The Sukuk Bond And Garland For Aregbesola!

By Bicci Alli

As the Guest Columnist of THISDAY Newspaperon Monday, September 18, 2017, Ms. Patience Oniha, Director General, Debt Management Office, wrote a well-articulated submission, titled “The Case for Nigerian Sukuk”. There is no doubt that her well thought and presentable piece was a delight, especially to the investing public.

As the title indicated, the piece x-rayed the recent public-financing tools, SUKUK, which was offered to the investing public between September 14, 2017 to September 18, 2017.Incidentally, the Guest Columnist, Ms. Patience Oniha is the Director-General of DMO that anchored the Islamic Bond.

As stated earlier, the offer for Nigeria’s debut sovereign SUKUK in the sum of N100 billion opened on September 14, 2017. This followed a roadshow, which took the (DMO), Ministry of Power, Works and Housing, Central Bank of Nigeria (CBN) and the transaction parties to Lagos, Port Harcourt, Abuja, Kano and Kaduna to engage with prospective investors on the issuance. The article was as a result of the need to throw more light on the issuanceof SUKUK. Madam DG explained the principle, rules, regulations and operating modalities of SUKUK. She explained further the benefits derivable from the issuance of SUKUK with specific mention of the fact that the SUKUK will be used to raise funds to finance infrastructure whichcontributes directly to achieving the objectiveof the Economic Recovery and Growth Plan (2017-2020).This is to build a globally competitive economy and one of the plans for achieving this is by investing in infrastructure which the SUKUK tends to provide. According to her, the proceeds from the issuance of the N100 billion SUKUK will be used to construct and rehabilitate 25 roads in Nigeria’s six geopolitical zones. These roads have been selected by the Ministry of Power, Works and Housing because of their strategic economic importance. The deployment of the SUKUK proceeds to these projects would improve road infrastructure, which because of the multiplier effect of good infrastructure, will translate to many benefits all over the country.

As explicitly stated in the article, good roads are important for Nigeria’s Economic Development and Growth; they actually connect different parts of the country; facilitate and foster trade relationship among different regions with each factoring its comparative advantages on natural and human resources; provide access to markets for farms produces onward to cities and townsand link villages, farmlands and remote areas to essential social services such as primary and secondary education rural dwellers; and primary and comprehensive health services. The goodness and greatness of Sukuk is that it is tied to projects and enquired about the specific roads towards which the N100 billion Sukuk would be applied. The level of disclosure and transparency for Sukuk financing which requires the issuer to present full details of how funds will be utilised gives investors information that will guide their investment decision whilst also giving them the ability to monitor the utilisation of the Sukuk proceeds after investing, to confirm that funds have been applied as proposed.

Other benefits of SUKUK was highlighted by the guest columnist, they include, deepening Nigeria’s financial market by increasing the variety of instruments available for issuers and investors; and benchmark for the pricing of future Sukuks that may be issued by other tiers of governments, corporate institutions and multilaterals. It should be noted that of the N100 billion, Sovereign Sukuk include the rental income, which will be paid to investors in the bond every six months at a rate of 16.47% per annum. It is a safe low-risk investment, as it is a direct obligation of the FGN, which is fully responsible for the payment of the rental income and the repayment of the principal at maturity. It is also backed by the full faith and credit of the federal government. On a final note, the CBN has conferred a liquid asset status, meaning that the low risk of the Sukuk and the liquid asset status make it relatively easy for investors to use the Sukuk holdings as collateral. This is to encourage the investment culture and mobilise savings; the rental income on the Sukuk is tax-exempt and will be listed on the Nigerian Stock Exchange (NSE) 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.

Sadly enough, Madam D.G. and other writers have failed to acknowledge the pioneering efforts and achievements of the Osun government in deepening the financial market in Nigeria through Sukuk. Ogbeni Rauf Aregbesola led Government of the State of Osun pioneered issuance of SUKUK in the country in 2013, four years long before the Federal Government of Nigeria explored the opportunity as a public financing alternative. The DG DMO and other enlightened commentators made no reference to his pioneering efforts of Aregbesola. Having laid the foundation, teething problems surfaced with issuance of SUKUK and verifiable solutions were proffered by Ogbeni Aregbesola, his government, advisers and transaction parties. It is a notorious fact that several pioneering programmes of the State have been Internationally recognized and emulated by the Federal Government and others States; these programmes include but not limited to School feedings, Tablet of Knowledge (Opon Imo), Free provision of School Uniforms, Agba Osun, OYES, at least one or more is replicated in KEBBI, KADUNA, ONDO States and by the Federal Government of Nigeria. Various pioneering programmes and models of Aregbesola have no doubt raised the bar and become point of reference of good governance in Nigeria. Again, garland for Ogbeni for deepening the Nigerian Financial Market through issuance of Sukuk. He was called all sort of unprintable names but his doggedness, visionary leadership and uncommon managerial (to some controversial) style saw the Osun Sukuk through against all odds.

It would be recalled that on 10th October 2013, the State of Osun issued N11.4 billion ($70.6 million) seven year SUKUK under the Osun State N60 Billion Debt Issuance Programme to fund the development of 20 High Schools, 2 Middle Schools and 2 Elementary Schools in the State. The SUKUK was issued at a rate of 14.75% per annum at N 1,000 per unit and matures on 08 October, 2020. Although two other African countries (The Gambia and Sudan) are known to have issued small amounts of SUKUK in their domestic markets; the State of Osun SUKUK is widely viewed as the first SUKUK to be issued by the government of a major African economy. The SUKUK is structured as a SUKUKAL-IJARA, a commonly used structure by sovereign issuers, which is based on a lease arrangement supported by rental payments generated from the underlying SUKUK assets. Using this structure, Osun State incorporated a special purpose vehicle, Osun Sukuk Company Plc (the SPV), to which it transferred the land for construction of the schools. Official rating for investors was done for the SUKUK and it was rated ‘A’ by Agusto& Co, a local credit rating Agency, and listed on the Nigerian Stock Exchange. It is understood to have been taken up by local banks, fund managers, insurance companies and high-net-worth individuals will eventually pay SUKUK holders a fixed return of 14.75%. Though the Pension Funds Administrators (PFA’S) were disallowed from investing in the SUKUK as the National Pension Commission (NPC) then maintained that existing regulations on the investment of pension assets did not explicitly provide for pension fund investment in Islamic financial instruments; it would have been massively subscribed by them. For right and appropriate financial and management decision, and as required by the Securities Exchange Commission, the transaction was signed off on by Dr. Mohamed El-Gari, Prof MonzerKahf and Prof. M.L Bashar as Shariah Adviser.

State of Osun SUKUK Bond did not happen without its challenges; sources close to the offering revealed some of the challenges that were encountered in structuring and successfully marketing the SUKUK. Some of the challenges noted were the lack of a solid regulatory framework in Nigeria, institutional investors’ limited understanding of certain structuring aspects of a SUKUK when compared to conventional bonds, and a general lack of awareness of Islamic finance as an alternative source of public funding.

The subscription rate was very high andthe product was well received. The SUKUK Bond was oversubscribed by N1.4bn ($8.7m), which appears to indicate a measure of appetite for that asset class in Nigeria as well as a measure of confidence by market participants in the structures that are already in place in Nigeria to support Islamic finance. We should be reminded that Osun Sukuk Company Plc; the SPC, carried out the investment transaction. Osun Sukuk Company Plc is a wholly owned Special Purpose Company of the Osun State Government incorporated with an authorised share capital of N1, 000,000.00 (One Million Naira) with 99 per cent of the shares held by the Osun State Government and One per cent held in trust by the Attorney General of Osun State on behalf of the State, owing to the fact that a Nigerian Company must have at least 2 Shareholders. It is worthy to mention that the Osun Sukuk Company Plc. issued SUKUK certificates to the investors and the SUKUK investors’ payment for the certificates represents the cost of construction of the schools. In accordance with Islamic law principles, each certificate represents an undivided beneficial ownership interest in the SUKUK assets, that is the School.

The SUKUK assets are however, held in trust for the SUKUK investors by the Issuer, the Osun Sukuk Company Plc. Also, the land upon which the schools will be built was transferred by the State of Osun Government to the Special Purpose Company and a Certificate was issued under an Agency Agreement; appointed the State of Osun Government as its agent to inter alia engage a construction company to construct the schools, obtain all government approvals, manage the operational and financial aspects of the construction for a prescribed fee and transferred the agreed cost of construction to the State of Osun Government. The SPC leases the schools to the State Government against rental payments which will be remitted to the Issuer to make distributions to the SUKUK investors; thus earning income for the investors during the construction of the schools. However, a Purchase Undertaking was executed by the State of Osun Government in favour of the Issuer to give assurances that at the end of the lease or maturity of the SUKUK or upon the occurrence of an event of default or early termination of the lease under the Ijara Agreement, the State of Osun Government will purchase the SUKUK assets; with the purchase price being used by the Issuer to redeem the SUKUK certificates at maturity.

It is no doubt that the success of the Government of Osun actually attracted the Federal Government of Nigeria as such Ogbeni’s achievements could not but be noticed and commended. That kudos and recognition should be given to Ogbeni Aregbesola cannot be a thought  wrongly conceived. True and resourceful leaders need to be celebrated while they are live.

Having tolled the same line with confronted challenges which were well addressed, there is a lot more that the Federal Government can learn from Ogbeni Aregbesola on the workability of SUKUK; challenges will sure arise from the N100 billions SUKUK Bond but same can be resolved same way Ogbeni and his team handled the N1.4bn ($8.7m) oversubscribed SUKUK in the State of Osun and for once Ogbeni will receive the accolades.