Godwin Okafor with Agency Report
LAGOS, Sept 14 – Nigeria has started the sale of a 100 billion naira ($326 million) debut sovereign sukuk on the local market to fund road infrastructure, the Debt Management Office said on Thursday.
The seven-year Islamic bond which is structured as a lease will yield a 16.47 percent rental rate, payable semi-annually. Subscription for the bond, which is guaranteed by the government, will close on Sept 20.
The Director-General, Debt Management Office (DMO), Patience Oniha, said this at various stops of the roadshow organised to drum support for the Islamic bond.
The sovereign Sukuk is an ethical-based investment in which rent is based on the investment bi-annually and the principal sum paid at the end of the seven-year tenor.
Patience Oniha also assured potential investors that the Sukuk was backed by the full faith of the Federal Government and was one of the avenues through which it intended to raise funds for capital projects in the country.
The DMO said the bond will be tradable on the Nigerian Stock Exchange and on FMDQ over-the-counter platform and that it may re-open the offer in case of an undersubcription.
The Islamic bond sale is part of plans to develop alternative funding sources for government and to establish a benchmark curve for corporates to follow, the DMO has said.
Last month the country’s Apex Bank said its setting up two financial instruments to provide liquidity support to its non-interest paying lenders.
It is a push by Nigeria, home to the largest Muslim population in sub-Saharan Africa, to establish itself as the African hub for Islamic finance, which follows religious principles such as bans on interest and gambling.
The central bank has been working to set regulatory ground rules for such things as Islamic bonds (sukuk) and insurance (takaful) to try to emulate the success of the industry in Malaysia.
Nigeria’s banking industry is dominated by lenders offering conventional products.
Islamic banking is currently offered by the Islamic window of Sterling Bank, Stanbic IBTC, a unit of South Africa’s Standard Bank, and Jaiz Bank , a full-fledged Islamic lender which has operated since 2012.
But Nigeria wants to increase the sector.
“In a bid to aid liquidity management and deepen the financial system, the central bank hereby introduces two new financial instruments … for access by non-interest financial institutions,” the central bank said in a circular.
Nigeria is gradually opening up to Islamic finance to bring non-interest banking to over 80 million Muslims and develop one of Africa’s growing consumer and corporate banking sectors.
In October the regulator granted liquidity status at its discount window for banks’ investment in Islamic bonds issued by national governments, and for banks’ liquidity ratios.
Among other conditions, it said non-interest lenders must have a liquidity problem to be able to access the new window — which will offer liquidity at zero interest, although lenders will be required to post collateral.
If a lender is unable to repay the funds, the central bank will discount the collateral at maturity, the regulator said in the circular.
Islamic banking products, which are compliant with Islamic sharia law, do not charge interest on financing. Profits or losses are instead shared with the borrower, meaning they discourage unnecessary speculation and spread risk.
Nigeria launched a 100 billion naira ($318 million) debut sovereign sukuk in the local market in June to help develop alternative funding sources for government and to establish a benchmark curve for corporates to follow.
Nigeria plans to borrow both locally and from offshore sources to help fund a budget deficit worsened by lower oil prices which have slashed government revenues and weakened its naira currency.
The country grew out of recession in the second quarter as oil revenues rose, but the pace of growth was slow, suggesting a fragile recovery.
The planned sukuk issue will target retail and institutional investors, with First Bank and Islamic wealth manager Lotus Capital managing the sale.
Nigeria is home to the largest Islamic population in sub-Saharan Africa, with about half of its 180 million people Muslims. It is also home to one of Africa’s growing consumer and corporate banking sectors.
In 2013, Nigeria’s Osun State issued 10 billion naira worth of sukuk, but no other sukuk transactions followed.
Africa’s biggest economy has a series of debt issues lined up this year, including a 20 billion naira in “green bond”. The West African country raised $1.5 billion Eurobond in the first quarter and sold another $300 million to its Diaspora.