Keying into FG’s N100bn Sukuk

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ANALYSIS 

Goddy Egene writes that the N100 billion Sukuk, a non-interest bond, that is being issued by the federal government will deepen financial inclusion and offer more investors the opportunity to earn returns, among other benefits

The N100 billion Sukuk currently being offered by the federal government is a very good opportunity for investors who have been waiting to invest in a non-interest instrument by the government.
While the federal government has been issuing various bonds to raise funds to finance developmental projects and finance budget deficits over the years, some investors, who prefer non-interest bearing investments have not been benefitting. However, the N100 billion Sukuk, which is the first sovereign sukuk to be issued by the government has offered such investors the opportunity to stake their money and reap the benefits. The Sukuk is also help in expanding financial inclusion.
Sukuk are Islamic bonds, structured in such a way as to generate returns to investors without infringing Islamic law that prohibits riba or interest. Sukuk is said to be ‘Shariah compliant’ because it eliminates the interest elements that are associated with a conventional bond.

Sukuk is different from convention bonds in the sense that it represents ownership interest in assets while bonds represent a pure debt obligation due from the issuer. The funds raised from Sukuk issuance must be used only for ethical purposes, whereas bonds can be issued to finance any legal purpose. Also, the sale of Sukuk represents the sale of the holder’s interest in an asset, while the sale of a bond is the sale of a debt.
The N100 billion Sukuk, which opened last Thursday is structured as a lease and yield a 16.47 percent rental rate, payable semi-annually. Subscription for the bond, which is guaranteed by the government, will close on September 20.
The sukuk is designed for all categories of investors, including retail investors, high net worth individuals, institutional investors such as commercial banks, insurance/takaful companies, pension funds, asset managers, private banks and others. Also, ethically inclined investors, cooperative societies, religious bodies, state investment companies and foreign investors will find it really attractive.
Before the offer was though open , the DMO had embarked on road shows to sensitise investors in order to ensure that as many Nigerians as possible are aware for them to invest in it.

For instance, the Director General of DMO, Ms. Patience Oniha, alongside officials of the Federal Ministry of Power, Works and Housing told stakeholders in Lagos, Port Harcourt and Abuja that the debut N100 billion is dedicated to building critical road infrastructure in the country.
It is designed by the government as a revenue source to fund the construction and rehabilitation of key economic infrastructure projects across Nigeria, such as roads. It is intended to diversify the sources of government funding, offer ethical investors an opportunity to invest in government-issued securities, achieve a higher level of financial inclusion and serve as a reference for pricing Sukuk issued by other bodies, especially private sector issuers.
Oniha, at the various stops on the road show assured potential investors that the Sukuk is backed by the full faith of the federal government and was one of the avenues it intends to raise funds for capital projects.

“This is one of several efforts to raise funds for specific projects and this is backed by the full faith of the federal government. This is a rental product to cater for segment of our society that requires such services,” she said.
The Federal Ministry of Power, Works and Housing has listed 25 road projects spread across the six geo-political zones of the country which the N100 billion Sukuk capital will be used for. Some of the projects include the Loko Oweto Bridge, dualisation of a section of the Abuja-Lokoja road, dualisation of the Suleja-Minna road, the dualisation of the Kano-Katsina road (phase 1), rehabilitation of the Onitsha – Enugu Expressway, and the Enugu-Port Harcourt road (section 1-3). Others are the Ibadan-Ilorin Road (Oyo-Ogbomoso), Kolo-Otuoke-Bayelsa-Palm Road (Yenegwa Road Junction), Kaduna Eastern By-Pass and Kano-Maiduguri Road (Potiskum-Damaturu).

Investment and financial analysts are optimistic that the product will open new opportunities and new investments flows following in the pattern set by other financial instruments such as the FGN Bond, Savings bond and the others the DMO had already put on offer. Benefits of investing in the Sukuk, according the DMO, include safety of investment, regular income which are tax free and liquidity because they will be listed and traded on the Nigerian Stock Exchange and the FMDQ OTC Securities Exchange Plc.
The Sukuk has been certified as ethically compliant by the Financial Regulation Advisory Council of Experts of the Central Bank of Nigeria. The product is also useful as collateral to access loans from banks.
Assessing the benefits of the financial instrument, the President of Federation of Muslim Women in Nigeria, Rivers State Chapter, Hajia Maimuna Bello, described it as a bold initiative to cater for a critical segment of the country and urged the DMO to deepen its awareness drive.
In Abuja, a former Executive Director of the NNPC, Ibrahim Waziri, who welcomed the development, expressed the hope that the raised funds would be deployed to the listed projects, and stressed that as an ethical financial instrument, investors are assured of timely rental returns.

Other countries that have issued Sukuk include the United Kingdom, Hong Kong, Malaysia, Republic of South Africa, Cote d’Ivoire, Senegal and Saudi Arabia.
The DMO had explained that as part of its Strategic Plan, 2013-2017, it has the objective of developing alternative sources of raising finance for development and attracting a wider pool of investors.
“One of these is the issuance of a sovereign non-interest financing products (Sukuk) in the domestic debt market would not only serve as an alternative source of financing for the government, it would facilitate the mobilisation of idle funds and more efficient allocation of scare resources within the economy. The introduction of Sukuk is not only seen as a means of raising investible capital for the government and promotion of greater financial inclusion but as a part of the plan to fast track the development of infrastructure and engage in purposeful and project-tied capital raising,” DMO said.
There are high optimism that the N100 billion Sukuk will be successful considering the huge booming international market for the product. Also, Osun State, which issued N10 billion Sukuk in 2013 had a successful outing as it was 120 per cent subscribed. Historically, the first Sukuk, worth RM125 million, was issued in 1990 by Shell MDS in Malaysia. The market experienced rapid growth culminating in the first issuance of Sukuk in the international markets when the Central Bank of Bahrain issued the first US-dollar denominated Sukuk worth $100 million.

Sukuk issuances across the globe is estimated at about $120 billion, up from just $15 billion in 2008. In June 2014, the United Kingdom became the first country outside of the Islamic world to issue a sovereign Sukuk, highlighting the growing importance of this innovative financial instrument across the world. In that debut issuance, the UK government raised £200 million to build residential buildings. Other countries outside the Islamic world that have issued Sukuk over the last two years include Hong Kong, Senegal, South Africa and Luxemburg. The five largest Islamic finance markets in the world – Malaysia, Saudi Arabia, UAE, Kuwait and Qatar – continue to account for over 90 per cent of global Sukuk issuances.

By the end of 2015, total assets under management in the global Islamic finance industry surpassed $2.5 trillion as more and more investors continue allocating their funds to Shariah compliant instruments across the globe.
“There is therefore a huge, unmet demand for Sukuk issuances from high-potential economies like Nigeria, especially in view of the fact that similar issues by peer countries were oversubscribed. Hence, the N100 billion Sukuk being issued by the federal government is a good move that will open the way for corporate bodies that ,ay want to go this route,” an analyst said.