Nigeria Sukuk

As part of its policy to diversify its sources of public debt financing, the Federal Government of Nigeria (FGN) is turning to sukuk issuance as a viable alternative fund-raising instrument, linked exclusively to road infrastructure development

By Mushtak Parker

According to Fitch Ratings, “Sukuk instruments have been made part of the government’s debt management strategy for 2020-2023.” In February 2022, Patience Oniha, the Director-General, of the Debt Management Office (DMO) at the Ministry of Finance, together with the Minister for the Federal Capital Territory (FCT) Malam Muhammad Musa Bello, launched the FCT Sukuk Technical Committee “towards the issuance of the FCT’s debut sukuk in the nearest future.” Compared with the DMO’s prolific FGN conventional bond issuance, Nigeria’s local sukuk market, says Fitch, remains in its early stages of development, with its share of the global sukuk market low at 0.15% at end-2020. However, Nigeria’s sukuk market global share was the highest among African countries, ahead of Egypt (0.04%), Senegal (0.04%), and Morocco (0.02%).

But “local-currency sukuk issuance,” added Fitch, “is expected to pick up in the medium term, as the sovereign seeks alternative funding sources and domestic investor appetite for sukuk as an alternative asset class increases. The Islamic finance industry in Nigeria is expected to continue its moderate growth trajectory in 2022-2023. Growth will be driven by top-down government support for the sector, sukuk issuance by the federal government, asset growth by newly-established Islamic banks and enabling regulations.”

In February 2022, Oniha handed over a cheque for N250bn ($610m) to Nigerian Finance Minister Dr Zainab Shamsuna Ahmed and the Minister for Works and Housing Raji Babatunde Fashola, the proceeds from the DMO’s latest benchmark 10-year Sukuk Ijarah sovereign domestic offering at end December 2021.

The FGN sukuk embodies two key sustainability features – infrastructure and financial inclusion. “We consider sukuk to be one of the useful and accepted products for raising funds,” explains Oniha. “The proceeds from the issuance will be used solely for the construction and rehabilitation of 44 arterial roads across the six geopolitical zones of the country. Issuing further Sukuk in 2022, will depend on eligible projects in the 2022 Appropriation Act.”

According to Oniha, sovereign Sukuk diversifies the product range available to investors in the domestic financial market, widens the investor base and promotes financial inclusion by attracting several first-time retail investors. This latest 10-year sukuk is the fourth such offering of the DMO to date, bringing Nigeria’s aggregate naira-denominated sukuk issuance to N612.57bn ($1.49bn), building up a yield curve for the instrument in the process.

The sukuk are guaranteed by the FGN and is priced at a fixed rental rate of 12.8% per annum. The transaction involved

several local-based financial institutions. The lead arrangers of the transaction were Greenwich Merchant Bank, Stanbic IBTC Capital and Vetiva Capital Management with the placement agents including the country’s two dedicated non-interest (Islamic) banks Taj Bank and Jaiz Bank, as well as local subsidiaries of the UK’s Standard Chartered Bank and South Africa’s Standard Bank, namely Stanbic IBTC Bank.

The growing investor appetite for sukuk, as Fitch maintains, is underlined by the “unprecedented subscription level of over N865bn ($2.09bn),” which means the issuance was oversubscribed by 346%.

The Sukuk certificates are available to both institutional and retail investors. Demand for FGN securities in the domestic market, stresses Oniha, is strong. The minimum subscription for retail investors for the latest N250bn offering is only N10,000 (US$24.38). DMO analysis reveals high levels of subscription from banks and fund managers (including pension funds), as well as non-interest (Islamic) financial institutions, ethical funds, cooperative societies and retail investors.

The journey of retail investors is revealing – 5% for the debut issuance in 2017, followed by 17.33% for the second issuance in 2018, to over 18% for the third issuance in 2020.

The increasing level of participation by a more diverse and larger number of investors, stressed the DMO, “is a confirmation that the DMO’s objectives of issuing sovereign Sukuk to grow the domestic investor base and promote financial inclusion is being achieved. In addition, the high subscription level is proof of investors’ acknowledgement of the impact the first three Sukuk issuances totalling N362.577bn ($880m) issued between 2017 and 2020 has had on the development of road infrastructure in Nigeria.”

The disappointing aspect of Nigeria’s first mover advantage in infrastructure linked Sukuk is that it has failed to spur a market for quasi-sovereign, corporate and social issuances. In 2021, the two lone corporate sukuk issuer was the debut sukuk by Family Homes Funds and the first ‘green sukuk’ by OneWattSolar. According to Nigerian banking sources, Dangote Cement, a major player in the country’s road infrastructure reconstruction programme in its capacity as the country’s major cement producer, was contemplating a debut Sukuk just prior to the onset of the coronavirus pandemic. But market conditions most likely put paid to that ambition, albeit the potential is good depending on the the certificates are guaranteed by the FGN; liquidity since the certificates can be traded on the two top local stock exchanges and qualify as liquid assets for banks and other institutions; and the Sukuk certificates may be used as collateral for securing credit facilities from financial institutions.

The Sukuk certificates are listed on the FMDQ Securities Exchange, Nigeria’s largest bourse, and the Nigerian Exchange Limited. With the listing, Sukuk certificate holders can trade them while new investors have an

WE CONSIDER SUKUK TO BE ONE OF THE USEFUL AND ACCEPTED PRODUCTS FOR RAISING FUNDS

reputation and financial stability of the issuer. There are also reports of more state governments following Osun State in issuing Sukuk.

An important development is the opening up of investment in FGN Sukuk by the 22 or so pension providers regulated by the National Pension Commission (PenCom) subject to its eligibility criteria. In fact, Patience Oniha, Director-General of the DMO, met with senior PenCom officials in December 2021 and January 2022 and discussed inter alia “recent developments in the sector and the plans for the two institutions to cooperate in areas of mutual interest.”

According to the DMO, FGN Sukuk IV has several sustainability and ethical attributes. These include responsible investing (the proceeds are dedicated to tangible road infrastructure projects; financial inclusion for non-interest investors with the aim also of further developing the savings culture in Nigeria; ethical investment for investors who are ethically minded; low risk as opportunity to buy the certificates in the secondary market, thus unlocking vital liquidity in the capital market.

The development impact of Sukuk is clearly visible - improved road infrastructure within and outside Nigerian cities, timely completion of designated projects and the multiplier effects associated with construction of capital projects such as roads. This, says the DMO, “has brought reprieve to road users, improved travel times between major commercial cities, linked borrowing and government expenditure to specific critical projects, helped increase the flow of cargo and passenger traffic across major cities, and improved infrastructure delivery across the country.

“The impact of the sovereign Sukuk on road infrastructure in terms of job creation, travel time, safety and movement of goods have made the Sukuk a beneficial financial instrument for financing economic growth and development.”