Sukuk: How government borrowing can deliver value for Nigerians

Nigeria’s Sovereign Sukuk which debuted in 2017 has demonstrated how borrowing can be better utilised to strategically fund infrastructure, promote financial inclusion and create depth in the domestic securities market.

The Sukuk issuance has been progressive, with about N612.557 billion realized so far from those well oversubscribed, four consecutive deals and whose proceeds are meant to help the federal government fund road infrastructure. The latest in the series was a N250 billion issuance in December 2021 and was about 346% oversubscribed. The proceeds would be utilized by the Ministry of Works- like in the past three. And for the first time, the Federal Capital Territory (FCT) and the Niger Delta Ministry have equally received part of the funds for some road projects in the oil-rich Niger Delta as well as the country’s capital city.

Authorities say the N250bn issuance – a 12.80%, 10-year Ijara sukuk due 2031 – would be used to finance up to 71 key economic road infrastructure, specifically identified by the Federal Ministry of Works and Housing, which got N210.565billion; Federal Capital Territory Administration, N29 billion; and the Ministry of Niger Delta Affairs, which received N10.435bn. Like the previous ones, the symbolic cheques were handed over to these three institutions recently in Abuja.

Infrastructure deficit in Africa’s largest economy is huge and expanding, and would require as much as $1.5 trillion in ten years to plug, according to President Buhari, who also acknowledges its limitations to jobs, poverty reduction and economic expansion. But incredibly low revenues now put at 7.5 percent of GDP is impeding government’s ability to meet this need for a country of more than 200million population size, with almost 3 percent annual growth.

Over the years, authorities have progressively implemented incremental budgets as they constantly look for ways to turn the ailing economy to growth, amid tight incomes. But in all of the years, revenues have failed to match projections, creating even increased deficits and borrowing.

For instance, the federal government had projected total revenue for the 2021 fiscal year, at N7.99trillion, but was only able to aggregate about N5.51 trillion, representing 74% of target as at November. Therefore, one of the landmark initiatives of the Debt Management Office (DMO) – an agency which centrally coordinates the management of Nigeria’s debt, was the introduction of Sovereign Sukuk into the domestic financial markets to fund the construction/rehabilitation of key economic roads across the six geopolitical zones of the country.

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Commonly referred to as Islamic Bonds, Sukuk – a non-interest bearing bond- has helped government diversify its sources of funding, while offering ethical investors an opportunity to invest in government-issued securities. The instrument has not only helped government achieve a higher level of financial inclusion, but has served as a reference for pricing sukuk issued by other bodies, especially the private sector.

Classified as liquid asset by the Central Bank of Nigeria, and listed and traded on the Nigerian Stock Exchange and the Financial Market Dealers Quotation OTC Securities Exchange, the Sukuk provides opportunities for holders to buy or sell on any business day. In fact, Johnson Chukwu, MD/CEO, Cowry Asset Management Limited described it as the smartest borrowing strategy of government in the sense that it attracts ethical investors, is project-tied, and has demonstrated visible outcomes.

“I think that the sukuk has been more effective than most other government borrowing in the sense that it is project-specific, and targeted at a particular type of infrastructure. And in terms of effectiveness, one can see the projects that have been executed with the funds, and it continues to attract investors who have issues with other bonds,” Chukwu stated. With the 2017 debut, the DMO raised some N100 billion to enable government finance 25 road projects across the six geo-political zones of the country. Based on the success of that issuance, another one for N100 billion was issued in December 2018, targeting 28 road projects, also across the six geo-political zones.

In June 2020, the DMO extended the frontier by issuing a third tranche of N150 billion, which again received massive subscription of N669.124 billion, representing 446%. But N162.557 billion was allotted to investors while the proceeds was used to finance 44 critical Road Projects, again, across the six geopolitical zones.

“Since the debut of Sovereign Sukuk in September 2017 whose benefit in terms of improved road infrastructure within and outside cities in Nigeria is clearly visible, the Sukuk has been commended as a viable instrument for financing infrastructure.

“The use of Sukuk has enabled timely completion of the designated projects whilst also delivering the multiplier effects associated with construction of capital projects such as roads,” the DMO notes. But apart from serving as alternative source of funding for the Government, the Sukuk is also acceptable as collateral for borrowing from banks and other financial institutions.

“Sukuk is an asset-based security, not debt instrument, and represents ownership in a tangible asset, service, project, business or joint venture.

“This is why Sukuk fits into the DMO debt strategy of borrowing to finance capital projects contained in the budget,” Patience Oniha, Director General at the Debt Management Office (DMO) explained.

According to Oniha, this ensures that government borrowings are used to finance development projects which have multiple economic and social benefits for citizens. Listing and trading the Sukuk on The Nigerian Stock Exchange and the FMDQ OTC Securities Exchange means huge benefits to the investors, including safety, tax free regular income, as well as market liquidity.

Details from the DMO indicate that the Sukuk has so far financed Road Projects across the country. In the North East and North West for example, Sukuk has funded several sections of the Kano-Maiduguri dual-carriage way linking Kano-Jigawa-Bauchi-Yobe and Borno States (Potiskum-Damaturu) as well as the sections linking Shuari-Azare in Bauchi State. The Kano-Maiduguri Expressway which has benefited immensely from the Sukuk Funds for up to 180.62 kilometres when fully completed, will serve as part of the Trans-African Highway No.5 running from Dakar (Senegal)-Ndjamena (Chad). It is a major trade route between the North West and North East of Nigeria and will facilitate trade under the African Continental Free Trade Area (ACFTA) Agreement. Similarly, the dualization of Kano-Katsina Road (Phase I Kano Town) at Dawanau Roundabout to Katsina State Border has created easy access for agricultural products and trade at the famous Dawanau International Market.

In the North Central Region, the construction of Oju/Loko-Oweto Bridge over River Benue to link Loko (Nasarawa State) and Oweto (Benue State) along Route F238 was completed using Sukuk Funds. The Bridge which has been under construction for many years until the intervention of Sukuk Funds in 2017, will reduce travel time between Abuja and the South East axis by as much as 2-3 hours, authorities say.

The Oju/Loko-Oweto Bridge is the second major Bridge across the River Benue, connecting the North to the South of Nigeria, the first being the Lokoja Bridge. When operational, the Bridge will particularly further facilitate the movement of agricultural produce from the North Central to other parts of the country. The rehabilitation of Abuja-Abaji-Lokoja Road Dual-Carriageway (International Airport link road junction-Sheda Village Junction) in the Federal Capital Territory (FCT) has been fully completed. The completion of this section of the Abuja-Lokoja Road has eased the traffic gridlock especially during festivities at Gwagwalada, which is Abuja’s Southern outlet.

Babatunde Fashola, minister of Works and Housing, described Sukuk as “something we all benefit from.” According to him, Sukuk has helped improve safety on the roads, faster travel time, access to markets for farm produce and opened up parts of the country for development.
Other important benefits of using Sukuk to finance road projects, he noted, include job creation and increased level of activity for service providers, many of whom are small business owners. Muhammadu Bima, Vice Chair, Senate Committee on Local & Foreign Debts said “it is self accounting, meaning you can see what the money has been used for.”

In the South-South and parts of South East, Sukuk funds have been used to rehabilitate and reconstruct several sections of Enugu-Port Harcourt Dual Carriageway. For example, Umuahia Town-Aba Township Rail/Road Bridge Crossing in Abia State has been completed. Other works include the rehabilitation of Enugu-Lokpanta in Enugu State and Lokpanta-Umuahia Town in Abia State, as well as Section IV of Aba-Port Harcourt Expressway. This is a major Federal Highway for the transportation of raw materials and finished products from the hinterland to the Port and vice versa by businesses located in the South East.

The Construction of Ikom Bridge in Cross River State is also benefiting from Sukuk. There is also in the South East, Sukuk intervention on the rehabilitation of sections of Onitsha-Enugu Expressway: Amansea – Enugu State Border which has been fully completed.

In the South West, the on-going dualisation of Ibadan-Ilorin Rd (Route No. 2) through the intervention of Sukuk, has resulted in tremendous progress on this critical commercial road linking the South West and North Central. Also, the reconstruction Benin-Ofosu-Ore-Ajebandele-Shagamu Dual-Carriageway, another commercial highway linking the South West, South-South and South East has benefited from Sukuk Funds. Other interventions of Sukuk include the dualization of Lokoja-Benin Road: Obajana Junction-Benin; Ehor-Benin Road, Edo State; Okene-Auchi; and, Ehor-Auchi in Kogi and Edo States where works are on-going. It is expected that this critical road which connects the North to the South-South would greatly ensure ease of movement of people and goods along that corridor. The dualization of Lokoja-Okene-Benin road is expected to ameliorate the congestion in the city of Okene and reduce the environmental degradation of the town due to congestion and air pollution. About 39.5km of the Dual-Carriageway has been rehabilitated with Sukuk Funds. In addition, the reconstruction of the long-abandoned Bida–Lambata Road in Niger State has changed the narrative of that road.

Some of the very critical roads being rehabilitated and constructed with the proceeds of 2020 issuance include: the Sokoto-Tambuwal-Jega-Kontagora- Makera Section 1 in Sokoto and Kebbi States; Kano-Maiduguri (Section 1 Kano-Wudil-Shuari); Four other Sections of the Kano-Maiduguri Road in the North East would also benefit from the Sukuk proceeds. Others include Odukpani-Itu-Ikot Ekpene Road connecting Akwa Ibom and Cross River State, beginning with the Odukpani-Itu Bridge Head which is expected to bring a major relief to commuters along that road has also been listed for financing by the Sukuk proceeds; the dualisation of the Ibadan-Ilorin Road through Sukuk Funds will broaden this narrow, ever-busy road, where road accidents are common.

Rehabilitation of Lagos-Badagry Express Way (Agbara Junction to Benin Border) and sections of Lagos-Ota Expressway linking Lagos and Ogun State, which have been in a poor state for several years, will improve their condition and cut travel time for users. Also, the rehabilitation of the outstanding sections of Onitsha-Enugu Expressway, which is a major connection between the commercial cities of Onitsha and Enugu, and a trade route for goods between the Northern part of Nigeria and the commercial city of Onitsha has also benefitted.

Idakolo Gabriel Gbolade, MD/CEO, SD&D Capital Market Management Limited also agrees that government use of Sukuk to fund infrastructure, “is a very smart move, looking at the rate of investment. And because of the religious connotation, it gives the government the will to actually utilise the fund.

“The fund is a very good intervention that the government has taken opportunity of and used in terms of road infrastructure,” Gbolade noted, however, urging quality and sustainability on the part of the contractors and government respectively.