Nigeria moves towards an interest-free economy after issuing first Sukuk

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By Ahmad S. Gimba
It was something to celebrate as the federal government issued its first Sukuk which marked a turning point and a historical milestone in the Nigerian economic drive amidst financial and economic trepidation.
But the recent announcement by the Nigeria Bureau of Statistics (NBS) that Nigeria is out of the recession of over three quarters is another story of joy that requires re-echoing.
Within the International Institute of Islamic Banking and Finance, IIIBF-BUK Alumni, we celebrate with joy together with the Federal government, investors and the Nigerian populace over this achievement.
It is never too late, that Nigeria joined the League of Nations that focused on Islamic banking and finance, based on interest-free obligation to liberate their economies in this direction. This is what was trending in the last decade.
No doubt, this policy will open a new avenue of research for students, industries, and academics throughout Nigeria and elsewhere, it will further encourage and attract investors towards diversifying and investing in the Sukuk at the same time it will spark consultancy activities, discourses and elaborations. It is timely and will indeed repay the government, SPVs and indeed the investors of funds within the period of the contract.
What is Sukuk?
According to the IMF, Sukuk is the most popular modern Islamic financial instrument. It is also called an Islamic bond, or to be more precise asset –backed fixed income bonds in the contemporary Islamic financial system.
The term “Islamic bonds” Sukuk with its contemporary concept was not known during the Prophet’s time (PBUH).  But the Islamic/Arabic term (sak) and its derivatives were known and used then.
The word Sukuk is a plural form of the Arabic word sakk which means “to strike one’s seal on a document”.  In its plural form, it is used as generic term for “note”, certificate, or “bonds”.  It generically refers to shariah compliant debt instrument in practice.  The Sukuk refers to ‘participation right in the underlying asset’.
There are three authoritative definitions of Sukuk.  The Accounting and Audit Organisation for Islamic Financial Institutions (AAOIFI), in its Shariah standard 17(2), defines Sukuk as “certificates of equal value representing undivided shares in ownership of tangible assets, usufructs and services, assets of particular projects or special investment activity.” (AAOIFI, 2008).
It was defined as “certificates that represent the holder’s proportionate representing an undivided part of an underlying asset where the holder assumes all rights and obligations to such assets” by the Islamic Financial Services Board (IFSB) in its Capital Adequacy Standard (IFSB 2) (IFSB, 2008).  Securities Commission Malaysia (SC), in its Guideline on Islamic Securities, 2004, defines Sukuk as a document or certificate which represents the value of an asset” (SC, 2004).
There are at least 14 different types of Sukuk structures recognized by the AAOIFI based on assets, debt, equity and services.  These Sukuk structures are based on three underlying forms of Islamic finance Murabaha (synthetic loans/purchase orders), Musharaka /Mudarabah (profit-sharing arrangements) and Ijara (sale-leasebacks), or combination of these.
There are two types of Sukuk, asset based and asset backed.  Under the asset based Sukuk, the Sukuk holders have beneficial ownership in the asset.  Under the asset-backed Sukuk, the Sukuk holders owned the asset and as a result, do not have recourse to the asset but to the originator if there is a shortfall in payment.
Sukuk structure and difference with conventional bond
Sukuk are structured in the following way.  The originator sells an asset to the special purpose vehicle (SPV) who then leases this asset back to the originator.  The originator pays rental for these assets.  This rental can either be fixed or floating depending on the originator.  The investors then buy Sukuk certificates and any profit made from the rental of the asset is transferred from the SPV to the Sukuk certificate holder.  At maturity, the SPV will sell the asset back to the originator and reimburse the Sukuk holders with this sale.
Sukuk can be asset-based or asset-backed.  Asset-backed sukuk are where a true sale has taken place and the SPV control the underlying asset.  Whereas, an asset-based sukuk is a securitization of the assets which is closer in form to conventional bonds.
Conventional bonds do not have any underlying assets and are rather debt instruments whereby investors will get a coupon (interest) payment and at maturity the face value.  This can be compared to the rental and proceeds received from the sale of underlying asset in a Sukuk.
The rental that a Sukuk holder receives is based on the profit or loss that the obligator makes from the use of the asset.  This is different from bonds where the return or interest is predetermined.
In the event the issuer of a conventional bond defaults on a payment, the bond holders can bring a lawsuit against it and collect as much as possible.  This differs in the case of a sukuk where the underlying asset can be sold and the proceeds from the sale will be distributed amongst the certificate holders.
Bonds and Sukuk are different in structure.  Conventional bonds have money as the underlying asset and in the case of Sukuk a tangible asset.
sukuk
Global Sukuk issuance
The history of global Sukuk issuance has been very interesting from the 1980s, when government of Pakistan and Malaysia were searching for Shariah compliant alternatives to conventional bond market due to inherent weaknesses in the later.
This is not to put aside the worthy contributions of the Islamic Development Bank (IDB) based in Jeddah, Saudi Arabia. IDB is a pioneer in the development of Sukuk market globally, from the role of Issuer in itself, to that of being an incubating ground of research and development (R & D) that gave rise to contemporary Islamic Capital Market. For instance, the IDBs Islamic Investment Portfolio (IBP) and the Unit Investment Fund (UIF) have played important roles in providing Shariah compliant channels of investment to the Islamic finance industry, during the late 80s and 90s.
For instance, the IDBs Islamic Investment Portfolio (IBP) and the Unit Investment Fund (UIF) have played important roles in providing Shariah compliant channels of investment to the Islamic finance industry, during the late 80s and 90s.
The Sukuk so far issued by the IDB has remained the most highly rated Islamic bond in the market with AAA ratings, oversubscribed in most of these occasions. The recent issuances by IDB Trust Services Ltd and IDB Tadamun Services Berhad still remains the darling of Islamic bond market with AAA ratings by Fitch.
Emergence of Sukuk in Nigeria
Several  Laws  regulate  the  issuance  of  sukuk  in  Nigeria  including  the Investments and Securities Act 2007, the SEC Rules and the state law authorizing the sukuk issuance.
The Commission in recognition of the development of Islamic finance introduced new rules on February 8, 2013, to regulate the issuance of Sukuk in Nigeria.
Rule 572 of the SEC Rules provides that all public companies (including SPV’s), state governments,  local governments,  and  Government agencies, as well as multilateral agencies, are eligible to issue, offer or make an inGovernment agencieson seeking the Commission’s approval.
The  Government  of  Osun  State  (“OSG”)  through  a  wholly  owned  Special Purpose Company, Osun Sukuk Company Plc issued on the 8th of October, 2013 the first sukuk in Sub-Saharan Africa worth N11.4 billion ($70.6 million) under the Osun State  N60  Billion  Debt  Issuance  Programme  to  fund  the  development  of  20  High Schools, 2 Middle Schools and 2 Elementary Schools in Osun State. The sukuk was issued at a rate of 14.75%  per  annum   at    N1,000 per unit and matures on 08 October, 2020.
Federal Government’s Sukuk
With the current issuance of Sukuk by the Federal Government, a new Sukuk has emerged with the following objectives:

  • Road construction and rehabilitation
  • Improving or expanding government’s revenue sources
  • Giving more opportunities to investors
  • Improving and developing the capital market
  • To stabilize sukuk prices especially to those investing in this direction

The 100 billion Naira Sukuk
The N100, 000, 000.00 Sukuk is meant for road construction of the following roads:

  1. Ibadan – Ilorin
  2. Kolo – Otuokek – Bayelsa – Palm
  3. Enugu – Port Harcourt
  4. Kaduna eastern bye pass
  5. Potiskum – Damaturu
  6. Loko – Oweto bridge

The minimum purchasing units is N10,000.00 representing 10 units of sukuk.
As the world moves towards Islamic interest free economy, we at the IIIBF Alumni felicitate and wish the Federal Government a successful business sojourn in this direction.
Ahmad Gimba is the National Chairman, Alumni, International Institute of Islamic Banking and Finance ()IIIBF), Bayero University Kano, Nigeria
 
 

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