The Sukuk Investment Opportunity

The N100 billion Sukuk, a non-interest bond that is being issued by the federal government is another opportunity for investors to earn returns and contribute to the infrastructure development of the country, writes Goddy Egene

Since the fall in price of crude oil, the revenue of the federal government has been affected significantly given that oil was a major source of government funds. As a result of the decline in revenue, the government has been contending with the challenge of financing its budget deficit. And the onus for the efficient management of government’s debt and sourcing for funds to finance budget deficits rests on the Debt Management Office (DMO).

However, the agency, under the management of Dr. Abraham Nwankwo, has been using innovative strategies to raise funds to successfully fund the budget deficits over the years. While DMO has been raising funds through bonds both on the domestic and international markets, the agency is now accessing the local market for N100 billion through Sukuk. This is the first time the federal government is taking this option to raise funds and it has been seen as another innovation from the DMO. It will open on June 28, 2017.

Sukuk is an Islamic bond, structured in such a way as to generate returns to investors without infringing Islamic law that prohibits riba or interest. Sukuk is said to be ‘Shariah compliant’ because it eliminates the interest elements that are associated with a conventional bond.
Analysts have said that the Sukuk is yet another debt offering from Nigeria, who has been looking for all possible ways of funding her deficit budget and triggering the revival of its economy.

Understanding the N100bn Sukuk Issue
The DMO last week said the Sukuk, which is the first for the country, is a 7-year tenor debt instrument and will go on sale from June 28, 2017, for three days via book building. It will be traded on the Nigerian Stock Exchange (NSE) and the FMDQ Securities Exchange OTC platform. The bond will target retail and institutional investors and First Bank and Islamic wealth manager Lotus Capital will act as managers for the sale. Minimum subscription amount is N10,000.00 with multiples of N1,000.00 thereafter.

According to DMO, as part of its Strategic Plan, 2013-2017, it has the objective of developing alternative sources of raising finance for development and attracting a wider pool of investors. “One of these is the issuance of a sovereign non-interest financing products (Sukuk) in the domestic debt market would not only serve as an alternative source of financing for the government, it would facilitate the mobilisation of idle funds and more efficient allocation of scare resources within the economy.

The introduction of Sukuk is not only seen as a means of raising investible capital for the government and promotion of greater financial inclusion but as a part of the plan to fast track the development of infrastructure and engage in purposeful and project-tied capital raising,” DMO said.
On the benefits to investors, they will earn rentals/profits income will be paid half-yearly directly into Sukuk holder’s account. The bond is also a good investment opportunity towards retirement and future projects.

According to some market operators, the Sukuk is a good move that portrays DMO as giving investment opportunities to all Nigerians irrespective of the religion. While it is said that other bonds issued by the government, have been mostly patronised non-Muslims who, the Sukuk will cater for the interest of Muslims.

It is believed that with this move by the government, the country is seeking to utilise its large Muslim population to garner capital to fund part of the deficit in the recently signed 2017 budget. Nigeria is home to the largest Muslim population in the sub-Saharan Africa, with also one of Africa’s fastest-growing corporate banking sector and consumer population.

Booming Sukuk Market
The likely success of the N100 billion Sukuk may not be an issue considering the huge booming international market for the product. Besides, Osun State, which issued N10 billion Sukuk in 2013 had a successful outing as it was 120 per cent subscribed. Historically, the first Sukuk, worth RM125 million, was issued in 1990 by Shell MDS in Malaysia. The market experienced rapid growth culminating in the first issuance of Sukuk in the international markets when the Central Bank of Bahrain issued the first US-dollar denominated Sukuk worth $100 million.

Currently, Sukuk issuances across the globe stand at about $120 billion, up from just $15 billion in 2008. In June 2014, the United Kingdom became the first country outside of the Islamic world to issue a sovereign Sukuk, highlighting the growing importance of this innovative financial instrument across the world. In that debut issuance, the UK government raised £200 million to build residential buildings. Other countries outside the Islamic world that have issued Sukuk over the last two years include Hong Kong, Senegal, South Africa and Luxemburg. The five largest Islamic finance markets in the world – Malaysia, Saudi Arabia, UAE, Kuwait and Qatar – continue to account for over 90 per cent of global Sukuk issuances.

By the end of 2015, total assets under management in the global Islamic finance industry surpassed $2.5 trillion as more and more investors continue allocating their funds to Shariah compliant instruments across the globe. There is therefore a huge, unmet demand for Sukuk issuances from high-potential economies like Nigeria, especially in view of the fact that similar issues by peer countries were oversubscribed.

SEC, DMO Collaboration
The issuance of the first sovereign Sukuk is a result of collaborative efforts of DMO and the Securities and Exchange Commission (SEC). Before now, Nwankwo and the DG of SEC, Mounir Gwarzo had pledged to partner to ensure a deeper bond market including non-interest products such as Sukuk.

For instance, Nwankwo stressed the importance of non-interest products, explaining that a sovereign Sukuk issuance had been part of the institution’s strategic plan designed four years ago.
He had therefore solicited support from the SEC, especially in the area of capacity building in order to realise the goal of issuing Nigeria’s first sovereign sukukthis year.

On his part, Gwarzo assured the DMO of the commission’s continued support, while pledging to take measures that would help enhance the capacity of relevant staff of the DMO.

He said: “Within the context of continued decline in the prices of crude oil in the international markets, attendant drop in both foreign exchange and government revenues as well as fragility of growth from major emerging markets like China, the need for alternative sources of capital to finance infrastructure becomes increasingly more compelling. Both government agencies therefore agreed on the urgent need to begin mobilising capital in order to address the nation’s investment needs. Particularly, issuing a sovereign Sukuk will attract significant amounts of affordable capital from the Gulf countries and other established Islamic markets around the world into Nigeria.”

As Nwankwo Quits DMO
Nwankwo, who became DG of DMO in 2007, will be leaving office at the end of June and the Sukuk issuance is seen as his parting gift. However, he would be remembered for many achievements the agency recorded during his tenure.

Given his solid academic background and position as one of the pioneer management staff of DMO, Nwankwo led the charge in the transformation of the capital market and played a pivotal role in the repositioning, strengthening and resuscitation of the FGN Bond market.

The DMO formulated a National Debt Management Framework (NDMF), 2008-2012, a review of same and publication of the revised (2nd) NDMF, 2013-2017 which incorporated debt management policies and guidelines. The agency has ensured regular and timely servicing of government’s debt has ontinued to conduct an annual Debt Sustainability Analysis (DSA) and has successfully prepared a Medium Term Debt Management Strategy (MTDS), 2012-2015 which is being implemented.

One of the major objectives of MTDS is to achieve optimal composition of external and domestic debt structure and to ensure low cost of government debt consistent with a prudent level of risk.
DMO has consistently promoted policies to encourage the creation of opportunities for private sector access to long term capital in both domestic and international capital markets in order to sustain and expand their businesses.

Determined to facilitate access to the international capital market for Nigerian corporate players, DMO issued $500 million Sovereign Eurobond in 2011. This was followed with $1 billion dual-tranche Eurobonds in July 2013, thus creating benchmarks for corporate borrowers. In 2014, DMO issued FGN Bonds in Global Depository Note (GDN) format for the first time aimed at diversifying the investor base and attract foreign investors to the domestic securities Market.

Besides, DMO developed a template for the establishment of Debt Management Departments (DMDs) which include outline of the legal institutional human resource framework. All the 36 states including the federal capital territory (FCT) have established DMDs) in conjunction with the agency.

Also DMO assisted in the managing and restructuring of the debt of cash strapped states in the country as a result of their failure to meet their financial obligations. Following the announcement of a bailout package for the states by President Muhammadu Buhari, 22 states applied to DMO for their debts to be re-structured into Federal Government of Nigeria Bonds. The agency successfully concluded the restructuring of N322.788 billion short term commercial bank debts of 11 states out of the 22 states to long term domestic bond at 14.83 percent yield in 20 years.

Just recently, DMO introduced the FGN Savings Bond targeted at retail investors and now the Sukuk. It is a consensus among analysts that whoever will succeed Nwankwo needs to work to sustain and improve on DMO’s achievements under his leadership.