The successful launch and closing of Nigeria’s first sovereign sukuk in September is another feather in the cap of the relatively new Director General of the Debt Management Office (DMO) of the Nigerian Ministry of Finance, Patience Oniha.
The DMO was established in 2000 to centrally coordinate the management of Nigeria’s debt, which was hitherto handled by a myriad of establishments in an uncoordinated fashion, leading to inefficiencies and confusion. It coordinates the issuing of government-backed securities and fixed-income bonds in the domestic and international markets. Sukuks are Islamic financial instruments. In line with sharia law, they do not pay interest but pay subscribers a share of profit.
The DMO issued the N100bn ($277m) sukuk through a locally incorporated special purpose vehicle, the FGN Roads Sukuk Company 1 Plc. In a statement issued on September 26, the DMO announced that the bond was oversubscribed, having attracted a total subscription of N105.878bn ($293m). The sukuk certificates, which are guaranteed by the Nigerian government, are priced at a rental rate of 16.47% payable semi-annually, and mature on September 25 2024.
The rationale for the issuance of the sukuk, explains Oniha, “is to enable the government to diversify its sources of funding, deepen the market for domestic securities and improve financial inclusion. After the issuance of the debut sukuk, the DMO plans to continue issuance based on the Federal Government’s financing needs.”
The sukuk provides investors with the opportunity to participate in the country’s growing capital market. In its statement the DMO said that subscribers came from a broad cross-section, including pension funds, banks, fund managers and institutions as well as more than a thousand retail investors from across Nigeria, who accounted for over 4% of the total subscription. With the success of the sukuk, another window has been opened to raise funds to close Nigeria’s infrastructure gap, said the DMO.
Funds earmarked for roads
The funds raised from this debut sukuk will be used for the construction and rehabilitation of 25 roads across the nation’s six geopolitical zones. The Federal Ministry of Power, Works and Housing says it has now commenced work on the project.
Nigeria’s infrastructure finance gap over the next 30 years is estimated at up to $3 trillion by the African Finance Corporation. The oil, gas, power generation, road and rail sectors alone will require $600bn over the next six years to provide quality infrastructure and upgrades, according to the Infrastructure Concession Regulatory Commission (ICRC) of Nigeria. The sukuk is also part of an ambitious plan of the Securities and Exchange Commission of Nigeria (SEC) to develop the debt market in the country.
Role of local banks
The issuance of the sukuk is also major achievement for local banks in that it was largely structured, arranged and distributed through a book-building exercise by them. It was jointly lead-managed by FBN Merchant Bank and Lotus Financial Services, which also acted as financial advisers and bookrunners to the transaction.
First Bank of Nigeria, Jaiz Bank, Zenith Bank and Sterling Bank acted as lead managersAccess Bank, Citi Bank Nigeria, Coronation Merchant Bank, Ecobank Nigeria, First City Monument Bank, FSDH Merchant Bank, Guaranty Trust Bank, Stanbic IBTC Bank, Standard Chartered Bank Nigeria and United Bank for Africa acted as placement agents.
According to Oniha, the multilateral Islamic Development Bank (IDB), in which Nigeria has a major equity subscription, provided a two-day training on sukuk for staff of the DMO, the CBN, the SEC, the MoF and Cross River State Government.
Adding depth to capital markets
According to Oniha, the SEC is in the process of “implementing a 10-year Capital Market Master Plan to make Lagos a [regional] financial hub. The DMO as part of its Strategic Plan, 2013–2017, has the objective of developing alternative sources of raising finance for development and attracting a wider pool of investors. This particular objective led to the development of new products, which includes sukuk.”
The Plan is similar to that of Kenya’s Capital Market Authority which two years ago launched the Capital Market Master Plan, incorporating an Islamic Capital Market Master Plan. It will take a number of years to develop and implement, and is part of Kenya’s ambition to develop Nairobi as the East African financial hub, which would include an Islamic finance hub.
To further add depth to the development of the Nigerian capital market, the Ministry of Finance has announced that the sukuk certificates qualify as securities in which trustees can invest under the Trustee Investment Act.
The certificates also come under government securities within the meaning of Company Income Tax Act and Personal Income Tax Act for Tax Exemption for Pension Funds. In addition, they are classified as liquid assets by the Central Bank of Nigeria; this will help banks holding these certificates in their liquidity management.
Credit rating not a concern
Oniha is unfazed by the fact that in recent months, Nigeria’s sovereign rating has hovered slightly above or below investment grade. “Nigeria,” she says, “recently successfully issued a $1.5bn Eurobond and $300m Diaspora Bond in the international market – both notes recorded high subscription levels. In view of these, credit rating has not been a major concern to Nigeria with respect to securities issuance in the international capital market.”
S Africa, Senegal, Togo and Côte d’Ivoire have been recent issuers of sovereign sukuk in Africa. The S African $500m sukuk has been the only sovereign issuance in the international market to date. Sudan was the pioneer of sukuk in Africa, while Djibouti and Gambia have also issued local currency sukuk.
The IMF and G20 countries have said that sukuk, by its very nature being asset based or backed, may be an ideal instrument for emerging countries in Africa and Asia to raise financing for infrastructure and by the corporate sector.
International sukuk could be on the cards
“Going forward,” confirms Oniha, “sukuk has a role to play in future government public debt programme, subject to the government’s funding need and portfolio management strategy. Maybe Nigeria may also go down the route of S Africa in issuing a sukuk in the international market.” Oniha, who was responsible for a number of innovations in her previous role at the DMO as Director, Market Development Department, is quietly bullish about the outlook for the Nigeria economy and financial services sector over the next year.
“The outlook for Nigeria,” she maintains, “is positive given the government’s initiatives and actions to stimulate growth and diversify the economy. Non-interest finance is beginning to evolve and we expect it to grow. The investment environment in Nigeria is open and not linked to creed or ethnicity.” Indeed the very purpose of the DMO’s Eurobond, FGN bond and now sukuk drive has been to create a debt capital market where the public and private sectors can access long-term funds to finance Nigeria’s growth and development.