IFN Monthly Article on Nigeria: November 2017 Issue

How Nigeria’s Appetite for Green Bonds and Sukuk Could See Eye to Eye

 

In advanced Islamic finance markets, the discussion around harmonising the Islamic finance industry and Socially Responsible Investing (SRI) has never been as resounding as it is today. This is to the extent that products like the green Sukuk recently emerged in Malaysia. Against this backdrop, it is worth exploring how Nigeria’s recent hint at a green bond issuance vis a vis its recently concluded Sukuk issuance, could better interact to fund the country’s massive budget deficit.

In the second week of November 2017, the Federal Government of Nigeria (FGN) confirmed its readiness to tap into the green bond market by December 2017. This is an audacious step that would make it the first African sovereign to issue green bonds. The government intends to raise N20bn ($602mn) in the first tranche to fund low-carbon transport projects, sustainable energy as well as clean water projects. To make this a reality, the Securities and Exchange Commission is already putting together the required regulatory framework to guide the issuance in the domestic market.

One of the key success factors of the Nigerian sovereign sukuk issued in September, despite religious sensitivities, was its link to a well-defined project with socio-economic benefit. This feature which is also shared by the green bond embodies a fine point of harmony between the instruments. There is sufficient reason to believe that if the government goes a step further to issue a green sukuk, another viable funding source could be unleashed. Firsly, a green Sukuk would offer appreciable interest-free returns, while addressing the investment goals of a broad base of ethical investors. In addition, a green Sukuk would assign direct ownership stake in the underlining project, such that the citizenry are be better motivated to invest.

Outside the domestic market, green bonds are mostly appreciated in the more developed western region, while Sukuk appeals to a Middle-Eastern/Asian audience. Evidently, combining the demand potential of both instruments into a green sukuk could help the Nigerian government better attract foreign capital from a broader investor base. Another factor to consider is the potential for a green Sukuk to deepen the domestic capital market and widen product breadth.

Notably, at the 2017 ‘Bonds, Loan and Sukuk’ event held in Nigeria this month, international spectators and islamic finance experts analysed the future of Sukuk and green bonds in the country. The event which was organised by GFC Media group had panellists discuss avenues for maximising the potentials of the Nigerian Economy through Islamic Finance Instruments. It also surveyed Investors’ appetite for green bonds in the domestic market. It would have been an interesting twist to see these stakeholders consider the prospects for harmony between these instruments as it concerns funding Nigeria’s large infrastructure deficit.