Categories: Op-Ed

Islamic Finance And Nigeria’s 2024 Budget

By Inwalomhe Donald

The Senate has approved President Bola Tinubu’s request on the 2022-2024 external borrowing rolling plan of $7.4 billion and €100 million. This came after the adoption of report of the Senate Committee on Local and Foreign Debt at plenary.

Finance Minister and Coordinating Minister for the Economy, Wale Edun, has explained why the Federal Government is embracing Islamic finance. The minister said the world can no longer afford the “elevated high levels” of interest-based financing. Edun stated this at a programme organised in Abuja by the Security and Exchange Commission (SEC) and the Islamic Financial Services Board (IFSB).

The minister noted that man-made and natural shocks have pushed interest rates sky-high, adding that development is also constrained by the soaring cost of borrowing. Highlighting the crippling effect of high interest rates, he listed infrastructure, education and healthcare as some of the vital areas suffering under the burden of exorbitant borrowing costs.

Offering a potential alternative, Edun drew attention to a recent $30 million grant from the United Arab Emirates (UAE) dedicated to climate action and adaptation in Nigeria. He said, “Notably, this grant was funded through Islamic finance principles, hinting at a shift in the landscape of available resources.”

Clearly, funds these days are with those who practise Islamic finance. You better follow the money.” He urged deeper understanding and utilisation of Islamic finance, saying it is a veritable tool for financing development endorsed by IFSB. According to Edun, Islamic finance provides an additional avenue through which Nigeria can propel critical economic growth.

Sukuk funds are part of Islamic finance which has taken over the funding of major roads project in Nigeria between 2017-2023 during the tenure of former President Muhammadu Buhari. Sukuk funds were used by Buhari to finance major road projects in Nigeria. The critics of Rauf Aregbesola, former Governor of Osun State in 2013 are today 2024 praising him for the huge benefits they have received from Sukuk funds. Aregbesola proved critics wrong when he judiciously used the first Sukuk fund in Nigeria in Osun state.

It was difficult for Aregbesola to convince Nigerians most especially the Christian Association of Nigeria (CAN) on how to use Sukuk to develop Nigeria.

The Christian body accused Aregbesola of trying to use Sukuk to Islamize Nigeria.

The then President Buhari had described in 2018 the Sukuk steel structure, Osogbo Government High school in Osun state, as an education egacy that should be emulated by other states of the federation. Buhari thanked Aregbesola for exposing Nigeria to the Sukuk market which has drawn increasing interest from sovereigns, multilateral institutions, multinational and national corporations both from developed and emerging economies to finance investments in a wide range of economic activities and development projects.

Osun Sukuk funds were used to finance construction of education projects, among other development initiatives with which Aregbesola laid a solid foundation for the future of the state which helped to convince Buhari. Eleven high schools with a total of 720 classrooms are at various stages of completion across the state. Two other high schools are proposed for construction in Osogbo to accommodate the total population of high school students in Osogbo metropolis. There are 11 schools in all, financed by the Sukuk bond. The bond is exclusively for high school development. They are: Wole Soyinka High School, Ejigbo, Ataoja High School, Osogbo, Fakunle Unity High School, Osogbo, Oduduwa High School, Ile Ife, Ila High School, Ila-Orangun, Adventist High School, Ede, Iwo High School, Iwo, Akinorun High School, Ikirun and Ayedaade High School, Ikire.

It is on record that the first set of Sukuk projects emerged from Osun state during the Aregbesola administration. Sukuk projects in Nigeria will ever remain the bequeathed legacy of Aregbesola who was the first Nigerian to introduce Sukuk bond. Aregbesola has always maintained that Sukuk projects are purely for business purposes and that the global issuance of Sukuk is “expanding with remarkable international reach and driven, in particular, by strong economic growth.

Aregbesola also said “Sukuk resembles public-private partnership financing whereby investors finance the assets and then own them which leads to real securitisation (a process of pooling/repackaging the non-marketable assets into tradable certificates of investment) after which they transfer them at maturity to the government”.

The first federal government Sukuk of N100 billion was deployed to 25 roads and it delivered a total of N482 km; the second SUKUK in 2018 was deployed to 28 roads and it delivered a total of 643 km ; the third 2020, of N162 billion was deployed to 44 roads and delivered 757 km. “Many of these roads had been awarded before we came but were not funded. Each year SUKUK came we were told the number of km that we must deliver with this money. “Part of the impact is that it created jobs for 97 construction and contracting companies who are keeping people at work; who are demanding supplies of diesel, bitumen, asphalt and that is how the money is moving round the economy.

The Buhari administration was in dire need of funds for the development of infrastructure across the country. It was in the attempt to make investment in government debt instruments more attractive to every segment of the society that SUKUK, a non-interest debt instrument, was introduced by the DMO. However, some expressed worries that the introduction of Sukuk, an Islamic instrument, was a ploy by the Buhari administration to Islamise Nigeria. Oniha and her team had to do a lot of explanations to convince the public that SUKUK had no hidden agenda of Islamising Nigeria. Consequently, the DMO commenced the issuance of Sukuk in September 2017 as a strategic initiative to support the development of infrastructure, promote financial inclusion and deepen the domestic securities market.

In the debut Sovereign Sukuk in 2017, N100 billion was raised to finance the rehabilitation and construction of 25 road projects across the six geopolitical zones. That debut Sukuk was over-subscribed. The 25 projects funded from the debut Sukuk include the dualisation of Lokoja-Benin Road, Abuja-Abaji-Lokoja Road Sections One, Three and Four, the construction of Oju-Loko-Oweto Bridge over River Benue and the dualisation of Suleja-Minna Road in Niger State, all in the North-Central.

The North-East had four projects namely the dualisation of Kano – Maiduguri Road Sections Two, Three, Four and Five. Similarly, the North-West had four projects namely the dualisation of Kano-Katsina Road Phase One, and the construction of Kano Western Bypass and Kaduna Eastern Bypass Road.

Four projects benefitted from the funds in South-East namely the rehabilitation of Enugu-Port Harcourt dual carriageway Section Two, Onitsha to Enugu Expressway, Enugu to Port Harcourt dual carriageway Sections One and Three.

For the South-south, five projects were funded including dualisation of Yenagoa-Kolo; Otuoke-Bayelsa Palm Road and rehabilitation of Enugu to Port Harcourt Road Section Four. Three projects were financed in the South-West namely the reconstruction and asphalt overlay of Benin to Ofosu to Ore to Ajebandele to Shagamu dual carriageway Phases Three and Four, and completion of the dualisation of Ibadan-Ilorin Road Section Two.

Encouraged by the acceptance of the instrument, the DMO issued another SUKUK for N100 billion in 2018 and N162.557 billion in 2019. The proceeds of the two issuances were deployed to 28 and 44 road projects, across the country respectively. Last year’s N250 billion was the fourth in the series with the total amount raised through Sukuk standing at N612. 557billion and applied to road infrastructure.

Since the debut Sovereign Sukuk in September 2017 whose benefit in terms of improved road infrastructure within and outside cities in Nigeria is clearly visible, 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.”

There is clear indication of the growing relevance and importance of the sukuk –Islamic finance market in Osun State which spread to other parts of Nigeria with the growing interest from both emerging and developed jurisdictions and the strategic approaches taken to diversify the funding sources through the sukuk market by former Governor Rauf Aregbesola. The overall direction and potential of the global sukuk market are certainly well recognized, particularly in its role in contributing towards greater economic development of Osun State. There is significant potential for the sukuk, in particular to fund infrastructure projects. This is particularly relevant for the Osun State and African region given the infrastructure needs going forward. This would contribute towards building deeper and more liquid, efficient and effective global sukuk market. The dynamism of the sukuk market also contributes towards strengthening financial stability and in facilitating the expansion of inter-regional investment flows. As we move towards increasing this internationalisation of Islamic finance, and thus towards greater global financial integration, it will contribute towards a global growth process and financial stability that will be mutually reinforcing. With this calibre of governments following suit to obtain Sukuk, it is now crystal clear that Aregbesola is not just a leader, but a leader that set positive pace globally.

The question today then is: are there implications of Islamic financing of these roads and their subsequent ownership by the Sukuk holders? Christians Association of Nigeria fears that the Islamic financial institutions will own the 25 major roads after construction. There is answer to that fear which is no and Nigerians are eulogizing former Governor Aregbesola for introducing Sukuk to Nigeria. The FGN’s Sukuk issuance is the first attempt by the FG to raise funds through the non interest capital market. The Aregbesola’s Sukuk issue was targeted at infrastructure development and financial inclusion.

There is no doubt about the potentials for using Sukuk as a tool for capital raising and infrastructural development in Nigeria. The Sukuk issuance attracted international acclaim by winning the IFN Africa Deal of the Year Award 2013. The Government of Osun State (“OSG”) through a wholly owned Special Purpose Company, Osun Sukuk Company Plc issued on the 8th of October, 2013 the first sukuk in Sub-Saharan Africa worth N11.4 billion to fund the development of 11 High Schools in Osun State.

The issuance of the first state Sukuk by Osun Sukuk Company Plc attests to the huge potentials for Islamic Finance in Nigeria, while its subsequent international acclaim creates integrity within the market which has the propensity to promote foreign direct investment. With the right team of professional advisers, it is clear that focusing on substance over form can contribute significantly to the rapid development of the Nigerian economy through the issuance of Islamic Finance products. Nigeria should not miss out on this opportunity.