment can attract new capital flows and strengthen stakeholder confidence in renewable energy initiatives.

Mobilise Impact and Faith-Based Investors: Faith-aligned investors and philanthropic capital can be directed toward off-grid energy in underserved regions. Other Muslim-majority countries have used zakat and waqf funds to support solar projects in socially impactful sectors.

Launch Pilot Projects in Targeted Communities: Pilot projects using Islamic finance instruments such as Mudarabah and Ijarah can demonstrate feasibility and attract further funding. Countries like Indonesia and Pakistan have used this approach to test and scale decentralised renewable solutions.

Conclusion

Nigeria stands at a pivotal moment in its energy transition journey, with approximately 90 million people still lacking access to electricity and more than 23 million households identified as potential off-grid users. Islamic banking presents a powerful, ethical, and Shariah-compliant financing pathway to bridge this gap. Instruments such as Green Sukuk, Ijarah, and Mudarabah have already proven effective in other Muslim-majority countries. Indonesia’s Green Sukuk programme has raised substantial amount of fund, while Malaysia successfully financed multiple solar projects through Ijarah-based Sukuk. 

Nigeria can replicate and localise these models by implementing a supportive regulatory framework, integrating Islamic finance into its Energy Transition Plan, and mobilising both public and private sector participation. With the right structure and partnerships, Islamic finance can play a transformative role in delivering decentralised renewable energy to Nigeria’s underserved communities.

Lukman Rajih is Sharia Audit Officer, Lotus Bank.