Much ado about FGN bond, Sukuk

By Odunewu Segun

Lots of controversies have trailed the Federal Government Sukuk initiative with some religious leaders labelling it as a subtle attempt to Islamize Nigeria.

However, investigation has shown that this may be far from the truth as this alternative to conventional funding is fast gaining grounds across the globe irrespective of religious affiliations.

As of early 2017, there were $328 billion worth of Sukuk outstanding worldwide. Countries that have issued Sukuk include Malaysia, Singapore, UAE, Bahrain, Qatar, United Kingdom etc.

Sukuk no doubt has its origin in Islam, but its benefits cut across all divides. The popularity is also growing on the African continent as an alternative funding source. South Africa, Kenya, Ivory Coast, Togo, Sudan and Niger have all issued Sukuk.

Recall that the N100 billion Sukuk bond issued by the Nigerian government was oversubscribed with the seven-year sukuk subscription attracting N105, 87,320,000.

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The Federal Government has subsequently handed over the proceeds to the ministry of Power, Works and Housing to finance 25 road projects across the country.

Each of the geopolitical zones of the country is expected to receive the sum of N16.67bn for road projects in the respective zones.

Due to the fact that Islam prohibits usury – collecting interest from your loans – interest based bonds are banned in Muslim nations. Instead, governments and corporations looking to raise capital will issue Sukuk notes which will pay a fixed percentage return as a profit sharing percentage of the underlying assets’ revenues.

FGN Bonds pay a fixed rate of return as interest (coupon) semi-annually or annually. Sukuk pays a fixed rate of return as a profit-sharing percentage of the underlying assets revenues, or as rental payments for renting those assets back to the issuer.

In terms of pricing, Sukuk bonds are market driven and depend on the fluctuation of the Market value of the underlying assets. If a Sukuk issues defaults, Sukuk holders will possess the asset and they can sell it to other buyers or keep it as an asset.

The aim of trading in FGN Bonds is to make capital gains as fixed-interest bond prices rise when variable market interest rates fall. Trading in FGN Bonds is therefore largely about exploiting interest rate developments and trading in paper that is usually unrelated to the value of any underlying asset.

The sale of a Sukuk bond means selling ownership in the assets backing them, while the sale of FGN Bonds is the Sale of debt. The major function of Sukuk bond is to provide an alternative to conventional bonds but in a shariah compliant manner.