A Brief On Sukuk Bonds In Nigeria
What are sukuk bonds?
Sukuk bonds are sharia-compliant financial instruments representing undivided ownership interests in defined assets.
Is there a legal regime for sukuk bonds in Nigeria?
Yes, sukuk bonds are legally regulated in Nigeria. The Securities Exchange Commission Rules and Regulations 2013 (SEC Rules) provides the legal framework for the issuance of sukuk bonds in Nigeria. In addition, the Nigerian Stock Exchange (NSE) has also prescribed rules governing the listing of sukuk and debt securities on its exchange.
What types of sukuk bonds are legally recognized in Nigeria?
There are four specific sukuk structures provided by the SEC rules to wit: sukuk al-ijara, sukuk al-musharakah, sukuk-murabahah, and sukuk al-istisnah and they are all specific asset financing structures. Be that as it may, the SEC Rules gives the Securities and Exchange Commission (SEC) the discretion to approve other sukuk structures.
Who may issue Sukuk?
The SEC Rules provides that Public companies (including SPVs), State Governments, Local Governments, and Government agencies as well as multilateral agencies are eligible to issue, offer or make an invitation of sukuk.
What are some of the essential legal requirements for the issuance of sukuk bond in Nigeria?
The SEC Rules provides that the issuer of a sukuk shall appoint a shariah adviser of good repute and character, adjudged to be sound and qualified in Islamic fiqh/jurisprudence and with experienced exposure in Islamic finance and capital market. The shariah adviser will be responsible for ensuring that the sukuk structure conforms with shariah principles. Furthermore, an underlying asset (tangible/intangible) is to be made available by the issuers as a condition precedent to the issuance of the sukuk. The Rules also provide that the purchase price of the underlying asset must not be more than 1.5 times its market value. In the same vein, ratings are to be provided on all sukuk issues, and the issuer is to ensure that the issue is rated and made available throughout the tenure of the sukuk issue. Similarly, a documentary pronouncement by the shariah adviser on shariah compliance of the sukuk including detailed reasoning/justification is to be delivered to SEC.
The Rules also provide that the purchase price of the underlying asset must not be more than 1.5 times its market value. In the same vein, ratings are to be provided on all sukuk issues, and the issuer is to ensure that the issue is rated and made available throughout the tenure of the sukuk issue.
How are sukuk structured in Nigeria?
Islamic financing is predominantly an asset backed financing, and is thus best suited to financing specific asset or good-based needs of the originator, as opposed to general liquidity needs of the originator (which are typically financed by conventionally lending based on a ‘fixed cost of funds’ arrangement). Hence, the sukuk structure will most often than not involve the establishment of an SPV (structured as an orphan company) by the issuers, to issue the sukuk certificates to the investors. It is useful to note however, that the ultimate structure would largely depend on the proposed utilization of the issue proceeds.
Has there been any sukuk issuance in Nigeria?
Yes. In fact, the first sukuk in Nigeria was issued by the Osun State Government (a subnational government) in as far back as 2013. Sukuk bonds have been utilized for notable infrastructure projects in Nigeria such as:
- Construction of 26 schools by Osun State Government using ijarah sukuk of N11.4 billion (US$70.6 million);
- Construction of luxurious apartments in Ikoyi – Lagos by Lotus Capital Ltd using N1 billion private sukuk of al-istisna;
- Construction of roads by the Federal Government using ijarah sukuk of N100 billion (approximately US$326 million).
Can sukuk be sold in the secondary market?
Yes. Trading can be done on the secondary market by licensed dealers on the floor of the Nigerian Stock Exchange and on the FMDQ OTP.
Are sovereign sukuk safe?
Yes, they are safe. All sovereign sukuk are backed by the full faith and credit guarantee of the Federal Government of Nigeria.
Can Sukuk be sold before their maturity date?
Yes, they can be sold before their maturity date. The sukuk holder is to contact his/her stockbroker or security dealer to either sell on the floor of the Nigerian Stock Exchange or the FMDQ OTC Securities Exchange upon listing.
Sukuk bonds though relatively new, are a viable investment option in Nigeria and are beginning to gain more investor’s attention/confidence. We at Renaissance Practice are steeply versed in the legal and practical nuances of sukuk, and willing to assist investors desirous of acquiring Nigerian sukuk bonds in diversification of their portfolios.
Olayinka Alao can be reached on: firstname.lastname@example.org
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