Nigeria has started the sale of a 100 billion naira ($326 million) debut FGN 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.
What is Sukuk
“Sukuk” is an Arabic term which simply means “certificates”. The origins of Sukuk can be traced to the classical Islamic period during which papers representing financial obligations from trade and other commercial activities were issued.
In its present form, a Sukuk issue is akin to the conventional concept of securitization – a process in which ownership of an underlying asset/project or transaction is transferred to a large number of investors through certificates representing proportionate value of the relevant assets.
The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), the leading international not-for-profit organization primarily responsible for development and issuance of standards for the global Islamic finance industry whose standards has been adopted by Central banks and regulatory authorities in a number of countries, either on a mandatory basis or as basis of guidelines defines Sukuk as “certificates of equal value representing common shares in ownership of tangible assets, usufruct and services or (in the ownership of) the assets of a particular project or a specific investment activity.”
The sukuk has swiftly emerged as an alternative financing mode for sovereigns and corporates alike (regardless of faith) and is now popularly termed the flagship instrument of the Non interest Finance industry.
Sukuk represent ownership shares in assets that generate profits or rentals to Sukukholders. Hence, it is essential that Sukuk are actually represented by a specific, tangible asset throughout its entire tenure and Sukuk holders must have a proprietary interest in the assets which are being financed.
Ijarah (Lease) Sukuk
This is the most common Sukuk issuance type for project finance or acquisition of new assets. Ijarah Sukuk is a leasing structure with a right available to the lessee to purchase the asset at the end of the lease period (similar to finance lease). The rental rates of return on Ijarah Sukuk can be fixed or floating.
The cash flows from the lease which comprise of rental and principal repayments are passed through to investors in the form of coupon and principal payments.
Forward receipt of rent is possible and is not prohibited in Shari’ah, but only on the basis that it is an advance payment on account from the amount of the rent. In this instance, rent is legitimately earned only after the physical existence of the infrastructure.
The Ijarah Sukuk provides an efficient medium to long-term mode of financing and it is tradable in the secondary market.
Key Benefits of Sukuk Issuances
Sukuk are competitively priced in line with conventional bond issues and most Sukuk structures are tradable and fill the need for alternative investments which suits the need of investors for liquidity profile.
It fulfils the needs of the Non Interest Financial Institutions, Pension Fund Administrators and ethically inclined
investors and promotes product diversification and financial inclusion.
Sukuk and bonds
Just like Bonds, Sukuk is sold to investors who receive a stream of payments or rental until the date of the maturity, at which time they get their original investment, in this case, seven years. It is usually intended to provide investors with less risk than equities (such as shares of stock) and thus it is wise to use it to balance a portfolio of investment instruments.
However, unlike Bond, Sukuk does not indicate a debt obligation but a partial ownership of an asset by the Sukuk Investor. The assets that Sukuk should be compliant with Shariah. In this case, the Sukuk offer will be deployed to the construction of twenty-five major federal roads and bridges across Nigeria’s six geopolitical zones. Information on the use of proceeds is provided in greater detail in the prospectus
Sukuk investors (in theory) share the risk of the underlying asset and may not get all their initial investment (the face value of the Sukuk) back.
The planned Sukuk issue will target retail and institutional investors, with First Bank and Islamic wealth manager Lotus Capital managing the sale.
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 under subscription.
FGN debut Sukuk
The debut Sukuk was originally planned to go on sale in June for three days via book building. Nigeria has a series of debt issues lined up this year, including a 20 billion naira in “green bond”. The country raised $1.5 billion Eurobond in the first quarter and sold another $300 million to its Diaspora.
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.
In 2013, Nigeria’s Osun State issued 10 billion naira worth of Sukuk, but no other Sukuk transactions followed.
Compliance with Islamic law
All non-interest products and services including sukuks are required to be reviewed and certified as compliant with the principles of Islamic law by a Shariah board composed of scholars knowledgeable in non-interest finance prior to issuance.
The FGN Sukuk has been certified as Shari’ah compliant by the Financial Regulation Advisory Council of Experts of the Central Bank of Nigeria (CBN). A copy of the certificate is included in the prospectus.
Nigeria’s 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.
The bank has set up liquidity support systems to its non-interest lenders after it issued guidelines last year to enhance the quality of sukuk instruments and grant the Islamic bond liquidity status at its discount window.
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What are the key Terms of the FGN Sukuk
- Issuer : FGN Road Sukuk Company 1 Plc. on behalf of the Federal Government of Nigeria.
- Description : FGN Sovereign Sukuk due 2024 at a of [.]%
- Tenor: 7 Years
- Issue Size: N100,000,000,000
- Unit of Issue: N1000 per Unit
- Minimum Subcription : Minimum of N10,000 (i.e 10 Units @N1,000/Unit and in Multiple of N1,000 (1 unit) thereafter
- Rental payment: Semi-annually
- Redemption: Bullet payment of invested fund at maturity
- Paying Agent/Regstrar: The Central Bank of Nigeria
- Security: Backed by the full faith and credit of the Federal Government of Nigeria