Sukuk Bonds in Nigeria

Sukuk Bonds in Nigeria

Sukuk Bonds in Nigeria

Faith-based investing such as Sukuk bonds a form of Islamic financing, remains a priority for markets thus, we have seen markets incorporate investment products that align with one’s faith, to create a holistic approach to investing.

Sukuk Bonds are one such investment product and, in this article, we will delve into everything you need to know about Sukuk Bonds in Nigeria, and how you can access them.

What are Sukuk Bonds?

Before we get into the nitty gritty of Sukuk Bonds, we must refresh our minds on what Bonds are. You can refer to our article on everything to know about bonds.

Now that we have that in mind, to establish what Sukuk Bonds are, we must explore what the term ‘Sukuk’ means. Sukuk is an Arabic word that refers to investment certificates or notes which evidence proportionate interest in ownership of tangible assets, that adhere to the principles of Shariah.

The basic principle behind the Sukuk Bond is that the holder has an undivided ownership right in the particular asset the proceeds of the Bond will be invested in and is therefore entitled to the return generated by that asset, through the Bond.

How did Sukuk come to be?

The application of Sukuk predates this generation. Islamic communities used Sukuk as ‘papers’ to represent financial commitments from trade and other economic transactions. The first Sukuk transaction took place in Damascus, Syria in the 7th Century AD.

Why was Sukuk Bond created?

The aim of creating the investment product was really to provide an alternative to conventional bonds in a Shariah-compliant manner.

Does the Sukuk Bond get invested in just any asset or project?

No, proceeds from the bonds have principles guiding where they should be invested. These principles dictate that Sukuk-funded projects must be beneficial to society, transactions should be based on valid contracts, free from deceit or speculation, and interest is strictly forbidden.

Additionally, Sukuk must be backed by tangible assets, ensuring transparency and alignment with Islamic finance principles. The specific principles include:

  • Projects to be funded from Sukuk must be beneficial and not harmful to society such as dealings with alcohol.
  • Any transfer of asset/property should be through a valid contract
  • The activity for which the transaction is based must be permissible in Shariah and based on mutual consent.
  • Transaction must be free of unlawful conditions in the form of deceit, fraud, uncertainty/ambiguity that might lead to destruction or loss
  • The transaction should be free of speculation and gambling
  • Interest is forbidden/prohibited
  • Sukuk must be backed by or be based on some underlying assets.
  • The Sukuk assets must be well-defined (specifications), physically existing (location) and known property with commercial value (revenue generating) (e.g. land, building, machinery) and owned by the seller
  • Returns to Sukuk holders are, as much as possible, generated from the revenue or cash flows of the underlying assets such as rent, profit or disposal
  • The asset can be tangible or intangible e.g. marketing rights, concession agreements etc.
  • For any Sukuk to be tradable, there must be 1/3 of its assets in tangible form

Types of Sukuk Bonds

Sukuk can be categorized as follows:

Product-based: The AAOIFI which issues standards on accounting, auditing, governance, ethical, and Shariah standards has laid down 14 different types of Sukuk.

The common ones include Ijara (Lease) Sukuk, Murabaha (Cost-plus-profit margin sale) Sukuk, Musharaka (Profit & Loss Sharing Partnership) Sukuk, Mudaraba (Profit sharing & Loss bearing Partnership) Sukuk, Istisna (Construction/Manufacturing Financing) Sukuk and Salam (Sale with spot payment but deferred delivery) Sukuk.

Issuer-based: Issuers including Sovereign, company and financial institutions can raise funds through issuance of Sovereign, Sub-national or corporate sukuk respectively.

A breakdown of the most popular types of Sukuk is tabled below:

StructureDescription
Ijara (Lease) SukukA contract where a party purchases and leases out a specific asset (e.g., equipment, parcels of land, buildings) to a client for a rental fee. Ownership of the asset remains with the lessor. Lease rentals serve as the source of returns to investors. Securities representing ownership of assets linked to a lease contract. Can be traded in the secondary Sukuk market.
Murabaha SukukInvolves a sales contract where goods are sold at a price including the purchase price plus a margin of profit. Proceeds used to purchase commodities from a Supplier/Vendor and sold to the Sukuk Originating Entity at cost plus profit. Widely used as a short-term financing instrument.
Musharaka SukukPartnership arrangement between parties to finance a business venture. Certificate holders become part owners of the project. Both parties provide financing and share profit/return based on agreed ratios. Losses shared based on proportionate capital contribution. Certificates are tradable in the secondary market.
Mudaraba SukukPartnership contract between capital provider and entrepreneur. Profits shared based on contract percentage, losses borne solely by capital provider unless due to misconduct. Trust certificates issued to finance projects/business activities, with profits shared between SPV (Sukuk holders) and Originating Entity. Losses borne by Sukuk holders.
Istisna SukukSale of a specified asset with seller obligation to manufacture/construct it and deliver it on a specific date. Certificates issued to mobilize funds for real estate construction/manufacturing large assets. Sukuk proceeds fund contractor/manufacturer during construction. Investors acquire title to asset and may pass title to Obligor or lease asset to developer. Tradable after delivery.
Salam SukukSale of a specific commodity with defined quality and quantity, delivered to purchaser on a fixed date in the future against immediate advanced full payment. Certificates issued to mobilize salam capital, granting ownership of goods to certificate holders. Commonly used in the agricultural sector.

How do Sukuk Bonds differ from Traditional Bonds?

SukukConventional Bonds
Ownership StructureRepresent ownership interests in assets or projectsEntail interest-bearing debt owed by the issuer
Underlying AssetsBacked by Shariah-compliant assetsNot restricted to Shariah-compliant assets
Pricing MechanismsValue determined by asset performanceTypically priced based on issuer’s credit rating
Returns to InvestorsDerived from asset performanceFixed interest payments
Nature of InvestmentHybrid instrument combining equity and debt featuresStrictly debt instrument

What similarities do Sukuk Bonds share with conventional Bonds?

They share similarities in that they have specific maturity dates and are tradable but see below for a wider view.

SukukConventional Bonds
Specific Maturity DatesYesYes
TradabilityYesYes
Potential for Credit RatingYesYes
Investable SecuritiesYesYes
Risk and Return ProfilesVaryingVarying

Who can invest in Sukuk?

  • Households – Individuals and families (local and foreign residents)
  • Small businesses –Traders, Merchants, Professional firms etc.
  • Associations and Unions – Professional bodies, Cooperative societies, Student Union Governments, Trade Unions, Town Unions, Chambers of Commerce etc.
  • Religious Bodies – Churches, Mosques etc.
  • Educational institutions – Primary, Secondary and Tertiary
  • Corporate entities-Banks, Insurance companies, Pension funds, Funds and Asset Managers etc.
  • High network individuals
  • Governments- Government agencies, states and local governments
  • Supranational institutions – World Bank, IMF, UN, ADB etc.

Benefits of Sukuk

  • Issuance of Sukuk can attract domestic investment capital which is invested according to Islamic principles.
  • Sukuk, as an investment product, appeals to faith-based investors as well as conventional investors who are seeking liquid, diversified and attractively priced instruments with stable returns
  • Sukuk ensures that every financial activity is backed by real economic activity and thus promotes financial stability and real economic development.
  • Sukuk as an investible product serves as a liquidity management tool for banks and other Islamic financial institutions.
  • The tradable nature of Sukuk enables investors to liquidate their investments with ease whenever the need arises and as a result, enhances market liquidity
  • Sukuk investment is relatively free from default risk

Legal framework for Sukuks in Nigeria

Under Nigerian law, Sukuk is regulated by the provisions of the Securities and Exchange Commission Rules 2013 and the Investments and Securities Act, while the primary regulator is the Securities and Exchange Commission (the SEC).

Under the SEC Rules, public companies, special purpose vehicles, the government, state governments, local governments, and government agencies, as well as multilateral agencies, are eligible to issue, offer or make an invitation to Sukuk upon seeking the SEC’s approval.

Specifically, the SEC Rules provide that the issuer of a Sukuk shall appoint an SEC-registered shariah adviser of good repute and character, adjudged to be sound and with a necessary qualification in Islamic FIQH or Islamic jurisprudence, Islamic finance and capital market.

The Shariah adviser shall deliver to the SEC a documentary pronouncement on the Sukuk’s compliance with Shariah law. Further, the SEC Rules prescribe that an underlying asset, whether tangible or intangible, shall be made available by the issuers as a condition precedent to the investors.

How to Buy Sukuk Bonds in Nigeria

There are 2 ways of accessing Sukuk Bonds in Nigeria:

1) Primary agents: The primary agents are the banks that deal directly in the public offer. They include Lotus Bank and FBN Merchant Bank.

2) Placement agents: Placement agents are secondary agents that resell the bonds. Most investment banks act as placement agents.

Final thoughts?

Making investments does not mean you have to break your faith. This is why the investment community has found a way to incorporate faith-based investing into the financial markets. Sukuks align with the Islamic faith, and it is a way to make a return while still being faith-compliant.

FAQs

  • What are the potential Projects to be financed from Sukuk?

Prospective issuers of Sukuk may invest the Sukuk proceeds in the following project areas: Agriculture, Roads, Air Transport, Rail Transport, Power, Petroleum Refining, Mass Housing, Education, Health facilities, Water and sanitation e.t.c

  • How do I buy Sukuk?

Interested persons can buy Sukuk during public offer through Capital Market Operators registered by the Securities and Exchange Commission or on recognized and registered Exchanges through a stockbroker.

  • Can I sell Sukuk before the maturity date?

Yes. Most sukuk can be sold through stockbrokers.

  • How do I profit from Sukuk?

Investors can profit from Sukuks through periodic returns to investors, such as rental income, profit-sharing, or predetermined payments.

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