Nigeria set to lead Africa’s Sukuk issuances with new Islamic papers in the works

Sukuk are gaining mainstream status as a funding tool in Nigeria where the Debt Management Office (DMO), the Niger State and the Sokoto State have plans, at different stages of progress, to tap the Islamic capital market for the financing of infrastructure projects. MARC ROUSSOT has the story.

The DMO is working on issuing a Sukuk facility to the tune of NGN100–150 billion (US$275.36-413.03 million) within the first half of 2020 for the construction of 44 road projects, Patience Oniha, the director-general of the DMO, told IFN.

The issuance would be part of the DMO’s plans to raise NGN850 billion (US$2.34 billion) and NGN744.99 billion (US$2.05 billion) from external and domestic borrowings respectively throughout the year.

The DMO was initially planning to sell its third Sukuk facility in 2019, following two successful issuances in 2017 and 2018 worth NGN100 billion (US$275.36 million) each and subscribed at 105% and 132% respectively.

But although the 2019 Appropriation Act provided for a total new borrowing of NGN1.61 trillion (US$4.43 billion), split equally between domestic and external, only the domestic component of NGN802.82 billion (US$2.21 billion) was raised due to the late passage of the 2019 Appropriation Act and the expectation that the implementation of Budget 2020 would commence on the 1st January 2020, the DMO said in a statement.

While Nigeria’s federal government is set to become a regular African issuer of Shariah papers, two Nigerian states, namely the Niger State and the Sokoto State, are also preparing to have skin in the game with their debut Sukuk in the pipeline.

Niger State’s second try
The governor of Niger State, Alhaji Abubakar Bello, has requested approval from the Niger State House of Assembly to tap the Islamic capital market with the establishment of a NGN20 billion (US$55.07 million) Sukuk program.

The first tranche, a seven-year Sukuk Ijarah facility worth NGN10 billion (US$27.45 million) and carrying a 15–16% expected fixed rate could be issued as early as February, while the second tranche would be issued a year after the first auction, according to Abubakar Maina Sadiq, the head of advisory at Buraq Capital, who is working on the deal.

The funds will be used for the rehabilitation or construction of four roads, one interchange and one hospital. The six infrastructures will be used as underlying assets, IFN confirmed with Zakari Abubakar, the commissioner for finance of the Niger State government.

It is not the first time that the Niger State is seeking the legislator’s greenlight for Sukuk. In 2018, the sub-sovereign wanted to raise NGN21.5 billion (US$58.94 million) Islamically, but the deal was eventually shelved following the Niger State House of Assembly’s decision to reject the proposal as the cost of borrowing was considered too high.

This was due to the Sukuk’s 17% profit rate, translating to over NGN10 billion over a period of seven years, which would have put the state into financial distress, according to lawmakers who were against the deal. It was also highlighted that several of the projects to be supported by the proposed Sukuk are not viable.

“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,” Zakari affirmed at the time.

Sokoto’s project
The Sokoto State is planning to launch a dedicated Islamic finance unit by April 2020 to raise funds, including from Sukuk, to finance infrastructure and public–private partnership projects, develop human capital, support women empowerment and boost small businesses through Islamic microfinance.

The unit, in the pipeline since mid-2019, and officially announced back in October 2019, will also be tasked to carve out a dedicated legal framework, create awareness about Islamic finance through the organization of seminars and support entrepreneurship programs.

“The establishment of an Islamic finance unit is all about expanding financial inclusion, inclusive growth, capital inflow, stabilizing medium and small businesses and lifting people out of poverty by providing easier access to finance,” shares Dr Balarabe Kakale, the commissioner of budget of the Sokoto State.

It is not the first time that the Sokoto State is looking at Islamic finance for its development. In 2016, Governor Aminu Waziri Tambuwal’s government launched the Sokoto State Zakat and Waqf (Endowment) Commission aimed at eradicating extreme poverty among its five million inhabitants, mostly composed of rural people who refuse to use conventional finance instruments due to their religious beliefs.

The Sokoto State is the poorest of Nigeria’s 36 states, with 85.7% of its population under the poverty line, according to the Oxford Poverty and Human Development Initiative’s latest report published in September 2019.

The northern state bordering Niger particularly suffers from the lack of quality health services caused by inadequate funding of the health sector. However, health budgetary allocation has been growing over the past few years and more than tripled between 2017 and 2019 growing from 3.7% of the total budget to 9.1%.

Should the Sukuk plans of the Sokoto State and the Niger State come to fruition, it would not be the first sub-sovereign Sukuk issued in Nigeria.

Back in 2013, the Osun State printed a NGN10 billion Sukuk Ijarah facility carrying a 14.75% fixed return to support the construction of 23 high schools, two middle schools and two elementary schools. The issuance maturing in 2020 had received bids amounting to NGN11.4 billion (US$31.39 million).

This article first appeared in IFN Volume 17 Issue 03 on the 20th of January 2019

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