IFN Monthly Article on Nigeria: November 2019 Issue

Who moved my Sukuk?

Nigeria’s Islamic finance institutions (IFIs) may be having sleepless nights of late and you will have to forgive them for the daytime crankiness. The reason is not far-fetched. Last month, I wrote about a liquidity glut in the market after the Central Bank of Nigeria barred some participants from Open Market Operations (OMO) auctions, which had a huge impact on the general yield environment. IFIs were initially less affected; however, they were drawn in this month as the federal government failed to issue a sukuk, for the first time in three years contrary to market expectations. Ostensibly this was due to the late passage of the 2018 budget and a change in the budget cycle mid-year. The combination of events caused a scramble for existing sukuk and sent sukuk yields even lower than similar tenured conventional instruments.

Not surprising as there had been a strong buildup in liquidity in anticipation of another sovereign sukuk issuance. In the Islamic fund management segment for instance, assets under management grew by c.41% so far this year, which would have been cause for cheer had compliant investible assets grown nearly as much. It seems like most IFIs will end the year sitting on large near cash assets even as more people embrace Islamic finance savings and investment products.

Well, all is not gloom as the new year holds promise. I take a cue from President Buhari’s stirring 2020 budget speech where he signaled the government’s intention to finance more capital projects with sukuk. If all goes according to plan, we should see another sovereign sukuk possibly as early as the first quarter of the year. There is also strong advocacy by IFIs for the government to issue short-term shariah compliant treasury instruments. This would be especially helpful given the industry’s recent expansion and the expected commencement of Islamic pension fund schemes.

However, should the industry’s hopes rest on government issuances? I strongly believe not. There is ongoing chatter of possible corporate sukuk issuances in the new year as corporate treasurers try to take advantage of the low-yield environment. Local banks have also endeavored to ramp up private sector credit, albeit with a bit of regulatory prodding, and I expect a few sukuk deals will eventually come to fruition. With all the noise around infrastructure bonds, sukuk at every level (sovereign, state and corporate) are under serious consideration.

One thing is clear, Nigeria needs more Islamic finance instruments.