By Chinenye Anuforo and Chinwendu Obienyi
Since the early 2000s, Sukuk (the Arabic name for financial certificates) has become a viable alternative for fund raising by corporates and sovereigns.
The first corporate Sukuk, worth RM125 million, was issued in Malaysia by Shell MDS in 1990, followed by Bahrain in 2001. In the same year, Kumpulan Guthrie Berhad, a Malaysian corporate, also issued the first global corporate Sukuk. Later on, the Malaysian government issued the Malaysian Global Sukuk, a landmark Sukuk Ijarah worth $600 million, which made it became the first country in the world to issue a global sovereign Sukuk.
Since then, Sukuk has been growing in popularity and has been utilised by both corporate sector and states for raising financing.
In Nigeria, in 2013, Osun State issued a N10 billion Sukuk with a yield of 14.75 per cent. The state had received N11.4 billion in total subscriptions for seven-year note when the offer closed on September 30, 2013 and was part of N60 billion debt raising programme that was expected to be listed on the Nigerian Stock Exchange (NSE).
Just last week, the Federal Government, through its agency of the Debt Management Office (DMO), announced plans to issue the maiden edition of sukuk bond as a means of raising funds and financing budget deficits.
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.
The DMO, under the management of Dr. Abraham Nwankwo, used 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, which will debut on June 28, 2017. This is the first time the Federal Government is taking this option to raise funds.
Based on the foregoing, we now want to look at the Sukuk investment opportunity and what investors stand to gain.
What are Sukuk bonds?
Sukuk is the Arabic name for financial certificates, also commonly referred to as “sharia compliant” bonds. Sukuk bonds are defined by the Accounting and Auditing Organisation for Islamic Financial Institutions as “securities of equal denomination representing individual ownership interests in a portfolio of eligible existing or future assets.”
Sukuk was developed as an alternative to conventional bonds, which are not considered permissible by many Muslims as they pay interest and may finance businesses involved in non-sharia-compliant activities (gambling, alcohol, pork, among others).
Sukuk securities are structured to comply with sharia by paying profit, not interest, generally by involving a tangible asset in the investment. For example, Sukuk securities may have partial ownership of a property built by the investment company (and held in a Special Purpose Vehicle), so that Sukuk holders can collect the property’s profit as rent, (which is allowed under Islamic law). Because they represent ownership of real assets and (at least in theory) do not guarantee repayment of initial investment, Sukuk bonds resemble equity instruments (but like a bond and unlike equity) regular payments cease upon their expiration.
The N100bn Sukuk issue
The DMO, last week, said the Sukuk, which is the first for the country, is a seven-year tenor debt instrument that would go on sale from June 28, 2017, for three days via book building. It will be traded on the 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 with multiples of N1,000 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 product (Sukuk) in the domestic debt market, which would not only serve as an alternative source of financing for the government, but also 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.
The Securities and Exchange Commission (SEC), reacting on the planned issue of N100 billion Sukuk bond by the DMO, said, “this is a major milestone for Nigeria as it will catalyse the development of non-interest capital market products. The issuance of this Sukuk follows diligent advocacy efforts from SEC on the need to issue the instrument in order to serve as an alternative product for investors.”
SEC said, “Sukuk, the non-interest equivalent of bonds, is becoming increasingly attractive as a preferred option for funding infrastructure development and economic growth across the globe. Several countries across diverse continents have increasingly issued non-interest financial instruments to fund their infrastructure deficit. The trend is also fast gaining pace in Africa, with notable Sukuk issuances by South Africa, Senegal and Cote d’Ivoire. As the federal and state governments seek alternative funding sources for infrastructure, Sukuk is considered as a viable option.”
Benefits
The main advantage of Sukuk is to compliance with sharia code while boosting the standard of living in Islamic societies and developing their economies. However, Sukuk also brings several other important benefits. It provides an ideal way of financing large projects for the public good that would otherwise not be possible. There are many economic activities or projects that are out of reach of individuals, companies, or, in the case of various developing Islamic economies, governments. In these cases, Sukuk bonds are perfect for financing these projects without falling into interest-based debt. This makes Sukuk an important avenue for redistribution of wealth and achievement of social justice. The use of Sukuk to fund large projects means that investors in Sukuk are incentivised to help economies develop by creating and producing rather than by consuming or manipulating others. Islamic finance is based on principles of fairness and justice, which are achieved by avoiding Riba.
Investors on the secondary market who are looking for investments that can be liquidated easily will find that Sukuk bonds are ideal. Thanks to the secondary market for Islamic securities, investors can sell their securities and obtain the cost of their certificates. If the projects that back their Sukuk certificates have generated profits, this results in a quick return on investment. This means that Islamic financial instruments are well suited for fund management. Banks or institutes can use part of their funds to purchase Islamic securities and then sell them on the secondary market when liquid assets are needed.