Sukuk: Alternative Source For Infrastructure Development In The Finance Sector

By Adebanke Adewumi

 INTRODUCTION

Sukuk is an investment certificate. It represents ownership interests in assets which produce profit or generate revenues. Sukuk does not pay interest but generate returns in the form of rents through actual transactions of sale, lease or combination of the two. It is currently a major Islamic financial instrument used to finance major projects in Islamic countries. The Accounting and Auditing Organisation for Islamic Financial Institutions defined it as securities of equal denomination representing individual ownership interest in a portfolio of eligible existing or future assets. The certificate issued can also serve as collateral in banks for loan and other licenced financial institutions. It is a faith-based system put in place to help the government in diversifying its funding sources, deepening the Nigerian capital market, mobilising more savings, and enhancing financial inclusion.

Sukuk bond is issued under different structures to accommodate the unique nature of the different transactions practicable under it. Some of these structures include: Musharakah, Murabaḥah, Mudarabah, Ijarah, Salam, and Istisna.  The Sukuk presents new opportunities for investors like insurance companies, retail investors, high net worth individual, commercial banks, asset manager, private and commercial banks, among others to invest in infrastructure development. The Nigerian Securities and Exchange Commission (“SEC”), the regulator of all securities-related transactions in Nigeria, recognises these Sukuk structures under Rule 571 of the SEC Rules.

REGULATORY FRAMEWORK FOR THE ISSUANCE OF SUKUK IN NIGERIA

The Nigerian government has a regulatory framework that governs the operation of Sukuk in Nigeria. The Investments and Securities Act (ISA) 2007, the Securities and Exchange Commission (SEC)Rules and Regulations 2013, and other relevant laws and regulations guide the operation of Sukuk financing. In addition, there are CBN Guidelines for the regulation and supervision of institutions offering Non-Interest financial services in Nigeria. The Nigerian Deposit Insurance Corporation (NDIC) has issued a draft framework on Non-Interest (Islamic) Deposit Insurance Scheme. On February 8, 2013, the SEC, pursuant to its powers under Section 313 (6) of the ISA, 2007, introduced new rules to regulate the operation of Sukuk in Nigeria. The objectives of these rules are to develop the Islamic capital market. Subject to SEC approval, Rule 572 of the SEC Rules makes the Local Government, State Government, and government agencies qualify to issue or make an invitation for a Sukuk. These regulatory backing is expected to boost investors’ confidence as it is a good signal that Islamic Finance has come to stay.

POTENTIALS FOR SUKUK IN NIGERIA

Based on the United Nations’ projection, Nigeria’s current population as at Friday, May 29, 2020 is 205,626,178, which is equivalent to 2.64% of the total world population, and it is expected to increase to 206,139,589 by July 1, 2020. Currently, the country is urbanising at one of the fastest rates in the world and this has led to development of large-scale urban infrastructure projects, as well as, a significant demand for the renewal and modernisation of aging infrastructure, making the Nigerian construction and rehabilitation growth one of the fastest in the world.

Nigerian infrastructure financing deficit is required in the region of about USD 35billion per annum and is projected to be about USD 3 trillion in the next 30 years. Putting into consideration the state of economy and challenges at the advent of the Covid-19 pandemic, the Federal government in a bid to ensure sustainable development on a stable long-term basis, offered to the public a N150, 000,000 Billion sukuk bond on the 21^st May 2020. The offer is placed at N 1,000 per unit, which is subject to a minimum subscription of N10,000 at 11.2% interest rate. It is set to last for a period of 7 years. The prime purpose of raising the money is to construct the major roads in the six geopolitical zones across the country in addition to the 2017 and 2018 sovereign sukuk bond. The 2020 sukuk bond is the biggest Sukuk issued till date in Nigeria. The Six geopolitical zones where the roads are set to be constructed are the North-Central, North-East, North-West, South-East, South-South and South-West respectively.

The Federal Government of Nigeria (FGN) had in 2017, through a Special Purpose Vehicle, issued a 100 Billion Naira (N100, 000, 000, 000) 7 years Sukuk bond for financing 25 roads project across the six geopolitical zones in the country and in December 2018 raised another 100 Billion Naira (N100, 000, 000, 000) 7 years sukuk bond for the same purpose which will be due in 2025. According to the information by the DMO, investors ranged across a broad spectrum from institutional, retail investors to pension funds, banks, and other high profiled individuals.

The Osun State Government has set the pace as the first state-issuer of Sukuk in Nigeria in 2013 using Ijarah Sukuk valued at 11.4 Billion Naira (N11, 400, 000, 000) for the construction and establishment of 26 Schools. As a result, many other states are considering issuing Sukuk. The opportunities for using Sukuk to finance Local Government, State and Federal Infrastructure are huge. However it is not yet clear, if and how Sukuk may be able to overcome traditional obstacles to infrastructure project finance, including financing and underlying asset revenue flow mis-match, tariff and prize restrictions in major sectors like power, petroleum, non-passage of key sector reform laws, questions around sanctity of contracts and enforceability of contracts and delays in the justice system.

Indeed, it is possible that these constraints may be the fundamental reason why the FGN Sukuk is a sovereign sukuk and the Ogun State Sukuk is back by an irrevocable first line charge on the state accruing federal revenues.  The import of this is that the Sukuk almost becomes a budget supported borrowing.

However, opportunities exist for private sector initiatives to utilize the Sukuk model. An example of its use is the1 billion private Sukuk of Al-istisna issued by Lotus Capital in the construction of residential apartment in Ikoyi, Lagos. The Nigerian Government, through the Central Bank of Nigeria (CBN) and other agencies, has issued licenses to financial institutions like Jaiz Bank and TAJBank, to provide full Islamic Banking services to customers. With this step, Nigeria is poised to take full benefit of the potential growth of Islamic finance, just as witnessed in other parts of the world like the United Kingdom, Malaysia, Indonesia, Saudi Arabia, and Qatar.

Aside construction of road, schools, apartments and roads, Sukuk Bonds may also be used for other infrastructure like, railway and airport construction, agriculture, hospitals, which will help other sector achieve a great fit, and also solve the problem of unemployment and curb illicit businesses in Nigeria.

CONCLUSION AND RECOMMENDATION

One of the greatest challenges across the globe, especially in Africa, is financial inclusion. It is without much ado that Nigeria is occupying the front seat, contributing a great deal to the problem. According to the Enhancing Financial Inclusion and Access (EFInA) Survey of December 2018, about 36.8% of adults’ Nigerian population are unbanked which translate to a population of 36.6 million adults Nigerians; hence their economic activities are not properly recorded by the GDP. Most of these categories of people are from the North-West and North-East regions of the country who subscribe to religious beliefs which hinder participation in the conventional interest-based financial activities. With the introduction of Islamic Banks/ bond, many of them may be captured in the financial sector. It will also encourage majority of the people in the unbanked area to participate, thereby giving rise to the fall in numbers of unbanked in Nigeria. Also, an attempt to invest in infrastructure is an attempt to unlock the economy which would solve the problem of unemployment.

The Sukuk is always based on an underlying asset pool. If strategically deployed it can enhance foreign investment flows, local accumulation of investments and financial stability in the economy. It has potentials to attract more pioneer investors (FDI), especially those from the Middle East and Asia that believe solely in the Islamic principle-based financial products.

Adebanke Adewumi is a Consultant and an Associate in the law firm of B.E Ukoha and Associates, Abuja, Nigeria

Email: adebankeadewumi23@gmail.com