IFN Monthly Article on Nigeria: October 2018 Issue

Nigerians are in for a second serving of Sukuk

 

Road works delivered, timely payments to road contractors, wider road networks, safe travel, shorter travel time; these are just some of the achievements of the last sovereign sukuk, which earned a lot of praise for the Nigerian government. With general elections around the corner, the Federal Government has rolled out this winning formula and announced plans for another sukuk. In a pre-election year, criticism from political opposition is not uncommon and incumbents usually prefer embarking on popular initiatives rather than controversial ones. Therefore, the timing of the next sukuk reveals a great deal about the public acceptance of sukuk and Islamic finance in Nigeria in spite of the country’s ethno-religious diversity.

The Nigerian government plans to raise an additional ₦100bn ($327mn) through the second sukuk to continue the rehabilitation and construction of roads across the country. The construction will cover key interstate roads which carry significant passenger and cargo traffic between the Northern and Eastern regions and the country’s main seaports in the South west. Construction will also extend to the north eastern parts of the country and further the government’s efforts to resettle displaced farmers while improving the region’s economic productivity. With a gaping infrastructure deficit and continuous clamour for transparency in public finances, Nigerian’s appear to have found unity in the benefits of sukuk issuance.

The proposed Sukuk adopts an ijara mawsoofa bi dhimma (forward lease structure) and will be listed on domestic exchanges alongside other government bonds. The liquidity offered by the exchanges increases the appeal particularly to institutional investors such as the domestic Islamic banks as it will address one of their key challenges of liquidity management.

The growth of Nigeria’s sukuk market fits almost perfectly into the country’s evolving financial landscape which has recently witnessed landmark reforms in taxation, pension, banking, insurance and financial technology. This is aided by the government’s current drive for financial inclusion which has helped market participant mobilise fresh funding through new channels such as agent banking networks and mobile money operations in rural and sub-urban areas. Notably, in October 2018, the Central Bank of Nigeria released guidelines for the establishment of specialised technology-driven payment service banks (PSB) to facilitate high-volume low-value transactions predominantly in unbanked locations. This new financial ecosystem is ripe for sukuk issuance as it assures increased patronage from retail investors.

Despite the novelty in 2017, Nigeria’s debut sukuk was oversubscribed by 5%. With lessons learnt, increased awareness, proof of success and higher anticipation, subscription levels for the second sukuk are likely to dwarf the first.