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posted 5 years ago
Article authored by Olayinka Alao, Managing
Partner of Renaissance Practice.
What are sukuk bonds?
Sukuk bonds are
sharia-compliant financial instruments representing undivided ownership
interests in defined assets.
Is there a legal regime for
sukuk bonds in Nigeria?
Yes, sukuk bonds are
legally regulated in Nigeria. The Securities Exchange Commission Rules and
Regulations 2013 (SEC Rules) provides the legal framework for the
issuance of sukuk bonds in Nigeria. In addition, the Nigerian Stock Exchange
(NSE) has also prescribed rules governing the listing of sukuk and debt
securities on its exchange.
What types of sukuk bonds
are legally recognized in Nigeria?
There are four specific sukuk
structures provided by the SEC rules to wit: sukuk al-ijara, sukuk
al-musharakah, sukuk-murabahah, and sukuk al-istisnah and they are
all specific asset financing structures. Be that as it may, the SEC Rules gives
the Securities and Exchange Commission (SEC) the discretion to approve other
sukuk structures.
Who may issue Sukuk?
The SEC Rules provides that
Public companies (including SPVs), State Governments, Local Governments, and
Government agencies as well as multilateral agencies are eligible to issue,
offer or make an invitation of sukuk.
What are some of the
essential legal requirements for the issuance of sukuk bond in Nigeria?
The
SEC Rules provides that the issuer of a sukuk shall appoint a shariah adviser
of good repute and character, adjudged to be sound and qualified in Islamic
fiqh/jurisprudence and with experienced exposure in Islamic finance and capital
market. The shariah adviser will be responsible for ensuring that the sukuk
structure conforms with shariah principles. Furthermore, an underlying asset
(tangible/intangible) is to be made available by the issuers as a condition
precedent to the issuance of the sukuk. The Rules also provide that the
purchase price of the underlying asset must not be more than 1.5 times its
market value. In the same vein, ratings are to be provided on all sukuk issues,
and the issuer is to ensure that the issue is rated and made available
throughout the tenure of the sukuk issue. Similarly, a documentary
pronouncement by the shariah adviser on shariah compliance of the sukuk
including detailed reasoning/justification is to be delivered to SEC.
How are sukuk structured in
Nigeria?
Islamic financing is
predominantly an asset backed financing, and is thus best suited to financing
specific asset or good-based needs of the originator, as opposed to general
liquidity needs of the originator (which are typically financed by
conventionally lending based on a ‘fixed cost of funds’ arrangement). Hence,
the sukuk structure will most often than not involve the establishment of an
SPV (structured as an orphan company) by the issuers, to issue the sukuk
certificates to the investors. It is useful to note however, that the ultimate
structure would largely depend on the proposed utilization of the issue
proceeds.
Has there been any sukuk
issuance in Nigeria?
Yes. In fact, the first sukuk
in Nigeria was issued by the Osun State Government (a subnational government)
in as far back as 2013. Sukuk bonds have been utilized for notable
infrastructure projects in Nigeria such as:
• Construction of 26 schools by Osun State Government
using ijarah sukuk of N11.4 billion (US$70.6 million);
• Construction of luxurious apartments in Ikoyi –
Lagos by Lotus Capital Ltd using N1 billion private sukuk of al-istisna;
•
Construction of roads by the Federal Government using ijarah sukuk of N100
billion (approximately US$326 million).
Can sukuk be sold in the
secondary market?
Yes. Trading can be done on the
secondary market by licensed dealers on the floor of the Nigerian Stock
Exchange and on the FMDQ OTP.
Are sovereign sukuk safe?
Yes, they are safe. All
sovereign sukuk are backed by the full faith and credit guarantee of the
Federal Government of Nigeria.
Can Sukuk be sold before
their maturity date?
Yes, they can be sold before
their maturity date. The sukuk holder is to contact his/her stockbroker or
security dealer to either sell on the floor of the Nigerian Stock Exchange or
the FMDQ OTC Securities Exchange upon listing.
Conclusion
Sukuk bonds though relatively
new, are a viable investment option in Nigeria and are beginning to gain more
investor’s attention/confidence. We at Renaissance Practice are steeply versed
in the legal and practical nuances of sukuk, and willing to assist investors
desirous of acquiring Nigerian sukuk bonds in diversification of their
portfolios.
Olayinka
Alao can be reached on: o.alao@renaissancepractice.com
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