Sukuk, The DMO Bond Strategy

0
86

The latest of the federal government debt instrument is the N100 billion Sukuk which followed a pattern of success story of the Debt Management Office (DMO) in its use of bonds to raise funds to drive the economy and provide for the government other sources of financing development projects. Before it, there were the Eurobonds, the Diaspora bonds and the FGN bonds.

The rationale behind the federal government’s decision to issue bonds are varied. But, essentially, it is to finance government fiscal deficits in a non-inflationary and sustainable manner. Similarly, it is part of the effort to enhance fiscal discipline of the government; refinance maturing debt obligations of the government; establish benchmark yield curve, which serves as reference for pricing bonds issued by other bodies, especially the private sector issuers; develop and ensure liquidity in the domestic bond market on a sustainable basis and enhance as well as deepen the savings and investment opportunities of the populace. Other reasons are that such debt instruments sustain the development of other segments of the bond market and diversify government financing sources.

It is already in the public space that the N100 billion seven-year debut Sukuk offer was oversubscribed. The total subscription is N105, 878,320.00 billion Sukuk. By definition, Sukuk is a project-tied investment facility for the ethics-conscious investors. Expectedly, in our opinion, it attracted investors from across a broad spectrum of the public comprising pension funds, banks, fund managers, institutional and retail investors in a manner that the Director General of DMO, Ms Patience Oniha said that its acceptance was an indication of the viability of the instrument as an investment option as well as a demonstration of utmost faith in the economy. The bond generated healthy enthusiasm among the investing public and was embraced as an instrument that is viable. Even on the part of experts, Sukuk was seen as a new instrument, that added its variety to existing products in the market.

That Sukuk succeeded as a novel investment platform was because it offered new investors an opportunity to participate in Nigeria’s growing capital market.  A look at the investors that subscribed for the Sovereign Sukuk revealed that another significant objective was achieved through the participation of over a thousand retail investors from across the nation who accounted for over four per cent of the total subscription.

The awareness campaign of the sukuk offer drew attention to the projects it is tied to such as the the construction and rehabilitation of 25 Roads across the six Geopolitical zones. The Sukuk as noted has a seven year tenor with a price of N1, 000 per unit. The rental payment of the bond is usually made semi-annually while the redemption would be a bullet payment of invested funds at maturity.

For those not familiar with this non-interest instrument, it may be useful to state that its main difference from the conventional bonds that are always on offer at the capital market is that it represents ownership interest in assets while bonds represent a pure debt obligation due from the issuer. In addition, the funds raised from Sukuk issuance must be used only for ethical purposes while bonds can be issued to finance any item that is considered legal. The sale of Sukuk represents the sale of the holder’s interest in an asset while the sale of a bond is the sale of a debt.

The success of the Sukuk has made it attractive to all segments of the investing public locally and internationally. All categories of investors, including retail investors, high net worth individuals, institutional investors such as commercial banks, insurance/takaful companies, pension funds, asset managers, private banks and others are keying in and taking advantage of its unique offer. Also, ethically inclined investors, cooperative Societies, religious bodies, state investment companies and foreign investors are increasingly finding Sukuk really attractive.

It is pertinent at this point, in our view, to state that this offer succeeded as a result of the solid foundation laid by DMO as an establishment of the federal government working in tandem with the Ministry of Finance and the Central Bank of Nigeria.