The Case for Nigerian Sukuk

The offer for Nigeria’s debut sovereign Sukuk in the sum of N100 billion opened on September 14, 2017. This followed a roadshow, which took the Debt Management Office (DMO), Ministry of Power, Works and Housing, Central Bank of Nigeria (CBN) and the transaction parties to Lagos, Port Harcourt, Abuja, Kano and Kaduna to engage with prospective investors on the issuance.
This first issuance of a Sukuk by the Federal Government of Nigeria has attracted a lot of interest as well as some questions from the public, hence the need to throw more light on the Sukuk’s issuance.
By way of background, the Sukuk is one of the financial instruments (bonds) used by governments and organisations to raise funds. However, unlike conventional bonds whose proceeds can be used for a wide variety of purposes including recurrent expenditure, funds realised from a Sukuk issuance can only be deployed to assets such as infrastructure. Furthermore, investors in Sukuk receive income, based on those assets rather than interest, as is the case with conventional bonds.
Prior to this time, the FGN had borrowed in the domestic market through conventional bonds namely, Nigeria Treasury Bills, FGN Bonds and the FGN Savings Bond.
The issuance of a new instrument (the Sukuk) by the government at this time is another landmark in the domestic market that is of immense benefit for the FGN, the capital market, investors and the Nigerian populace for various reasons.
One of the three broad strategic objectives of the Economic Recovery and Growth Plan (2017-2020) is to build a globally competitive economy and one of the plans for achieving this is by investing in infrastructure; thus, every avenue towards developing Nigeria’s infrastructure must be explored. The use of the Sukuk to raise funds to finance infrastructure contributes directly to achieving this objective.
The proceeds from the issuance of the N100 billion Sukuk will be used to construct and rehabilitate 25 roads in Nigeria’s six geopolitical zones. These roads have been selected by the power, works and housing ministry because of their strategic economic importance. The deployment of the Sukuk proceeds to these projects would improve road infrastructure, which because of the multiplier effect of good infrastructure, will translate to many benefits all over the country.
Good roads are important for Nigeria’s economic development; they connect different parts of the country, facilitate trade, provide access to markets for farmers and link remote areas to essential social services such as education and health.
Many of the prospective investors that the DMO met during the roadshow were very interested in the fact that the Sukuk is tied to projects and enquired about the specific roads towards which the N100 billion Sukuk would be applied. The level of disclosure and transparency for Sukuk financing which requires the issuer to present full details of how funds will be utilised gives investors information that will guide their investment decision whilst also giving them the ability to monitor the utilisation of the Sukuk proceeds after investing, to confirm that funds have been applied as proposed.
To provide additional comfort to investors, the FGN has appointed two trustee firms registered with the Securities and Exchange Commission (SEC) that will, on behalf of the investors in the Sukuk, monitor the utilisation of the proceeds and the quality of work. 
The Sukuk also provides an opportunity for the federal government to diversify its sources of funding by introducing a product that is more acceptable to ethical investors who would ordinarily not invest in interest-bearing instruments. The Sukuk effectively provides an avenue for ethical investors to also contribute to the development of the nation in a manner consistent with their investment preferences. The Sukuk will thus expand and diversify the FGN’s investor base.
The debut Sukuk offer will also encourage financial inclusion by providing an avenue for non-interest investors to participate in the fixed income market. In addition, it provides an opportunity to further develop the savings culture in Nigeria, particularly among individuals and other retail investors. For this purpose, the minimum subscription amount for this debut offer has been set at N10,000 to make it accessible to all categories of investors. It is expected that financial institutions, social and religious organisations, co-operative societies, trust funds and retail investors will take advantage of this opportunity.
It is important to add that the issuance of the sovereign Sukuk will also deepen Nigeria’s financial market by increasing the variety of instruments available for issuers and investors. The DMO expects that the sovereign Sukuk will serve as a benchmark for the pricing of future Sukuks that may be issued by other tiers of governments, corporate institutions and multilaterals. For this purpose, the DMO will be extending the developmental role it played in the capital market using FGN Bonds to the non-interest bearing segment of the market.
Significant highlights of the N100 billion Sovereign Sukuk include the rental income, which will be paid to investors in the bond every six months at a rate of 16.47% per annum. It is a safe low-risk investment, as it is a direct obligation of the FGN, which is fully responsible for the payment of the rental income and the repayment of the principal at maturity. It is also backed by the full faith and credit of the federal government.
The CBN has conferred a liquid asset status, meaning that the low risk of the Sukuk and the liquid asset status make it relatively easy for investors to use the Sukuk holdings as collateral.
To encourage the investment culture and mobilise savings, the rental income on the Sukuk is tax-exempt and will be listed on The Nigerian Stock Exchange (NSE) and the FMDQ OTC Securities Exchange to provide an avenue for investors that may wish to sell part or all of their investment in the Sukuk before maturity.
• Ms. Oniha, Director-General of the Debt Management Office (DMO), writes from Abuja