IFN Monthly Article on Nigeria: December 2018 Issue

2nd Sovereign Sukuk offer pulls through, with an oversubscription rate of 132%

 

In a bid to promote total financial inclusion across all levels within the country, the federal government of Nigeria announced the second tranche issue of its debut Sovereign Sukuk bond. Officially announced through the Debt Management Office of the federation, the 7-year ijarah (lease) Sukuk was launched on December 6, 2018 with a closing date set at December 17, 2018. Through a special purpose vehicle, FGN Roads Sukuk Company 1 Plc, N100 billion worth of Sukuk units were offered for subscription to members of the general public. The non-interest lease financing comes with a competitive rental rate of 15.743% per annum, payable half-yearly. We note that the rental income rate competes fairly with yield rates for other FGN bonds of similar tenor. As a result of increased retail investors participation, the FGN sukuk recorded an oversubscription rate of 132%.

The sukuk event enjoyed maximum publicity with a lot of buzz going on both in Lagos and Abuja, where investors forums were held regarding the successful implementation of the debut sukuk’s proceeds on road projects. Proceeds from this 2nd tranche will be used in the construction and rehabilitation of key economic roads across the six geopolitical zones of Nigeria. Some of these roads of economic importance currently undergoing rehabilitation include the dualisation of the Ibadan-Ilorin road, Enugu-Port Harcourt Expressway and Kano-Maiduguri Road. In Q2 2018 alone, infrastructure development accounted for 7.66% of the non-oil sector’s quota of the nation’s GDP due to a flurry of road and rail construction and rehabilitation activities embarked upon by the federal government.

Upon its purchase, owners of the Sovereign sukuk are presented with an investment trust certificate showing ownership interest in the assets of the federal government; a certificate that entitles the holder to receive rental income from the use of such assets. Noteworthy is the fact that the FGN sukuk has received a sharia compliancy certification by the CBN’s Financial Regulation Advisory Council of Experts. Investors get to enjoy the semi-annual rental income plus a bullet repayment of the principal at maturity in 2025. Apart from being a good investment vehicle for ethical investors, the FGN sukuk offers enough trading liquidity on both the Nigerian Stock Exchange and OTC exchanges.

The incessant oversubscription rates recorded on both tranches of the FGN sovereign sukuk has shown that the market for alternative ethical investment vehicles remains largely untapped. Since inception, the sukuk has helped create jobs across the country, designed a framework for proper accountability of funds used in road rehabilitation and construction projects, and has paid rental income twice to investors. Given the positive acceptance of these sukuk instruments and the government’s debt level landscape, our expectations are high for another issue of the ijarah (lease) sukuk instruments financing come 2019. We anticipate a widening in the scope of sukuk financing – Rail is fast becoming the future of transportation. Projects spanning the development of airports and rails, as well as infrastructural projects engendered towards to the educational sector could also be funded through subsequent sukuk issues.

Investors’ appetite regarding the Sovereign sukuk seems not be waning anytime soon.