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Nigeria scales up its Sukuk issuance policy and capacities with a debut infrastructure linked issuance by the Federal Capital Territory and an international issuance edging closer

The Federal Government of Nigeria (FGN) is enhancing its Sukuk issuance policy and seems to be edging towards issuing its first offering in the international market in addition to more sovereign domestic issuances.

Patience Oniha, Director-General of the Debt Management Office (DMO) at the Ministry of Finance, has been busy in the First Quarter of 2022 building up the capacity and capabilities of her Sukuk team.

In early March 2022, Oniha led a retreat organized by the Federal Ministry of Finance, Budget and National Planning on ‘Process Optimization in Donor-Financed Projects in Nigeria.’ In February, Oniha together with the Minister for the Federal Capital Territory (FCT) Malam Muhammad Musa Bello, launched the FCT Sukuk Technical Committee at the Federal Capital Territory Administration (FCTA) Office in Abuja which she described “as an important milestone in the journey of the issuance of Sukuk in Nigeria.”

The DMO, she assured, “is committed to partnering with the Ministry towards the issuance of its first Sukuk in the nearest future. The FCT Ministry is keen for the DMO to repeat its success and reputation it has gained in issuing the FGN’s four road infrastructure linked domestic Sukuk to date, by helping the FCT to raise funds through Sukuk issuance to finance the Federal Capital’s infrastructure development.

The meeting, which was also attended by Olusade Adesola, the Permanent Secretary, of FCTA, saw “extensive discussions on current infrastructural progress across the Federal Capital Territory and avenues for generating necessary capital finance geared towards bridging current infrastructural gaps within the nation’s capital.”

Fitch Ratings, in a recent commentary, confirmed that “Sukuk instruments have been made part of the government’s debt management strategy for 2020-2023.” Compared with the DMO’s prolific FGN conventional bond issuance, Nigeria’s local Sukuk market, says Fitch, remains in its early stages of development, with its share of the global Sukuk market low at 0.15% at end-2020. However, Nigeria’s Sukuk market global share was the highest among African countries, ahead of Egypt (0.04%), Senegal (0.04%), and Morocco (0.02%).

But “local-currency sukuk issuance,” added Fitch, “is expected to pick up in the medium term, as the sovereign seeks alternative funding sources and domestic investor appetite for sukuk as an alternative asset class increases. The Islamic finance industry in Nigeria is expected to continue its moderate growth trajectory in 2022-2023. Growth will be driven by top-down government support for the sector, sukuk
issuance by the federal government, asset growth by newly established Islamic
banks, and enabling regulations.”

Asked by this author in a recent interview whether there are any prerequisites for the FGN to issue a Sukuk in the international market, Oniha replied that “the pre-requisites for an international Sukuk issuance will be the same for a Eurobond issuance and probably more.” Asked whether she would like to see the Islamic Development Bank (IsDB) lead the way in Africa with a domestic currency naira Sukuk like it has done in the sterling, Singapore dollar, Euro and Malaysian ringgit markets, she stressed that this would depend on “them (the IsDB) being interested in issuing a sukuk in the domestic Nigerian market and obtaining the required approval from the Government.”

Also in February, Oniha handed over a cheque for N250 billion (US$610 million) to Nigerian Finance Minister Dr Zainab Shamsuna Ahmed and the Minister for Works and Housing Raji Babatunde Fashola, the proceeds from the DMO’s latest benchmark 10-year Sukuk Ijarah sovereign domestic offering at end December 2021. At the ceremony, Oniha reiterated “the significant improvement the Sovereign Sukuk has brought to road infrastructure across the six (6) geopolitical zones and the FCT, in Nigeria, which in turn has increased credence in the financial product as a result of its
evidential impact.”

The FGN Sukuk embodies two key sustainability features – infrastructure and financial inclusion. “We consider sukuk to be one of the useful and accepted products for raising funds,” explains Oniha. “The proceeds from the issuance will be used solely for the construction and rehabilitation of 44 arterial roads across the six geopolitical zones of the country. Issuing further Sukuk in 2022, will depend on eligible projects in the 2022 Appropriation Act.”

According to Oniha, sovereign Sukuk diversifies the product range available to investors in the domestic financial market, widens the investor base and promotes financial inclusion by attracting several first-time retail investors. This latest 10-year Sukuk is the fourth such offering of the DMO to date, bringing Nigeria’s aggregate naira-denominated Sukuk issuance to ₦612.57bn ($1.49bn), building up a yield curve for the instrument in the process.

The Sukuk are guaranteed by the FGN and is priced at a fixed rental rate of 12.8% per annum. The transaction involved several local-based financial institutions. The lead arrangers of the transaction were Greenwich Merchant Bank, Stanbic IBTC Capital and Vetiva Capital Management with the placement agents including the country’s two dedicated non-interest (Islamic) banks Taj Bank and Jaiz Bank, as well as local subsidiaries of the UK’s Standard Chartered Bank and South Africa’s Standard Bank, Stanbic IBTC Bank.

The growing investor appetite for Sukuk, as Fitch maintains, is underlined by the “unprecedented subscription level of over N865bn ($2.09bn),” which means the issuance was oversubscribed by 346%. “We consider Sukuk to be one of the useful and accepted products for raising funds. Issuing a Sukuk in 2022 will depend on eligible projects in the 2022 Appropriation Act. Our domestic financial markets are open to local and foreign investors. Demand for FGN securities in the domestic market is strong,” maintains Oniha.

The Sukuk certificates are available to both institutional and retail investors. The minimum subscription for retail investors for the latest N250bn offering is only ₦10,000 (US$24.38). DMO analysis reveals high levels of subscription from banks and fund managers (including pension funds), as well as non-interest (Islamic) financial institutions, ethical funds, cooperative societies and retail investors.

The journey of retail investors is revealing – 5% for the debut issuance in 2017, followed by 17.33% for the second issuance in 2018, to over 18% for the third issuance in 2020.

The increasing level of participation by a more diverse and larger number of investors, stressed the DMO, “is a confirmation that the DMO’s objectives of issuing sovereign Sukuk to grow the domestic investor base and promote financial inclusion is being achieved. In addition, the high subscription level is proof of investors’ acknowledgement of the impact the first three Sukuk issuances totalling N362.577bn ($880m) issued between 2017 and 2020 has had on the development of road infrastructure in Nigeria.”

The disappointing aspect of Nigeria’s first mover advantage in infrastructure-linked Sukuk is that it has failed to spur a market for quasi-sovereign, corporate and social issuances. In 2021, the only two corporate Sukuk issues were the debut Sukuk by Family Homes Funds and the first ‘green Sukuk’ by OneWattSolar.

An important development is the opening up of investment in FGN Sukuk by the 22 or so pension providers regulated by the National Pension Commission (PenCom) subject to its eligibility criteria. In fact, Patience Oniha met with senior PenCom officials twice in the last two months and discussed inter alia “recent developments in the sector and the plans for the two institutions to cooperate in areas of mutual interest.”

According to the DMO, FGN Sukuk IV has several sustainability attributes. These include responsible investing (the proceeds are dedicated to tangible road infrastructure projects; financial inclusion for non-interest investors with the aim also of further developing the savings culture in Nigeria); ethical investment for investors who are ethically minded; low risk as the certificates are guaranteed by the FGN; liquidity since the certificates can be traded on the two top local stock exchanges and qualify as liquid assets for banks and other institutions; and the Sukuk certificates may be used as collateral for securing credit facilities from financial institutions.

The Sukuk certificates are listed on the FMDQ Securities Exchange, Nigeria’s largest bourse, and the Nigerian Exchange Limited.

The development impact of Sukuk is clearly visible – improved road infrastructure within and outside Nigerian cities, timely completion of designated projects and the multiplier effects associated with construction of capital projects such as roads. This, says the DMO, “has brought reprieve to road users, improved travel times between major commercial cities, linked borrowing and government expenditure to specific critical projects, helped increase the flow of cargo and passenger traffic across major cities, and improved infrastructure delivery across the country. The impact of the sovereign Sukuk on road infrastructure in terms of job creation, travel time, safety and movement of goods have made the Sukuk a beneficial financial instrument for financing economic growth and development.”

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