Financing infrastructure: Islamic Bond to the rescue

The Federal Government has an ambitious plan to fix the deficit in infrastructure, especially in roads, power and railways, with the N7.44 trillion 2017 Budget.  It hopes to finance the budget largely with borrowed funds. COLLINS NWEZE reports that the  government is eyeing a  N100 billion (about $300 million) Sukuk (Islamic Bond) to fix targeted developmental projects. 

The stage is set for the Federal Government to sell a N100 billion (about $300 million) sovereign Sukuk (also known as Islamic Bond) this month. The target is the local market.

The government, which is relying on loans to fund this year’s N7.44 trillion Appropriation, is taking advantage of the friendly terms to approach the Islamic finance market.

The Islamic finance market is growing globally. This phenomenal growth is despite the poor recovery in other segments within the world’s financial markets.

The International Monetary Fund (IMF) has linked the rapid growth of Islamic banking in developing countries to its relative resilience to financial crises, contrary to the developments in conventional banking. Thus in the next two to three years, Shariah-compliant assets are expected to sustain a double-digit growth.

The government plans to inject the funds into road projects and to fund the Budget of Economic Recovery & Growth which was signed last week by Acting President, Yemi Osinbajo.

According to the budget details, the Federal Government plans to borrow about $10 billion from the debt markets, with about 50 per cent of the fund coming from foreign sources. It is to fund a budget deficit worsened by lower oil prices at the international market, a development that has weakened the Naira and forced the government to readjust spending. The government’s plan is to fund more than half of its budget deficit of N2.36 trillion from local borrowing and to tap concessionary sources to fill its funding needs. It has opened talks with the World Bank since last year.

The Sukuk is based on an Ijara structure. Ijara is a common leasing arrangement in Islamic finance, which bans payment of interest. Sukuk have become an increasingly popular investment globally, particularly among cash-rich funds in the Gulf Region and Southeast Asia.

The Islamic bond with a seven-year tenor will go on sale on June 28 for three days via book building. It will be tradable on the Nigerian Stock Exchange (NSE) and on FMDQ over-the-counter platform. The bond issuance will be guided by the Debt Management Office (DMO) under Abraham Nwankwo as Director-General.

Nigeria is home to the largest Islamic population in sub-Saharan Africa, with a reasonable percent of its N180 million people as Muslims. It is also home to one of Africa’s fastest-growing consumer and corporate banking sectors.

Islamic finance means a situation in which corporations, including banks and other lending institutions, raise capital in accordance with the Sharia, or Islamic law.

The bond issuance remains part of government’s plan to fast-track the development of infrastructure and engage in project-tied capital raising, given that Nigeria has challenges with road, railway and power infrastructures.

Nigeria is not new to Sukuk. In 2013, Osun State issued N10 billion worth of Sukuk, but no other Sukuk transaction followed.

The latest issuance is part of plans to develop alternative funding sources for government and to establish a benchmark curve for the corporate world to follow. The target of the offer are retail and institutional investors, with First Bank and Islamic wealth manager Lotus Capital managing the sale.

The Osun example

In October 2013, the Osun State government issued a N10 billion Sukuk yielding 14.75 per cent, bankers said. The Osun State bond was the first Islamic bond from a major economy in sub-Saharan Africa.

The cocoa-producing southwestern state of Osun got N11.4 billion in total subscriptions for its seven-year paper, from asset managers and Islamic funds, bankers said.

Sukuk has become an increasingly popular investment globally, particularly among cash-rich funds in the Gulf and southeast Asia. The Sukuk bond was issued in accordance with enactment of the Osun State Bonds, Notes and Other Securities Law 2012 and setting up the Osun Sukuk Company Plc. Though Islamic in nomenclature, Sukuk bond, is a conventional bond and coordinated by the regular investors in the nation’s capital and money market. The bond was issued in accordance with the Security and Exchange Commission’s (SEC’s) rules and regulations.

The redemption of the bond being used to finance roads and school constructions across the state will be due in 2020.

Authorising and approving the offer at a board meeting for the Sukuk Company, Osun State Governor, Ogbeni Rauf Aregbesola explained why his administration opted for Sukuk bond. He described it as an opportunity to develop the state. He appealed to the people to see the bond as an avenue to attract development to the state for the benefit of all and sundry.

Other African countries including South Africa, Kenya and Senegal also plan to issue Sukuk. The Gambia has been selling small amounts of Islamic Bond for several years.

Local credit rating agency Agusto & Co gave an ‘A’ rating to the Sukuk, suggesting it will attract ample investor demand. Bankers have also said that Osun hoped the issue, would be bought by both local pension funds and international investors.

Speaking on the bond issuance, Currencies Analyst at Ecobank Nigeria, Olakunle Ezun said the Sukuk allows government to raise funds for specific targeted developmental projects that will add value to the lives of the people.

He explained that Islamic bond has the potential of improving liquidity in the capital market and creating wealth for more investors even as the bond offers investors collectable returns in the form of profit from sale, rental or combination of both.

The Sukuk, he added, also serves as tool for risk management as the bond has relatively low risk profile, as the investors are always confident of recouping their investments without fears of losing their funds.

It has strong appeal to ethical investors, who are able to benefit from the investment opportunities that Sukuk offers to institutional investors. Besides, bond holders can trade their investment for cash anytime they so desire to bring more people into the financial system in line with the financial inclusion project approved by the Central Bank of Nigeria (CBN). He said the Sukuk appeals to Islamic faithful and other investors interested in reaping good returns from their investments.

The Managing Director of Cowry Assets Management limited, Johnson Chukwu, said the Sukuk allows the people who do not want to invest in interest-bearing instruments to participate.

Chukwu said: “The Sukuk bond will meet the investment need of large population of Nigerian that do not want to invest in interest-bearing instruments. It will attract funds from people that have refused to invest in other debt instruments because of their values. It will bring more people into the financial system.”

According to him, Sukuk can play an important role in the development of an Islamic market and banking system.

An Islamic scholar, Abiodun Rasaq, said prospects for Islamic finance are very bright, adding that the finance system has become necessary given a very significant proportion of Nigeria population strongly believe that based on the nature of the capital market and the dictates of their religion, they cannot invest in the market.

He called for the development of products that is attractive to these set of investors to allow easy flow of their funds into the market.

Chukwu said that just as some Christians also do not like certain things like alcohol, or invest their money in companies producing arms and ammunitions or gambling firms, some Muslims also prefer Islamic finance that is interest-free.

He disclosed that Nigeria’s profile as Africa’s most liquid debt market after South Africa has been rising since JP Morgan and Barclays, included its bonds in their sovereign bond indices, encouraging greater foreign participation in its debt market.

He said the use of Islamic finance in Africa could grow further as several north and sub-Saharan African countries including Morocco, Tunisia, South Africa and Kenya are laying the legal groundwork to be able to issue Sukuk.

Other stakeholders believe that Sukuk provides an ideal way of financing large projects for the public good. “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 are perfect for financing these projects without falling into interest-based debt,” he said.

Also, investors on the secondary market that are looking for investments that can be liquidated easily will find that Sukuk are ideal.

How Islamic finance works

Islamic finance is an interest-free banking plan. When Muslim cleric Abubakar Usman told his entrepreneur friend Ahmad Yusuf that sharia law forbids paying interest on borrowed funds, it surprised the later. Yusuf, an Osun State cocoa merchant quickly returned N1 million loan he got from a commercial bank to the lender and approached the fast-growing industry of Islamic banking.

Islamic banking is a market that has doubled in size in the past five years. Its worth has been estimated above $2 trillion, with a demand forecast that it will soar to new heights in the coming months.

After repaying the loan a week after securing it from a commercial bank, Yusuf said: “A cleric told me it is not permissible under Islam to take loans from a non-Islamic bank because they charge interest.”

A few days later, he arranged for a loan from an Islamic bank after paying a $100 service charge. Islamic banking customers, aside being mainly Muslims, are attracted to Islamic finance by its flexibility, link to real economic activity and its ban on transactions involving speculation or uncertainty.

Islamic finance is gaining ground in the country. Besides Nigeria, global acceptance for Islamic finance is increasing by the day despite initial hitches to its survival. According to Standard & Poor’s (S&P), Islamic finance remained a demand-driven market, with scarce supply, still hampered by a limited range of Islamic financial centers and their various regulatory frameworks.

The rating agency said it believed that regulatory efforts to accommodate Islamic finance and the establishment of additional industry bodies at national levels will take center-stage beginning from 2014.

The newcomers in the industry — such as Oman, Turkey, and Nigeria, for instance — have been tracing the footsteps of fast-growing pioneers, such as Malaysia.

“Right behind the newcomers, a long line of countries is aspiring to enter the market, with the continent of Africa in the forefront,” it said.

 

CBN’s regulation

With local commercial banks facing cash crunch over dwindling oil revenue and increasing need to shore up their capital bases, the time to promote Islamic finance, analysts said, is now.

Hence, many people saw it coming when the apex bank in 2015, issued guidelines for an advisory body that will oversee Islamic banking in the country.

An essential governance structure and element of regulatory oversight for institutions offering non-interest (Islamic) financial services is the establishment of an advisory body at the level of the apex bank. The bank is to provide assurance that the strategic direction and conduct of financial transactions of Non-Interest (Islamic) Financial Institutions (NIFIs) are in compliance with the rules and principles underpinning their operations.

Also, section 9.1 of the CBN Guidelines for the Regulation and Supervision of Institutions Offering Non-Interest Financial Services in Nigeria provides for the establishment of an advisory body at the CBN on Islamic banking and finance.

The body shall be called the Financial Regulation Advisory Council of Experts (FRACE). The Council shall advise the CBN on matters relating to Islamic commercial jurisprudence for the effective e regulation and supervision of NIFIs in the country.

With the policy guidelines, the CBN has become the latest regulator to opt for a centralised approach to the Islamic banking industry.

Traditionally, Islamic banks have practiced self-regulation when ensuring that their products follow religious principles. But a centralised model of supervision is increasingly being favoured across the world.

Financial institutions that offer Islamic banking products are required to have their own boards of Sharia finance experts, who are limited to serving in one institution at a time. The advisory body will be guided by the principles of sharia governance issued by the Malaysia-based Islamic Financial Services Board.

Capital base

The CBN guidelines on non-interest banking peg the minimum capital base at N10 billion for National Islamic Banks and N5 billion for regional Islamic banks. However, the regulator allows deposit money banks to offer non-interest banking products, using existing structure such as the branches, even manpower.

The CBN has so far registered Jaiz Bank and it has given a licence to Stanbic IBTC Bank to operate Islamic banking window. Sterling Bank also has approval to operate an Islamic window. This is in addition to the work being done by National Insurance Commission to promote Takaful, an Islamic insurance product.

Analysts believe that many Islamic financial markets had established their presence in all the major financial centres and were playing key roles in deepening the financial markets with products across the globe.

They insist that in the face of the growing network  in  the global financial system and its integration, it is unrealistic for any existing or aspiring financial centre to be oblivious of this development.

The post Financing infrastructure: Islamic Bond to the rescue appeared first on The Nation Nigeria.



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