CAN we all just try to understand what Sukuk bonds are already?

Mid-2017, the Debt Management Office of the Federal Government announced that Nigeria will be offering its first sovereign Sukuk bond in a bid to diversify the sources of government funding by opening it up to the non-interest-investing public as well as fund road projects in ALL geopolitical zones of the country.

The Sukuk bonds, while being Sharia-compliant – especially for Muslims who do not invest in a number of businesses which are prohibited for them (alcohol, for example) nor subscribe to anything upon which interest accumulates (regular bonds, for example) – were made open to the general public, including corporate entities and associations.

However, what in the name of all that is good for Nigeria are these Sukuk bonds and how do they work?

It has become important to lay this down seeing as the leadership of the Christian Association of Nigeria got its collar fastened too tight over this FGN Sukuk thing all week.

And of course, no one wants that. It will be extremely sad to see Reverend Asake choke over something that simply intends to guarantee the financial inclusion of about 50% of Nigerians in the process of generating and diversifying government funding for the Nigerian State we all live in. Although you’d think that with a middle name Musa, the general secretary of the Christian Association of Nigeria would know a thing or two about Sukuk bonds or at least enough to know that it is not “an outright confirmation of an Islamisation agenda” nor any kind of confirmation at that.

First off, a Sukuk is simply the Arabic term for legal instruments or deeds. Under the Islamic rules of business, it is used to describe financial certificates and although it is usually likened to the bonds in regular financial parlance, Sukuk really are financial products that generate returns similar to those of conventional fixed-income instruments. Only that they comply with the following Islamic investment-related prohibitions:

Earning returns from a loan contract or interest;

Compensation-based restructuring of debts;

Excessive uncertainty in contracts;

Gambling and chance-based games;

trading in alcohol, pork or other prohibited food or goods;

Trading in debt contracts at discount;

Forward foreign exchange transactions.

How it works:
The issuer (in this case, the FG) of Sukuk sells a financial certificate to investors (the general public) and then uses the proceeds to purchase an asset (building 6 roads in 6 geopolitical zones), of which the investors will have partial ownership with a contractual promise to buy back the bond at a future date and at a value set at the date of issuance.

Sukuk represent the aggregate and undivided shares of the ownership in the known tangible asset as it relates to a specific project or a specific investment activity. The investors in a Sukuk, therefore, do not own a debt obligation owed by the issuer as in a regular bond, instead, they own a piece of the asset that’s linked to the investment so receive a portion of the earnings generated by the tangible asset linked to the investment (the Rental Income).

Essentially, while a regular bond indicates a debt obligation, Sukuk indicates the ownership or shares of an investor in a known asset. There are many other differences like the structure of returns and the pricing of the instrument and the fact that the value of Sukuk increase in relation to the tangible asset backing the financial instrument while the value of the principal debt in a bond cannot be increased.

In this case…

Nigeria, facing a budget deficit and the possibility of leaving major capital infrastructure across the nation unattended still, has decided to sell a 100 billion naira’s worth of Sukuk in the local market this month to help fund 6 road projects.

The Sukuk is issued by a Special Purpose Entity (SPE) created by the FG and which holds the Sukuk proceeds in trust for the Sukuk holders and invests them on their behalf. For this purpose, it enters into a forward lease agreement with the FG to build and then acquire the roads in the and the leases them to the FG.

The FG will then start to pay rentals (Rental Income at a rate of 16.47% per) annum for the lease of the roads every six months for a period of seven years. At the end of the 7-year term (maturity of the Sukuk), the Federal Government will buy the constructed roads from the SPE.

The rental income paid over the course of the 7 years is the return on the Sukuk investment for the investors which is paid by the SPE to them periodically.

The FG has also made the investors’ rental income on the Sukuk tax-exempt. And while secondary markets for Sukuk are generally still uncommon, the FG will list the Sukuk on Nigerian Stock Exchange and the FMDQ OTC Securities Exchange to provide an avenue for investors that may wish to sell part or all of their investment in the Sukuk before maturity.

The first known Sukuk were issued in 1990 by the Malaysia Shell MDS and it was not until 2001 that Sukuk became international when the Central Bank of Bahrain issued the first US-dollar-denominated Sukuk to the tune of $100 million. But look, the world is hardly Islamised because of it. In fact, Sukuk are hardly the cause of the mistrust, judgment, suspicion and general Islamophobia prevalent in the world today. That will be ISIS, Al-Qaeda, Boko Haram and – since we are being honest – outrageous and unfounded fears being promulgated against anything vaguely Islamic or for the benefit of Muslims like this statement issued by Reverend Musa Alake on behalf of the Christian Association of Nigeria last week.

The real question we should be asking as smart Nigerians right now is how the Federal Government intends to manage the roads in over the period of 7 years in order to realise the funds required to buy them back from the SPE. In plain terms, rather than bickering over the mode of getting the funds and some phantom Islamisation attempt (through this, at least), we should be trying to get an assurance that they won’t put up tolls on said roads and unnecessarily tax us, delay us at toll points and generally punish us as they already do with tolls like the Lekki one for infrastructure we deserve for free.

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