In light of the recent global and economic financial crisis, particularly in Nigeria, business enterprises and Governments alike have realized the important need to diversify in the area of raising capital to finance capital projects. One of such ways identified and emerging in Nigeria is the issuance of bonds (by corporates or Governments). Hence, the need to nurture a strong and viable domestic bond market has become inevitable.

Bonds are debt instruments and suffice to say that issuing bonds come with certain risks. Investors, especially in a country like Nigeria, may not see the need to take such investments risks which may manifest in the inability of the issuer to meet its obligations in terms of coupons and/or principal payments. The foregoing, coupled with the high transaction costs (including tax) to both the issuer and investors, have in no small measure, impeded the development of the Nigerian domestic bond market. In fact, it is common knowledge that Federal Government bonds (FGN Bonds) have enjoyed more patronage from investors simply because they have been tax free in addition to being risk averse.

In a bid to enhance the development of the domestic bond market in Nigeria, players in the industry have pushed for tax waivers in the hope that an eventual grant of these would help to reduce the dominance of FGN Bonds in the Nigerian investment market as well as address some of the factors militating against the development of a vibrant sub-national and corporate bond market. The provision of tax waivers/rebates have been linked to the development of a healthy domestic bond market as it then gives debt securities a better platform to compete against equities as investment options of choice.

Pursuant to the above, the Bond Market Steering Committee (BMSC)1, through its chairman, the Honourable Minister for Finance, submitted a paper highlighting certain suggestions to the Nigerian Government relating to workable initiatives for the development of the Nigerian domestic bond market, especially in its sub-national and corporate segments. Among the initiatives suggested were tax waivers and stamp duty reduction. In a welcome development, following the BMSC's submission, the Acting President of the country on March 16, 2010 approved a waiver of taxes on a range of debt securities (i.e. Federal, Sub-national, corporate and supra-national bonds, mortgage-backed securities and asset-backed securities) and short term securities issued by the Federal Government of Nigeria, such as Nigerian Treasury Bills. The approval includes a reduction in stamp duties for the re-issues of previously executed debentures to 20% of the stamp duty payable on a new debenture of the same value.

The tax exemptions granted shall be for an initial period of ten years and are to include (in addition to the exemptions for bonds previously granted under the Companies Income Tax Act) taxes under: The Personal Income Tax Act, Value Added Tax and the Capital Gains Tax Act.

The benefits of the tax exemptions granted can be highlighted as follows:

  • Sub-nationals and corporate entities can now access long term capital by issuing bonds at a relatively cheaper cost than they would have if there had been no tax exemptions.
  • A level playing field is created for all bonds regardless of the issuer2.
  • Multilaterals such as the World Bank, International Finance Corporation and the African Development bank among several others can issue bonds which will be exempt from Nigerian taxes. The effect of this would serve to encourage multilaterals to participate in the development of the Nigerian domestic bond market while the perception of Nigeria in the international financial markets will be improved.
  • The tax exemptions will increase the range of securities/options available to investors, encourage the development of new products and attract foreign investors to the domestic capital market.
  • Issuers would have an opportunity to raise more stable capital from a large investor base at a relatively lower cost.
  • It would help improve the lull in the capital market and also help even out the imbalance between interest in equity versus debt securities.
  • It is hoped that the subsequent investment activities that should necessarily follow the waivers would ultimately translate into an increase in Nigeria's Gross Domestic Product.

No doubt, the waivers granted by the Federal Government of Nigeria are long over due and can best be described as a welcome development; however, it is hoped that all the necessary Government parastatals would create the required legislative as well as administrative processes that will be required for a seamless transfer of the approvals from its current state (i.e. Government paper/position) to an operational reality, within a short period of time.


1. THE BMSC is a body with a mandate to drive the growth of all segments of the domestic bond market. Its members include regulators (Debt Management Office, Securities and Exchange Commission, Central Bank of Nigeria, The Nigerian Stock Exchange, National Pension Commission, Federal Inland Revenue Service and National Insurance Commission) and private operators under their trade or professional associations ( Association of Issuing Houses of Nigeria, Financial Markets Dealers Association, Primary Dealer Market Makers Association, Nigerian Discount Market Association, Association of Corporate Trustees and the Chartered Institute of Stockbrokers).

2. This is bearing in mind the fact that only Federal Government Bonds were tax exempt.

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.