Nigeria: SUKUK: Finance Product Of A Modern Economy, And The Potential Reversal Of Nigeria's Infrastructure Decline

Last Updated: 21 March 2018
Article by Osaze Ogbomo

Growing economies, rely a great deal on debt financing. This type of financing, allows businesses or governments, to receive capital for an ascertainable length of time, following which it must be paid back. Using the traditional debt finance model, for instance, a borrower seeking finance would approach its bankers for a 'loan' which would be paid back, with interest, after a definite period. The Bank on its part, makes use of depositors' funds (either in the form of customers' funds, or other banks' funds - through the interbank markets) in carrying out its lending business. The depositors are not left out as they in turn receive some compensation, in the form of periodic returns on their deposits. This system is tried and tested, albeit extremely limiting and outdated in today's highly sophisticated and competitive global finance marketplace.

Using the traditional debt finance model, lenders are naturally restricted to providing funds, for a shorter length of time than the deposit period. This significantly inhibits the ability of commercial banks/lenders to provide funding for projects of a long-term nature - such as infrastructure projects. It is needless to state the negative impact of such a shortfall in funding – especially in developing economies, where infrastructure is usually at a comparatively low level. Without the galvanizing benefit of a modern and reliable infrastructure base, it is unlikely that the inherent potentials of any developing economy can be fully unlocked. One possible alternative would be to resort to other more expensive, and usually external sources of funds. This however either ends up stifling infrastructure projects, creating loopholes and avenues for corrupt practices, or raises the eventual cost to the end-user of the infrastructure.

This need not be so, and increasingly, focus is being given, with recorded successes, to the use of Islamic Finance; otherwise known as "Non-interest Banking" in bridging the funding gap, particularly in infrastructural development. The most recent example of this upsurge in popularity of Islamic Finance, is the issuance of a N 100 Billion (one hundred billion Naira) Sukuk Bond by the Federal Government of Nigeria. The Sukuk Bond was backed by the Sovereign guarantee of the Nigerian government. This sovereign guarantee makes the bond virtually risk free and thus, an even superior investment to the traditional Islamic finance transaction – where there is at least the possibility of a loss; which is then shared in proportion between the parties. Due to its sovereign backing, the bond was over-subscribed. The backing of the Federal Government was perhaps a demonstration of its faith in, and support of the Sukuk model adopted – and an indication that Islamic finance has perhaps officially gone mainstream in Nigeria.

Islamic Finance – Separating the Myth from Reality

The term "Islamic Finance" has proven somewhat misleading; or at least, subject to diverse interpretations in the public space. Despite its growing importance as a major segment of the global finance industry, it has continuously been plagued by social and religious intricacies. Islamic Finance mirrors conventional financial systems in many respects. It however differs in its philosophy and application. Simply put, Islamic Finance comprises financial institutions and products, designed to comply with the central tenets of Sharia/Islamic Law.1 While it is guided by certain key Islamic principles and ethics (such as abstinence from prohibited substances like pornography, pork, and alcohol), it is not a system restricted in any way to adherents of the Muslim faith. It is open to any professional with requisite financial expertise, to function within the system. Similarly, any private individual, corporation or government may take benefit of the same; either as an investor/lender, or a borrower. Some of the main features that render the Islamic finance system unique, are that it does not permit charging of conventional interest, but rather has as its cornerstone, the promotion of social justice by encouraging risk sharing in economic transactions. When a risk is shared among two or more parties involved in an economic activity, the burden of risk faced by each party is reduced. Modern Islamic financial transactions are ideologically premised on the sharing of profit and loss between contracting parties. There is the sharing of a reward between the investor and the entrepreneur, rather than a situation where one party has a fixed expectation of an income irrespective of the outcome of the business venture or economic endeavour undertaken.

Islamic finance transactions could involve business persons, banks and even the government. The government for instance, could provide funds for a business venture, in agreement with an Islamic bank which acts as a special purpose vehicle, utilizing the funds in Sharia compliant ways to meet the needs of consumers. It recognizes the important principle that under Sharia, money does not have a time value separate from the value of goods that are exchanged using money. To compete with their conventional counterparts, Islamic finance institutions have continued to adopt innovative products for their customers. This has become frequent practice; provided that such products meet the permissibility requirements by Sharia Boards.

Sukuk bonds – An innovative investment vehicle

Sukuk bonds are some of the innovative products offered by Islamic financial institutions. They are issued via certificates, with each sakk representing a proportion of undivided ownership rights in a tangible right or a pool of predominantly tangible assets or business venture(s). Conversely, conventional bond holders have no ownership shares in the asset, project or joint venture which the bonds support. Thus, perhaps the easiest way to understand a Sukuk bond, is by drawing distinctions between its features, and those of conventional bonds. While a conventional bond is proof of a debt, a Sukuk bond is proof of ownership in a specific project or investment activity – in accordance with Sharia rules and principles. Thus, while Sukuk holders receive a share of the profit from the underlying asset, bond holders receive fixed income for the life of the bond, and their principal is also guaranteed to be returned upon the maturity of the bond.

As alluded, bonds may be used to finance any asset, project or joint venture, whereas Sukuk bonds can only be issued in respect of an asset, investment or project activity which is Sharia compliant. Of further significance, is the fact that unlike with a conventional bond, the face value of a sakk is not artificial or fixed but always based on the face value of the underlying asset; whereas the face value of a bond is based on the issuer's credit worthiness. On the opposite side of the perceived benefit of fixed income, is the fact that a sukuk bond is not limited as is a conventional bond, and bears the possibility of capital appreciation. This is attractive to investors because investors can get more return on their invested capital, as opposed to conventional bonds where return is fixed and cannot change with the performance of the bond issuer. Also, sukuk transactions are cordially carried out as a buyer-seller relationship unlike the conventional bonds which is that of a borrow-lender.

A Compelling Case for Sukuk Bond in Nigeria

Nigeria has a huge population size of about two hundred million people. This is a large potential market for any Islamic finance product, - as seen by the overwhelming support for the recent oversubscribed debut Sukuk offer, issued by the Federal Government of Nigeria. Funds realized from the Offer, are intended to bridge the crucial road infrastructure gap in Nigeria, by providing for the construction and rehabilitation of 25 major roads across the 6 geo-political zones in the country. According to information from the Debt Management Office, investors ranged across a broad spectrum from Pension Funds, Banks and Fund Managers to Institutional and Retail Investors.2

There is no reason why this success cannot be easily replicated by the private sector. The Nigerian Government, through the Central Bank of Nigeria (CBN) has issued licenses to financial institutions such as JAIZ Bank Plc and Stanbic IBTC Bank3 to provide full Islamic Banking services to customers. With this step, Nigeria is poised to take full benefit of the potential growth of Islamic finance; just as witnessed in other parts of the world such as Malaysia, Indonesia, Saudi Arabia, Qatar and the United Kingdom. Even the widely acclaimed success of Dubai as a financial hub, is owed in part to application of a diverse range of finance products, including Islamic finance products – since as far back as; starting with the Dubai Islamic Bank.

Just like her foreign counterparts, the Nigerian Government has setup a legal framework for enhancing the prospects of Islamic finance, with a view to boosting investor confidence. The Investment and Securities Act 2007, is one of several laws and regulations regulating the issuance of sukuk in Nigeria. Also, there are CBN Guidelines for the regulation and supervision of institutions offering Non-Interest financial services in Nigeria4 and the Nigerian Deposit Insurance Corporation (NDIC) draft framework on Non-Interest (Islamic) Deposit Insurance Scheme.5 Also, the policy of allowing conventional banking institutions to offer Islamic Banking services; by having subsidiaries operating this window, is a good indication that Islamic Finance is here to stay in Nigeria.

Some of the concerns expressed about sukuk structures, is that they come close to the methods used for money laundering and criminal financing; by adding layers of financial intermediation, so that the true origin of funds or their use, is difficult to determine. Additional concerns have come from the use of off-shore centres for the location of the special purpose companies involved in the structures. The fact that these centres and structures have been commonplace in conventional finance, does not remove the concerns, but rather emphasizes them; especially following all that has been learned during the recent collapse of many structured vehicles. This has led to criticism of the perceived improper application of Islamic principles in Islamic finance, from some quarters of the leadership of the Islamic faith.

Despite criticisms, and possible abuses in some quarters, it is nonetheless evident that Islamic Finance is still an evolving concept with great potential particularly in developing economies like Nigeria. The Government of Nigeria has made considerable efforts towards creating an efficient legal framework for Islamic Finance transactions; which is in turn beginning to attract a lot of investors into the market. More however needs to be done to create awareness of the benefits of the finance products available. Also, priority should be given at this relatively early stage of Islamic Finance in Nigeria, to protecting investors and building customers' confidence in the Nigerian market. Now is the time for innovative investors, to seize the opportunities inherent in Islamic finance; after due consultation, and appreciation of the legal framework for their protection. It is also expected that as the market grows, the Nigerian Government will continue to anticipate and ensure that there are no loopholes in the legal framework – and that when there are breaches, the laws are enforced to the fullest extent possible.



Accounting and Auditing Organisation For Islamic Financial Institutions (AAOIFI) SS17


Jackson-Moore E, International Handbook of Islamic Banking and Finance (Global Professional Publishing 2009)

Saleem M, Islamic Banking-A $300 Billion Deception (Xlibris Corporation 2005)


Abdullahi N.A., Islamic Banking In Nigeria: Issues and Prospects (2016) Pg 11, Vol. 4(2) Journal of Emerging Economies and Islamic Research

Afshar T.A., Compare and Contrast Sukuk(Islamic Bonds) with Conventional Bonds, Are They Compatible? (2013) Pg 1, Vol. 9 The Journal of Global Business Management

El-Gamal M A, 'A Simple Fiqh-and-Economics Rationale for Mutualisation in Islamic Financial Intermediation' (2006) Houston: The Rice University. Retrieved June 20 (2011) Oladunjoye M.O., Sukuk As A Tool For Infrastructural Development In Nigeria (2014) Pg 343, Vol. 2(1) Journal of Islamic Banking and Finance


A Primer on Islamic Finance: Definitions, Sources, Principles and Methods

Alhaji Umar Ibrahim, NDIC (Lecture on Islamic Finance in Nigeria: Challenges And Options 26 July 2011)< > accessed 12 January 2018

The Vanguard Newspaper, (Federal Government of Nigeria Issues Bond 6 October 2017) < > accessed 13 January 2018

* This Article was written by Mr. Osaze Ogbomo. Osaze is an Associate with Perchstone & Graeys. He works out of the firm's Benin Office.


1 A Primer on Islamic Finance: Definitions, Sources, Principles and Methods


3 M.O. Oladunjoye, Sukuk As A Tool For Infrastructural Development in Nigeria (2014) Pg 343, Vol. 2(1) Journal Of Islamic Banking and Finance

4 Alhaji Umar Ibrahim, NDIC (Lecture on Islamic Finance in Nigeria: Challenges And Options 26 July 2011)<> accessed 12 January 2018  

5 Ibid

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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