IFN Monthly Article on Nigeria: April 2018 Issue

Tide Turning: Nigeria’s subnational and corporate sukuk market shows promise

Nigeria’s subnational and corporate sukuk market may be a few months away from fresh Sukuk issues as some states and corporates have rolled out sukuk issuance plans for 2018. This development is a major indication that the 2017 sovereign Sukuk issue has started to provide the much needed impetus for the domestic Sukuk market to take off.

In April 2018, the Governor of Niger State sought the approval of the State House of Assembly to raise N21.5 billion through sukuk issuance. The proposed sukuk is earmarked for infrastructure projects that could include the construction of a hospital, roads, water supply schemes, a trailer car park, market complex and solid mineral processing centres.

Niger State is the first sub-national to make a solid move at sukuk issuance since Osun State opened up the sukuk market in 2013 with its N11.4bn offer. Since then, Nigeria’s sub-national debt market has been relatively quiet as state governments grappled with high personnel costs and a large debt burden following a reduction in their oil-dependent revenues. With recent improvements in the Nigerian economy and higher oil prices, the tide is turning once again in favour of sub-national debt. More importantly, the recent FGN sukuk has stimulated investors interest and provided the long-awaited benchmark for pricing other issues.

The prospects of corporate sukuk issues have also been lifted particularly in Nigeria’s real estate and financial services sectors. Over the last three years, Nigerian corporates were overwhelmed by the economic downturn, foreign currency crises and high interest rates. However, there has been significant recent improvement in the business environment characterized by foreign exchange stability, lower interest rates and lower inflation. Although no Nigerian corporate has ever issued a sukuk in the domestic capital market, the Securities and Exchange Commission’s (SEC) has already provided sufficient regulatory guidance to accommodate sukuk issuances. The SEC’s robust framework has provisions for a wide range of sukuk including Ijarah, Musharaka and Mudharaba sukuk. The framework also outlines requirements for special purpose vehicles, credit ratings & enhancements, debt thresholds and independent trusteeship. While we consider the macroeconomic environment to be ripe for sukuk, we believe the ability of prospective issuers to meet the SEC’s requirements will be the major determinant of issuances that eventually make it to market in the near term.