Sukuk for Nigeria’s Niger State still a possibility

Nigeria’s Niger State is considering issuing Sukuk or conventional bonds in 2019 after dropping its initial plan of selling maiden Islamic papers worth NGN21.5 billion (US$59.47 million) within two years following the Niger State House of Assembly’s decision to reject its proposal. MARC ROUSSOT has more.

Currently drafting its Budget 2019 expected to be submitted to the Niger State House of Assembly in October, the Niger State government is mulling the issuance of Sukuk or bonds. The decision to tap the capital market will depend on government priorities while the characteristics of the Shariah securities that could be auctioned have yet to be decided.

“We are considering issuing bonds or Sukuk depending on market conditions. It will also depend on whether the assembly approves the budget. Our goal is not to issue Sukuk for the sake of issuing Shariah papers but to tap the Islamic capital market if it is cheaper and more interesting than the sale of a conventional bond,” explains Zakari Abubakar, the commissioner for finance of the Niger State government.

The amount, the tenor, the structure and the underlying assets may differ from that of the debut Sukuk planned by the Niger State but rejected by the Niger State House of Assembly, which pushed the government of Niger to cancel its project.

“We dropped the project because we do not have enough time to change it and issue Sukuk before the end of 2018. Moreover, general elections are going to be held during the first quarter of 2019 and it is not a good period to proceed with an issuance,” explains Zakari.

The proceeds of the Sukuk would have been utilized for the improvement of healthcare services in major townships, the development of trailer parks and markets, as well as for the diversification of the state’s income through the development of a mining complex.

While Niger State has issued conventional bonds in the past, it wanted to issue Sukuk this time because it felt that there is momentum in the Nigerian Islamic capital market. Both the federal government issuance in 2017 and Osun State’s auction in 2013 had been well received by the market. Overall, the government was expecting to have a much higher subscription by issuing Sukuk than conventional bonds.

The initial idea was to print seven-year Sukuk within two years with a first tranche worth NGN12.5 billion (US$34.58 million) and the second one amounting to NGN5 billion (US$13.83 million). The Shariah security consisted of four underlying assets, namely the Suleja trailer park, Kontagora Hospital, Chanchaga water treatment plant and mineral processing facilities and followed the Ijarah structure. With a profit rate of 17%, the Islamic paper was expected to attract mainly Nigerian investors, particularly banks and corporates.

“The Niger State House of Assembly turned down our proposal because they thought that we could have negotiated some of the charges better. But we are confident that this is what the market had to offer so we could not have done any better. The cost was actually lower than what we would have obtained if it was a conventional bond,” affirms Zakari adding: “Nigeria’s federal government Sukuk had one of the biggest profit rates for Sukuk globally at 16.47%. If a government obtains this profit rate, and considering the additional risks from a sub-sovereign like us, I believe that our profit rate of 17% was not too bad.”

Zakari also mentions the misconception of Islamic finance from some of the members of the House. “Because we said that Sukuk is an Islamic instrument, most of the honorable members of the Assembly believed that it should have come without any cost, which is the way they understand interest-free. Even though 95% of the population living in the Niger State are Muslims, it does not mean that they understand Sukuk, so we need to work harder to make them understand how it works,” he says.

IFN contacted the Niger State House of Assembly but has yet to receive an answer. However, it was reported that it voted against the Sukuk plan due to management fees and contingency and professional fees that were not acceptable. The burden the Sukuk would have placed on the state, which has debt amounting to NGN57.9 billion (US$160.16 million), was also mentioned.

This article first appeared in IFN Volume 15 Issue 34 on the 22nd of August 2018

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