Rent on Sukuk bonds jumped from N8.17 billion in the first quarter of 2022 to N33.13 billion in the second quarter, according to an analysis of the Federal Government’s domestic debt service report by the Debt Management Office (DMO) Nigeria for each quarter. This indicates an increase of 305.51%.

A Sukuk funded road in Nigeria. Photo: Debt Management Office (DMO)

Debt servicing means making payments to satisfy a debt obligation, including principal, interest, and applicable late payment fees. Countries with solid financial positions will want a low ratio of debt service payments, relative to revenue. The DMO is a government agency established to centrally coordinate the management of Nigeria’s debt.

Generally known by their Arabic name, sukuk, and often incorrectly referred to as ‘Islamic bonds’, sharia-compliant, fixed-income capital markets instruments have steadily increased their share of global markets over the past decade.

According to the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI); sukuk refers to “certificates” of equal value representing common shares in ownership of tangible assets, usufruct, and services or (in the ownership of) the assets of a particular project or a specific investment activity.

Initially developed exclusively in jurisdictions with majority Muslim populations, the global market for sukuk has seen considerable development over the past 10 years, with a number of high-profile corporate issuances and a number of sovereigns tapping the market.

As a component of Islamic finance, Sukuk is a non interest based investment and financing instrument but its application is not restricted to Muslims as it conforms to ethical standards and justice.

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. Subsequent to the debut Sovereign Sukuk in 2017 in which N100 billion was raised to finance the rehabilitation and construction of twenty-five (25) road projects across the six (6) geopolitical zones, the DMO issued a Sukuk for N100 billion in 2018 and another for N162.557 billion in 2020. The proceeds of these two (2) Sukuk issuances were also deployed to twenty-eight (28) and forty-four (44) road projects, also in the six (6) geopolitical zones. In summary, a total of N362.577 billion Sovereign Sukuk was issued between September 2017 and June 2021.

The Nigerian Sukuk system

The Federal Government offers investors who purchase Sukuk bonds a certificate of ownership.

The funds are invested in national assets in which the investor holds a stake.

A legally binding pledge to repurchase the bond at a future date is also made by the federal government. On their assets, the investors receive matching rental income.

Although it was a non-interest loan, Oladele Afolabi, Director of Portfolio Management at DMO, stated that “the government was expected to pay rents on the roads to the Sukuk investors during the tenure of the loan.”

“Government transfers its roads to Sukuk holders for that period. So, they become legal owners of that road,” he added. So, they become legal owners of that road. Government is now renting the roads from them so that citizens can travel on those roads. The government pays rent to the Sukuk holders based on an agreed rental rate payable every six months.

According to reports, the DMO’s director general, Ms. Patience Oniha, said that “rental payments will be credited bi-annually, directly to the investors’ bank accounts as and when due. At maturity, the principal investment will also be credited directly to the bank accounts specified by the investors in their application forms.

One payment was made in Q1 2022, and it was made on March 26 according to information provided in a separate document on the DMO website titled “FGN Sukuk Rental Payment Dates.”

But three rent payments were paid in the second quarter of 2022, specifically on June 16, 28, and 29.

By Q3 2022 payment was to be paid in September, while three rental payments are expected in Q4 2022 in December.

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, the 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. The Sukuk fund, according to the Minister of Works and Housing, Mr. Babatunde Fashola (SAN), will help to address several funding difficulties for road construction in 2023.

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