Unabated demand for high yields by investors in Nigerian treasury bills and bonds might have pushed Nigeria’s government to resort to raising needed funds through sukkuk bond issuance as the country’s economy managers strive to keep debt service cost at manageable levels.
Analysts say that issuance of a sovereign sukuk is part of a plan by Nigeria’s debt managers, the Debt Management Office (DMO) to develop alternative sources of funding and establish a benchmark curve.
Sukuk is an Islamic financial certificate, much like a conventional bond, which complies with the Islamic religious law, the Sharia; it usually does not pay a coupon but the issuer typically agrees to make a contractual promise to buy back the bond at a specified future date at par value.
Recent efforts to raise funds through treasury bills and bonds by the government of Africa’s economic giant which has been distressed by sustained plunge in oil prices, has been marginally successful following investors’ demand for high yields as compensation heightened uncertainty fuelled by intractable inflation.
Efe Akhigbe, CEO at Lagos-based investment Bank, Planet Capital limited said that the sukkuk is an alternative for the government to get funds at lower cost.
“The federal government should succeed in raising money through the sukkuk because it will have a large investor base which will include institutional investors such as islamic sovereign wealth funds that would ordinarily not invest in the conventional bonds,” Efe said.
Nigeria has the largest Islamic population in sub-Saharan Africa with Muslims comprising up to 50 per cent of the 180 million people in Africa’s most populous nation.
Currently in a biting recession, Nigeria’s economic managers propose to get the economy on the path of prosperity in the coming year through increased spending, 31 per cent of which will be funded by borrowing as the government proposed a 36 per cent deficit budget for the 2017 fiscal year.
In a budget proposal presented to the national assembly on Wednesday, December 14 2016, the country’s president, Muhammadu Buhari, revealed that the N7.3 trillion budget would have a deficit of N2.63 trillion which amounts to 31 per cent of the budget.
The government proposes to borrow up to N2.23 trillion of the budget which it christened budget of recovery and growth.
The DMO revealed that it has set up a government committee which will proffer advice on the size of funds to be raised from the sukkuk bond issuance, the timing of the issuance, as well as the jurisdiction of the issue.
Efe said that the government cannot just decide to raise any amount, but would want to find out from the market to know how much they are willing to invest and the return they are willing to accept.
“They want to sound out the prospective investors to know what amount can be raised and what rate is possible,” Efe said.
The DMO had said on Monday that Nigeria is looking for financial and legal advisers and trustee firms to organise its first Islamic bond in the domestic market, the country’s Debt.
Once issued, the sukkuk whose size is yet to be confirmed, will be the debut sovereign Islamic bond that will be issued by Africa’s largest economy and key member of the cartel of oil producers, the organisation of petroleum exporting countries (OPEC).
The country’ central bank issued in October, guidelines that limit commercial banks’ investment in Islamic bonds issued by state governments to 10 per cent of the total amount on offer and fixed a maximum tenor of 10 years for the bonds.
Importantly, the DMO said in a public notice that it required the services of banks and an issuing house to serve as financial adviser, a legal firm to serve as a legal adviser and a trustee firm for the deal, setting January 9 2017 as the deadline for the submission of bids for the specified roles.
With the date of issuance yet to be announced, these advisers are expected to work with the DMO to ensure the success of the sukuk issue.