Opinion: NIGERIA TO ISSUE SUKUK SHARIA-COMPLIANT BONDS? – By JAMES PAM
Nigerian newspapers have, in the last one year, have reported that meetings have been taking place between Alhaji Mounir Gwarzo, the Director General (DG) of the Securities & Exchange Commission (SEC), and Dr. Abraham Nwankwo, the Director General (DG) of the Debt management Office (DMO). Gwarzo is reported to have urged Nwankwo to explore the possibility of the DMO issuing Sukuk Bonds on behalf of the Federal Government of Nigeria. The idea is for the Federal Government to utilize this Sharia-compliant debt instruments to raise funds for the execution of Federal Government projects.
Sukuk bonds are financial instruments that are designed to meet the dictates of Sharia Law. Sukuk (plural for the singular form sakk) are, therefore, debt instruments similar in principle to conventional Bonds except that they are Sharia-compliant.
According to Dr. Tahmoures A. Afshar, School of Business, Woodbury University, USA, Sharia Law prescribes that all Islamic financial transactions must be free of the following:
(a) The payment or acceptance of interest (Riba) for a loan is absolutely forbidden. The word Riba means excess or addition and implies excess compensation without due consideration (Islamic Banking, Wikipedia, 2011, p.2). Accordingly, imposition of late payment penalty of rentals and loans is forbidden since it is considered as Riba. (The Journal of Global Business Management Volume 9, Number 1, February 2013, pg. 45)
(b) Trading under uncertainty (Gharar) in financial transactions must be eliminated. The Sharia defines Gharar as a situation whose consequences are hidden or are unknown. Accordingly, undertaking transactions with insufficient knowledge of the market or product and thereby incurring an excessive risk or interest is forbidden.
(c) Under Islamic Law, money is not an asset; it is merely a medium of exchange and a measuring unit of value. An individual or an institution should not be able to generate income from money. This self-generation of money from money qualifies as Riba, which is absolutely forbidden in Islam. Accordingly, the trading/selling of debts or receivables (without an underlying asset) for anything other than its par value is not permissible (Howladar, 2010, p.7)
(d) In Islam, a return on capital is justified only when the capital has taken the form of real (non-monetary) assets.
(e) Islamic finance distinguishes between the time-value of money as a measure of investment efficiency and as a means of determining yield. Therefore, yields are either based on profit or loss sharing in the enterprise or negotiated price for sale or lease transactions.
(f) Conventional insurance and reinsurance are not allowed.
(g) Any transaction (buying, selling or distribution) that involves alcoholic beverages, pork, prohibited drugs, gambling, pornography, and weapons is forbidden.
Afshar defines two basic types of Sukuk – the Asset-based Sukuk and the Asset-backed Sukuk. Under the Asset-based Sukuk, the Sukuk holders have beneficial ownership in the asset. Under Asset-backed Sukuk, the Sukuk holders own the asset and as a result do not have recourse to the asset but to the originator when there is a shortfall in payment.
In a publication, ‘The Sukuk Handbook’ by Latham and Watkins LLP, the authors list eight popular variations of the Sukuk in use: Sukuk al-ijara, Sukuk al-wakala, Sukuk al-mudaraba, Sukuk al-musharaka, Sukuk al-istithmar, Sukuk al-manafa’a, Sukuk al-istisna’a and Sukuk al-murabaha. They also opine that there are regional peculiarities between the Middle Eastern countries and Asian countries. Country to country differences within these regions do exist. They explain that these differences arise due to differences in the treatment of tax and zakat and how conservative or liberal a country is in its interpretation of Sharia Law.
In view of the afore-mentioned complexities, it became necessary to set up a specialised accounting and auditing body to assist participants. This body is the AAIOFI (Accounting and Auditing Organization for Islamic Financial Institutions), a non-profit organization, which was established in March 1991 to maintain and promote Sharia standards in the Islamic financial industry. It is supported by 155 members and the Central Banks of 40 Islamic countries (Nigeria not included).
In terms of performance, the Sukuk market enjoyed healthy growth between 2001 and 2007 when it grew in sales volume from USD 500 million to USD 60 billion. In 2008 the number of Sukuk issued globally declined by 50% as compared to 2007 according to Afshar. Market experts and commentators blamed the global financial crisis of 2007, lack of standardization in the market and some high-profile Sukuk defaults by originators (Chance, pg 89). Others placed the blame on criticisms by Sheik Muhammad Taqi Usmani, a prominent scholar, who declared that 85% of Gulf Sukuk did not comply with Sharia Law.
This writer was only able to find one cogent reason why some Nigerians and foreign investors might insist on Sukuk. Afshar gave this single reason as, “Sukuk is an ideal choice as compared with the conventional bonds for the Islamic investor. This is because Sukuk are Sharia-compliant instruments and therefore free from unpermitted transactions.”
With such complications and uncertainties, why does the DMO still want to dabble into Sukuk? After all, just a tiny fraction of the country’s credit needs would be met through it. Nigeria already attracts credit from the world’s biggest international financiers. In April 2016, our President went to China to seek for a loan of $2.0 billion but was surprisingly offered a $6.0 billion line of credit.
The DMO has had to set up a very large committee made up of CBN, SEC and DMO senior staff just to work around these Sukuk complexities. Nwankwo had hoped that the committee would be finished by the first quarter of 2016, but this date has had to be shifted to the third quarter.
It is near impossible for the DMO to monitor funds raised via Sukuk and pumped into the Bank of Industry or Railways or youth employment to be monitored in order to work out profit earned so that it can be shared the Sharia way. It is also very difficult to monitor such funds to ensure that the projects financed by the BoI have nothing to do with pigs or pork or gambling (approved lotteries) or insurance businesses in hundred and thousands of micro, small and medium scale enterprises. How will Corporate Tax, Withholding Tax, VAT, etc be avoided and still comply with extant Tax laws and Accounting conventions?
An issue for the promoters of Sukuk to consider is the fact that the Christian population, which is about fifty percent of Nigeria’s populace, will be disqualified from participation of benefiting this Nigerian scheme unless they will be forced to comply with the dictates of a religion not theirs. They will read it as an overt move to lord Sharia law on all Nigerians.
Rightly or wrongly, the current Government has been accused by some of subtly attempting to Islamize the through policies, biased employment and legislation. The view that everything ‘conventional’ or ‘Western’ is Christian is not true. If the Government insists of some of these very controversial and highly volatile issues, it will be announcing that Christians and Muslims cannot live together in Nigeria. After all, Islamic banking is thriving in the country. Sharia-compliant financial services are available for those interested. Our main banking legislation, BOFID 1992, has adequate provision for interest-free or profit/loss sharing banking.
We have led the developing world in Foreign Direct Investment (FDI) inflows for years until 2016. Our Dollar-denominated bonds via conventional vehicles have always been oversubscribed. The $6 Billion line of credit placed at our disposal by China takes care of 54% of the proposed deficit of N2.2 Billion ($11.1 Dollars) in the 2016 Budget. The necessity for Sukuk is therefore not there.
The DMO would be well advised not to venture into the already turbulent waters of Nigerian religious controversies.
James Pam, June 06, 2016, [email protected]
AAIOFI (2008). “Shari’ah Resolution: Issues on Sukuk.”
Afshar, T. A. “Compare and Contrast Sukuk (Islamic Bonds) with Conventional Bonds, Are they Compatible?” School of Business, Woodbury University, USA. Published in The Journal of Global Business Management, Volume 9, Number 1, February 2013.
Chance, C. “Sukuk Guidebook”, Dubai International Financial Center (DIFC), pp.1-95.
Howladar, K. (2009). “The Future of Sukuk: Substance over Form? Understanding Islamic Securitisation, Asset-backed and AAIOFI Principles”. Moody’s Investors Service, pp. 1-13.
Islamic Banking, Wikipedia, 2011, p.2