By Inwalomhe Donald
ThE State of Osun in southwestern Nigeria raised a sukuk bond worth ten billion naira (some $62 million) from the capital market to fund educational development. It was the first of such step by Africa’s biggest economy. Governor Aregbesola is aware that Islamic financial instruments such as sukuk have been used to finance infrastructure projects in countries like Malaysia and Indonesia, and in the Middle East, and could attract investors from such countries. The Governor knows that Islamic finance requires a clear link with real economic activity and transactions have to relate to a tangible, identifiable asset, which comes in handy in the case of infrastructure financing.
After the recent trend of Eurobond issuance by African countries, Osun’s offering was sowing the seeds for more African sukuk. Prior to Osun, only Gambia and Sudan had issued local-currency short-term domestic notes (Sudan sold local currency sukuk worth $160 million in 2012).
Aregbesola had worked hard to introduce a sustainable framework, including training quality staff destined for Islamic finance industry. “The huge demand for Islamic finance products had prompted the Osun government to introduce new bond laws with provisions to establish Sharia-compliant bonds. Aregbesola believes that the potential of Islamic finance can also attract investors, operating in Middle East market to come and invest in Osun. By introducing Islamic bonds in finance market, Osun will be favorably positioned to become a hub of resilient and robust Islamic finance in Africa.
In March 2013, the SEC approved new guidelines for the issuance of sukuk bonds to State of Osun, only months after new guidelines were also approved for the operation of takaful (Islamic insurance). A local credit ratings agency, Agusto and Co, was given the note – to be listed on the Nigerian Stock Exchange – an A rating. The seven-year bond was issued through “a book-building process,” which would earn returns for sukuk holders through a semi-annually paid rent structure called the Ijara.
The funds were used to finance construction of education projects, among other development initiatives with which Aregbesola hopes to lay a solid foundation for the future of the state. Eleven High Schools with a total of 720 classrooms are at various stages of completion across the State. Two other High Schools are proposed for construction in Osogbo to accommodate the total population of high school students in Osogbo metropolis. There are eleven schools in all in the sukuk bond. The bond is exclusively for high school development.
The High Schools are: Wole Soyinka High School, Ejigbo, Ataoja High School, Osogbo, Fakunle Unity High School, Osogbo, Oduduwa High School, Ile Ife, Ila High School, Ila-Orangun, Adventist High School, Ede, Iwo High School, Iwo, Akinorun High School, Ikirun and Ayedaade High School, Ikire.
The planned seven-year paper would be the first sukuk bond to be issued by Africa’s largest economy. Aregbesola’s story is that the State of Osun was pioneering the alternative and less burdensome financial service in Nigeria. Osun State’s planned multi-billion naira sukuk fund for education represents Nigeria’s most innovative and ambitious attempt thus far to promote Islamic finance. The move came within the context of ongoing efforts to attract Middle East investors and consolidate Nigeria’s latest foray into alternative financial services. It is a very commendable step in our drive to buy into alternative financial services, which will in turn attract investors from the Islamic world and Asia.
The governor believes that globally, the sukuk market has experienced tremendous growth. Though sukuk market issuances declined in 2008 as a result of global market turmoil, long-term prospects for the sukuk market remain strong. Global sukuk outstanding rose to more than USD231.4 billion at the end-2012. The governor made Nigerians to understand the potential of the sukuk market and its role in the economic development process and in contributing towards financial stability.
This recent decade has witnessed the accelerated development of the global sukuk market. The global sukuk market which has now reached USD$270 billion outstanding is evolving to become a distinct platform for fostering greater international economic and financial linkages. The success of the sukuk market reflects its ability to meet the changing and differentiated demands of the mordern economy, to develop innovative and cutting edge structures and products, and to achieve such issuances at competitive pricing.
The Osun State helmsman has exposed Nigeria to the sukuk market which has drawn increasing interest from sovereigns, multilateral institutions, multinational and national corporations both from developed and emerging economies to finance investments in a wide range of economic activities and development projects. The geographical reach of the sukuk market has also become more extensive, with the global sukuk outstanding now being domiciled in more than 20 countries, while the investor base that spans from Asia, the Middle East and Europe.
Let me conclude my remarks. There is clear a indication of the growing relevance and importance of the sukuk market in Osun State, with the growing interest from both emerging and developed jurisdictions and the strategic approaches taken to diversify the funding sources through the sukuk market by Governor Rauf Aregbesola.
There is significant potential for the sukuk, in particular to fund infrastructure projects. As we move towards increasing this internationalisation of Islamic finance, and thus towards greater global financial integration, it will contribute towards a global growth process and financial stability that will be mutually reinforcing.
When the Governor of the State of Osun adopted Sukuk, an Islamic bond to help the State execute its projects, his critics were calling for his head. Many said it was part of his ploy to islamize Osun. Not quite long, the government of ‘almighty’ United Kingdom, I mean the British Government, also stated it had resolved to obtain Islamic bond, Sukuk to execute government projects.
With this calibre of government following Aregbesola’s footsteps to obtain Sukuk, it is now crystal clear that he is not just a leader, but a leader that sets a positive pace globally.
*Donald, a public affairs analyst, writes from Benin City ([email protected])
