Using Islamic Bonds to Forestall Debt Crisis, Osun Leading By Example
Bonds are essentially debt instruments that will be repaid by the entity that issues them. Issuing Islamic bonds make borrowing cheaper and limits the chance of a debt crisis.
Since 2006 when the Paris Club of creditors agreed to cancel a massive $18 billion of Nigeria’s debt, enabling the country to become a credit-worthy nation, Nigeria has since become one of the fastest-growing economies in the world.
But that achievement meant that the nation’s infrastructure gap has to be bridged to sustain its economic growth. To do this, the federal government has majorly relied on the domestic bond market. State governments have also resorted to the bond market to finance their budget deficits and development needs.
In its annual National Debt Sustainability Analysis (DSA) released by the DMO recently, the total domestic debt of the 36 states and the Federal Capital Territory (FCT) reached N1.471 trillion last year. This is an increase of 19.34 per cent compared with the N1.233 trillion domestic debt figures the previous year. As at December 2011, the value of federal government bonds listed in the Nigerian Stock Exchange (NSE) was N3.54 trillion. The amount, which represented the total sum borrowed by the federal government to finance various projects, was issued from 2003, with maturity dates of up to year 2030.
This is apart from the N3.5 trillion Assets Management Company of Nigeria (AMCON) bond. Late in 2011, AMCON listed its N1.675 trillion zero coupon bond on the NSE, with the last tranche expected to be listed soon.
Meanwhile, analysts have warned that the growing domestic debt may result to a debt crisis if not checked. Others have advised the government to look for cheaper alternatives to finance its transformation agenda.
One of the cheaper alternatives today is Sukuk or Islamic bond, which is interest free. Regular bonds are a debt that is going to be repaid by the entity that issues them. However, with Islamic bonds, this is not the case. Instead, they will give you a piece of ownership in something.
Islamic bonds or sukuk are a type of security that works differently from traditional bonds. Sukuk essentially means financial certificate in Arabic. Islamic bonds are not used in the same way that traditional bonds are used. Under Islamic law, the charging of interest is strictly prohibited. Therefore, interest is not paid on this type of bonds. Because of this, the bond is structured differently so that they can adhere to Islamic rules. Sukuk are structured to pay a fixed profit rate rather than a coupon and are commonly backed or based on real estate or infrastructure.
Leading by example, State of Osun has begun offering the country’s first Islamic bond, taking a major step towards developing an Islamic finance industry in Nigeria. The issue makes Nigeria the first big economy in sub-Saharan Africa to market a sukuk. The offer will close at the end of this month. The sukuk is based on an Ijara structure, a common leasing arrangement in Islamic finance, which bans the payment of interest. Local credit rating agency Agusto & Co gave an A rating to the sukuk, suggesting it will attract ample investor demand.
Other African countries are also embracing large-scale Islamic finance as they seek to tap cash-rich Middle Eastern investors to finance their large infrastructure programmes. Africa is home to roughly 400 million Muslims but until now only Gambia and Sudan have issued any sukuk, and they were for tiny sums on a short-term basis.
Defending the decision of his government to issue a sukuk, Osun State Governor, Rauf Aregbesola, said the N11.4 billion sukuk bond under the government’s N60 billion debt issuance programme was not an Islamic fund but an instrument of development. The governor, who spoke at the completion of board meeting of Osun Sukuk Company Plc, explained that the bond would be used to finance road projects and other developmental projects embarked upon by his administration.
He said: “The sukuk has an Islamic name but just one out of the 42 investors, Jaiz Bank, is Islamic. Sukuk is just a nomenclature, the investors are secular Nigerians. Can we say First Bank Plc is Muslim or Christian bank? No, so other investors there except one with Islamic character.
“This is not a special Islamic fund but a means of accessing fund for development for the benefit of the people of the state. The sukuk bond is a veritable avenue for us to access capital to develop our state. We want our people to also see this opportunity that opens to us as such. In name, the bond is Islamic but it has the conventional bonds’ characteristics and is coordinated by the regular capital and money market investors.”
Osun State Commissioner for Finance, Budget and Economic Planning, Dr. Wale Bolorunduro, described the sukuk as a unique product.
Bolorunduro said the bond made it possible for the first time in Nigeria for a government to open itself up to the capital market in transparent manner.
He said the landmark achievement had offered the Osun State government the opportunity to optimise capital for business purposes.
The sukuk bond was issued in accordance with the enactment of the Osun State Bonds, Notes and Other Securities Law 2012 and setting up the Osun Sukuk Company Plc.
Analysts said the Nigerian Sharia-compliant bond issued by Osun State while relatively small at $62 million, signalled the start of a trend.
culled from THIS DAY