Opportunities for Sub-Nationals To Achieve Socio-Economic Development Through Sukuk

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Tuesday, February 11, 2020 / 03.05PM / Bukola Akinyele for WebTV / Header Image Credit: WebTV

 

As Nigeria prepares in Q1, 2020, to issue its Third Sukuk bond as a sovereign, the value and opportunity for states to leverage on it to drive economic development has become a major source of discussion in the Non-Alternative Finance Market space.


At a recent Sterling Alternative Finance forum Mrs. Hajara Adeola the CEO of Lotus Capital engaged stakeholders on how Sub-Nationals can tap into the Sukuk to boost economic activities.


She acknowledged the fact that there was a need to scale up activities in the market with only one sub-national Sukuk issued in Osun state since 2013.


According to Adeola, collaboration amongst players in the market was vital to pushing the acceptance of the Sukuk market in the country.


Hajara Adeola said the absence of collaboration could slow the pace of the growth of Sukuk in terms of adoption across the nation, as an alternative source of financing.


The CEO of Lotus Capital stated that there is a huge funding problem for states in the country, which was manifest in the budget deficits and challenges of financing infrastructural projects.


"There is hardly a state government that can raise money in a typical convention fashion today, which provide a certain opportunity for Islamic finance because it can provide funding models that can fill the gap if we have the right legal framework in place and the right risk mitigants in place," Hajara Adeola said.


She elaborated further that there are two typical models in Sukuk, which are Musharaka and Ijara.


Musharaka is used extensively in mass housing projects in sub-nationals, which is part of social projects that will have some impact on the economy.


The second model is Ijara, which means rent/ lease. Ijara finance model is for road construction, the Ijara model relates to the first two FGN Sukuk and the third that is about to be issued.  One of the appealing features about Ijara or rental is that it is tradable in the secondary market.


 Speaking further, she said Ijara is attractive because it is flexible to cover the forward lease agreement before the construct and give people return before the asset is fully completed.  The return is known in advance.


She noted that road construction is a very simple model. The process for Mrs. Hajara Adeola includes allocating the road to the Special Purpose Vehicle, SPV which raises money and leases the road back to the state government once it has been built, and the lease rent out is paid to the Sukuk owners.


Musharaka and Ijara for Mrs. Hajara Adeola are models in the Sukuk space that can help states to address socio-economic issues, at a time of challenging revenues and financing constraints in the nation.


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