As the pressure on federal revenue mounts following steady decline in oil revenue, the FG would be resorting to a Sukuk Bond for funding the widening budget deficit. Sukuk is a financial certificate, similar to the traditional government bond, but complies with Sharia, Islamic religious law. The Debt Management Office, DMO, and Securities and Exchange Commission, SEC, are collaborating in an effort to issue the Nigerian sovereign Islamic bonds this year.
According to DMO “issuing a sovereign Sukuk will attract significant amounts of affordable capital from the Gulf countries and other established Islamic markets around the world into Nigeria.” Though Nigeria would be the third West African country to issue Sukuk after Senegal and Cote d’ Voire, Osun State had rolled out $62m Sukuk in 2013.
Because the traditional bond comes with interest paying structure which is not permissible under the Islamic financial system, the issuer of a Sukuk bond would sell the certificate to an investor group, who then rents it back to the issuer for a predetermined rental fee. The issuer also makes a contractual promise to buy back the bonds at a future date at par value. Islamic bonds are structured in such a way as to generate returns to investors without infringing Islamic law that prohibits interest.
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