All is now set for Osun State Government in southwest Nigeria to issue Sukuk valued at NGN10 billion (US$62.05 million). This will be the first of its kind in the republic and will boost the development of the Islamic finance industry, which was introduced into Nigeria a year ago. The Sukuk, which is based on the Ijarah structure,will comprise of seven-year certificates and will mature in 2020.
The Muslim-dominated state, recently boosted by the success of its 2012 NGN30 billion (US$188.8 million) fixed rate development bond, intends to finance infrastructure projects with the proceeds of the Sukuk. Specifically, the net proceeds of NGN9.62 billion (US$60.5 million) will be utilized for the construction of 24 millennium model schools. This may include the reconstruction and renovation of old and dilapidated school buildings as well the construction of new ones all spread within the state.
The structure of the Sukuk allows its subscribers to own the property, therefore making it a Shariah compliant transaction with income derived from the use of the asset. In addition, the state intends to use its internally generated revenue as security. The state of Osun has aggressively grown its revenue in the last two years, by curtailing rising recurrent expenditure while increasing capital expenditure which resulted in the growth of internally-generated revenue by 10.42% from NGN5.7 billion (US$35.37 million) in 2011 to NGN6.34 billion (US$39.34 million) in 2012.
The Sukuk, if successful, will go a long way towards providing support to the Nigerian Islamic finance market, where issues of Shariah compliant liquidity instruments are affecting the development of the few existing players. This will offer some respite to Jaiz Bank and other Takaful players which have huge deposits with no reliable avenues of investment. In addition, it will also spur competition among other state governments in the issuance of Sukuk, as it will serve as a way of funding projects without reliance on funds from the federation account.