What Are Sukuk Securities?


You must have been hearing about Sukuk investments and you do not know how it works and what makes it different from other forms of financing.

As usual at PageOne Markets, we adapted a well-thought-out crash course on Sukuk written by the FMDQ OTC Securities Exchange and how it is operated in Nigeria.

The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) defines Sukuk as “securities of equal denomination representing individual ownership interests in a portfolio of eligible existing or future assets.” Sukuk securities are required to strictly adhere to Islamic laws (Sharia principles) which prohibit the charging or payment of interest.

Every Sukuk must be rated by a rating agency and also certified by at least one reputable Islamic scholar.

With the emergence of Islamic finance as a widely accepted funding alternative in the global financial system, Sukuk (Islamic bonds) have emerged as a key capital market instrument used by issuers to meet their financing requirements. In the latest report published by International Islamic Financial Market, annual global Sukuk issuance has grown from $1.20bn in 2001 to $60.70bn in 2015.

The Sukuk market has seen new issues occurring from traditional hubs in Malaysia and Indonesia to non-traditional hubs such as Germany and Luxembourg. Across the globe, issuers ranging from sovereigns, quasi-sovereigns, Islamic and non-Islamic financial institutions have issued Sukuk under various structures which include debt-based, equity-based, agency-based and leasebased structures.

Over the years, numerous Sukuk structures have been used in the industry. Some popular structures include:

Sukuk Ijarah: used for the purchase of assets which are then leased to the issuer. Investors are then paid a lease rental rate for the duration of the Sukuk

Sukuk al-Musharakah: used to provide financing for a partnership or project. Investors then share profit or loss with the issuer, as agreed at the initiation of the contract

Sukuk Murabaha: used to finance purchase of goods for the issuer. Debt repayments are made to the investors through the duration of the contract.

In 2013, Osun State Government issued the very first Sukuk in the Nigerian debt capital market. Following the ₦13.40bn Ijarah (lease) Sukuk by Osun State, the Securities Exchange Commission (SEC) came up with a 10-year Non-Interest Capital Market Plan. The Plan states that Sukuk should constitute 15% of the overall debt market by 2025, however, the Osun State Sukuk remains the only Sukuk issued in Nigeria since its listing in 2013.

Globally, the growth of the Sukuk market has typically been characterised by a sovereign issuance followed by a quasi-sovereign issuance, before the emergence of a corporate issuance of Sukuk. It is on this premise that industry experts believe that the Sukuk market in Nigeria should fully kick-off upon the issuance of a Sukuk by the Federal Government of Nigeria (FGN) via the Debt Management Office. Following the recent issuance of Sukuk by its West African neighbors, Cote D’Ivoire ($511.00mm) and Togo ($255.00mm), demand for Sukuk issued by Nigeria is expected to be strong.

The development of the Sukuk market in Nigeria is also interwoven with the development of non-interest finance institutions (NIFIs) such as banks, insurance (Takaful) and asset management companies. NIFIs in Nigeria suffer from non-availability of short-term and long-term Islamic financial securities. At an Islamic Liquidity Management seminar, the Kuwait Central Bank Governor, Mohammad al-Hashel said: “A key issue is the absence of secondary markets that provide a proven record of being a reliable source of liquidity at all times.”

A Sukuk issuance by the FGN is expected to serve as a huge boost for the Nigerian Islamic finance industry, particularly the Sukuk market, as it will provide Islamic financial institutions with the much needed Sharia compliant securities. With the FGN’s desire to bridge its infrastructure gap combined with the tough fiscal challenges currently faced, the issuance of a Sukuk will provide additional funding sources as an increasing number of investors are likely to show high interest in the Sukuk issue.

Just like other rational investors, majority of investors in Sukuk will base their decisions on yield, credibility of the issuer, rating and liquidity of the Sukuk. It has been observed that Sukuk issued in developing Islamic financing hubs are typically not liquid, therefore, industry stakeholders must lead the advocacy to ensure that majority of the Sukuk issued in Nigeria are structured in a manner which permits them to be tradeable in the secondary markets. Since Sharia laws demand that debt-based Sukuk can only be traded at par, it is essential that Sukuk issued in Nigeria are structured as either lease-based or equity based Sukuk.

The SEC, alongside notable securities exchanges such as FMDQ, are leading the Islamic finance advocacy across the country and as a result, awareness about Sukuk and Islamic finance in Nigeria is gradually increasing amongst financial market participants and the general public.

On a final note, the industry stakeholders must increase their advocacy and engagement with one another to ensure the growth of the Sukuk sector of the Nigerian debt capital market and Islamic finance industry, as this would lead to a more varied and robust Nigerian capital market

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