Nigeria’s First Sukuk

This month, the Nigerian government will issue a $328 million (100 billion naira) sukuk, a kind of sharia-compliant bond that avoids Islamic prohibitions on interests. The government will use the bond “to help fund road projects.” As the Financial Times explains,

Sukuk represents undivided shares in the ownership of tangible assets relating to particular projects or special investment activity. A sukuk investor has a common share in the ownership of the assets linked to the investment although this does not represent a debt owed to the issuer of the bond.

In the case of conventional bonds the issuer has a contractual obligation to pay to bond holders, on certain specified dates, interest and principal. In contrast, under a sukuk structure the sukuk holders each hold an undivided beneficial ownership in the underlying assets.

Consequently, sukuk holders are entitled to a share in the revenues generated by the Sukuk assets. The sale of sukuk relates to the sale of a proportionate share in the assets.

Reuters reports on how the bond will work in Nigeria:

The Islamic bond with a 7-year tenor will go on sale on June 28 for three days via book building, the [Debt Management Office, DMO] said. The bond will be tradable on the Nigerian Stock Exchange and on FMDQ over-the-counter platform.


The DMO said the issue was “part of the plan to fast track the development of infrastructure and engage in … project-tied capital raising.” It said Nigeria has challenges with road, railway and power infrastructures.

In 2013, Nigeria’s Osun State issued 10 billion naira 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 corporates to follow, the debt office said.

If you’re financially illiterate like me, you can learn about “book building” here.

Worth noting is that the DMO is experimenting with other types of new bonds, such as the recently issued diaspora bond. The sukuk is part of the DMO’s 2013-2017 Strategic Plan (p. 21), which mentions the goal of using “non-interest debt financing instruments (e.g. Sukuk) for investment in critical national development priorities and sectors.”

The Nigerian press is predicting that the sukuk will do well, given the past experience in Nigeria’s Osun State and given global trends. Here is This Day:

The likely success of the N100 billion Sukuk may not be an issue considering the huge booming international market for the product. Besides, Osun State, which issued N10 billion Sukuk in 2013 had a successful outing as it was 120 per cent subscribed…Currently, Sukuk issuances across the globe stand at about $120 billion, up from just $15 billion in 2008…By the end of 2015, total assets under management in the global Islamic finance industry surpassed $2.5 trillion as more and more investors continue allocating their funds to Shariah compliant instruments across the globe. There is therefore a huge, unmet demand for Sukuk issuances from high-potential economies like Nigeria, especially in view of the fact that similar issues by peer countries were oversubscribed.

Islamic finance has a relatively short history in Nigeria. The country’s first Islamic/non-interest bank, Jaiz, opened in 2012. So Nigeria is an experimental phase with regard to instruments like the sukuk. It will be interesting to see how the sukuk does, and what reactions it elicits from different religious communities in Nigeria.