Sukuk - More Than Just a Bond: Shaking Up Nigeria's Infrastructure Game!
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Nigeria is a rapidly developing country with a population of over 200 million people. The country is blessed with abundant natural resources, but it also faces a number of challenges, including a significant infrastructure deficit. Infrastructure development is essential for economic growth and job creation. It helps to reduce the cost of doing business, improve the movement of goods and people, and attract foreign investment. It's the backbone of progress, connecting cities, empowering industries, and improving the lives of millions. Finding innovative solutions to bridge this gap is paramount. One such solution so far seems to be Sukuk financing. Sukuk is an Islamic financial instrument that is similar to a conventional bond. However, Sukuk investors are essentially financing the purchase of an asset, which is then leased back to the issuer and instead of paying interest, sukuk investors receive a share of the profits generated by the underlying asset. This makes sukuk an attractive option for investors who are looking for ethical and socially responsible investment opportunities.
Sukuk financing has been used to fund infrastructure projects in a number of countries around the world, including Malaysia, Indonesia, and Turkey. In recent years, it has also been used to fund infrastructure projects in Nigeria. With an estimated infrastructure deficit of around $3 trillion, according to the World Bank, and decades of misappropriation of funds meant for infrastructure projects, it remains to be seen whether this type of funding will accelerate infrastructure development in Nigeria. This article will aim to discuss the benefits of using Sukuk funding for infrastructure development in Nigeria.
Understanding Sukuk: More than Just Bonds
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Sukuk is not merely an alternative to conventional bonds; it's a financial instrument grounded in principles that transcend economics. It adheres to Sharia, or Islamic law, ensuring that transactions are not only profitable but also ethically sound. There are various Islamic financing contracts that underpin a sukuk and according to the Nigerian Securities & Exchange Commission (SEC) website, "The AAOIFI which issues standards on accounting, auditing, governance, ethical, and Shariah standards has laid down 14 different types of Sukuk."
But generally, here's how it works:
- Ownership, Not Debt: Unlike traditional bonds that just generates interest and is not strictly tied to anything tangible, Sukuk represents ownership in a tangible asset or project. When you invest in Sukuk, you essentially have a share in something tangible – a bridge, a road, a hospital. Your returns come from the profits generated by that asset or project.
- Risk and Reward Sharing: Sukuk is designed to be equitable. Investors share both risks and rewards. The philosophy behind this is that, the wealthier person that is investing, is better positioned to absorb losses and would not be left destitute if the project or venture was to encounter a loss.
- Ethical Finance: There is a distinctive ethical foundation to Sukuk. It's not just about profit; it's about how that profit is made – without harm, exploitation, or injustice. Therefore Sukuk bonds are prohibited in investments in what may be considered socially harmful ventures i.e. alcohol, gambling, pornography, tobacco, guns etc.
The Benefits of Sukuk for Nigeria's Infrastructure Development
1. Inclusivity and Social Impact: Nigeria is a nation with diverse social and economic strata. Sukuk, by design, is inclusive. It has a number of advantages over traditional forms of financing. For one, it is a more inclusive form of financing, as it attracts investors from both the Muslim and non-Muslim communities, unlike conventional finance that excludes strict Muslims due to the interest paying ("Riba") element.
Sukuk offers opportunities for both high-net-worth individuals and ordinary citizens to invest in the nation's infrastructure. Whether a corporate giant or an individual subscriber, Sukuk allows the investor to be a part of the nation's development journey. Imagine a Nigeria where your investments in Sukuk help build schools, bridges, and hospitals in your community. This is ideally the promise of Sukuk – it brings development closer to the people.
2. Accountability & Transparency: In a world where financial scandals and improprieties often make headlines, and the track record of misappropriation in government spending has been well documented, the contractual structure of Sukuk provides a greater level of accountability.
With Sukuk, unlike conventional bonds, The government does not receive the funds raised by investors but rather acts as a guarantor and pledges assets to the sukuk structure. The funds are kept in trust by a Trustee, whose job it is to protect the interest of the investors, ensure proper accountability of funds, and process disbursement of funds to contractors upon achieving required project milestones. Therefore, there are no comingling of funds to pay for government expenditures such as salaries and other non-project related expenses.
3. Diversification of Funding Sources: Traditionally, Nigeria has relied heavily on a limited range of funding sources for its infrastructure development. Sukuk provides a worthy alternative. It diversifies Nigeria's funding sources, reducing dependency on traditional methods. For example, in accounting terms, a Federal Government of Nigeria (FGN) Sukuk bond is considered a contingent liability to the FGN and therefore provides some fiscal buffers.
This diversification isn't just a matter of economic prudence; it's a strategic move to ensure the nation's resilience in times of financial turbulence. When one source of funding dries up, others remain open, allowing for a balanced fiscal approach.
4. Long-Term Stability: Infrastructure development isn't a short-term project. It's a marathon, not a sprint. Sukuk recognizes this. Sukuk often comes with longer maturities, providing a stable source of funding for projects that need sustained commitment.
This stability is crucial for projects like building a national railway network, revamping the power sector, or constructing vital healthcare facilities. These aren't projects that can be completed overnight, and Sukuk's long-term perspective ensures they stay on track.
5. Attracting Foreign Investment: By embracing Sukuk, Nigeria is not only attracting domestic investments but also welcoming international capital. The global demand for Sharia-compliant investment opportunities is growing, and Nigeria can tap into this expanding market.
When foreign investors see Nigeria as a nation that embraces ethical finance, it becomes an attractive destination for capital. This not only funds development but also strengthens economic ties with other nations.
Sukuk Success Stories in Africa
State Government Sukuk: The Nigerian government has also issued sukuk bonds to finance education projects. For example, the Osun state government issued a N10 billion sukuk bond in 2013 to finance the construction of ten schools in the state.
Senegal's Toll Highway: Senegal's use of Sukuk to finance its toll highway serves as a beacon of hope. This project not only enhanced transportation but also showed the versatility of Sukuk in supporting various types of infrastructure initiatives. It's a testimony to the adaptability of Sukuk financing to diverse development needs.
Paving the Path to Progress
In the pursuit of progress and development, infrastructure is the foundation on which nations build their future. Nigeria, with its vast potential, diverse population, and pressing infrastructure needs, stands at a crossroads. Sukuk financing offers a path forward that is ethical, inclusive, and sustainable. Indeed investor sentiment seems to corroborate that, as every FGN Sukuk issued since 2017 has been significantly over-subscribed. With limited investment outlets for the non-interest banks and other non-interest financial institutions, coupled with idle funds sitting in the National Deposit Insurance Commission (NDIC) as well RSA Pension fund VI, there is massive scope for more Sukuk issuances from both the FGN and private sector for infrastructure development. The FGN recently (October, 2023) issued another series of its 10-year, N100 billion Sukuk bond offering to be used for construction and rehabilitation of roads. If you missed out on it, you can still partake by investing in the numerous Sukuk funds offered by SEC-licensed fund managers.
As Nigeria continues on its journey towards economic prosperity, Sukuk emerges as a potential catalyst to ignite development. Despite representing only 1.5% of the FGN's domestic debt stock as at June 30, 2023, it has already had a tangible impact on the nation's infrastructure. At least one major road in every geopolitical zone in Nigeria has that unique green signpost with the words "Sukuk" emblazoned on it to denote where the funding for that road section came from. By harnessing the power of ethical finance, Nigeria can not only build roads and bridges but also bridge the gap between tradition and modernity. In doing so, it fosters a legacy of inclusive development for generations to come. The infrastructure financing game in Nigeria is gradually changing and Sukuk is showing the way.
Thanks for taking time out to read this article. Please feel free to send me a message or comment on the article. I am always happy to discuss other perspectives and explore different philosophies.
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