The Central Bank of Nigeria (CBN) has set commercial banks’ investment in Islamic bonds issued by state governments to 10 per cent of the total amount on offer.
CBN’s Director, Financial Markets Department, Angela Sere-Ejembi, said the apex bank also fixed a maximum tenor of 10 years for the bonds.
“In view of the need to foster financial system and economic growth and development, as well as complement the efforts of government at various levels, the CBN has approved “Guidelines for Granting Liquid Asset Status to Sukuk Instruments Issued by State Governments”, to enhance the diversification of sources of funding for development at the sub-national levels,” she said.
She said financial deepening is gradually gaining ground in the Nigerian financial landscape with the introduction of new financial products, including non-interest financial instruments, to cater for the diverse financial needs of the populace and government at various levels.
The adoption of Sukuk issuance by state governments in Nigeria, as an alternative means of financing public expenditure, will contribute to the deepening of the financial system. In the same light, it is expected that other levels of government as well as interested supra-national financial organisations may get involved in Sukuk structuring at some time in the future.
She said to ensure the sustainability of this development, the CBN has considered the need to enhance the quality of Sukuk instruments, by issuing these guidelines to provide for eligibility for the grant of liquidity status to Sukuk issued by state governments at its discount window as well as for the purpose of liquidity ratio computation. This will further deepen the market and promote investment and secondary market activities.
The Sukuk issuance, she said, shall be backed by a law enacted by the relevant House of Assembly, specifying that a sinking fund to be fully funded from the consolidated revenue fund account of the state be established.
“The state government shall have in place a fiscal responsibility law, with provisions for public debt management, in order to enhance investor confidence. The state government shall establish a debt management department in order to ensure transparency and professional management of debt issues,” she said.
She continued: “The Sukuk shall, at inception and throughout its tenor, be of investment grade as determined by a rating agency accredited by the Securities and Exchange Commission (SEC). A SEC confirmation that the proceeds have been disbursed in line with the provisions of the prospectus shall be submitted to the Director, Financial Policy and Regulation Department (FPRD) of the CBN at the anniversary of the Sukuk issuance. Subsequently, SEC confirmation shall be required on amounts that have not been disbursed by the first anniversary.”
She added: “Repayment structure shall be from a funded sinking fund account (supported by a legislated irrevocable standing payment order (ISPO) and/or other legislated sources of repayments disclosed in the offer documents). The Trustee(s) to the Sukuk shall submit to Director, FPRD, CBN every six months: (a) a statement of accounts of the sinking funds’ investments and (b) a statement of declaration on the sufficiency of the sinking funds’ investments and investment income in meeting maturing and redemption obligations