We are all aware of the crucial role played by infrastructure development in overall national development and the multiplier effect it has in creating social and economic well-being of societies. We have also witnessed how in modern times it has become one of the greatest spurs of economic growth of nations, opening employment opportunities, reducing the cost of production of goods and services, stimulating increase in the demand for goods and services and facilitating financial intermediation to mention but a few.
Infrastructure development projects are usually capital intensive with the investment amount normally lumpy, large and incurred at the initial stages of projects. Funding for these projects has historically been 100% government financed, and this has proved to be insufficient, volatile and in many cases resulting in inefficient allocation of resources that gives rise to ‘white elephant’ and abandoned projects that fail to achieve the development goals of the nation. Potential sources of funding as alternatives and/or complementary sources to government funding of infrastructure projects are seen as the viable solution proffered to address this problem. Private sector funding through Public Private Partnership (PPP) and other mechanisms is one of these potential sources.
In the past decade we have witnessed a growing application of Islamic finance to complement and in some cases serve as an alternative in financing infrastructure projects in various parts of the world. This has been done through various interests – free financing modes offered by syndications of Islamic financial institutions or through interest-free versions of conventional bonds called Sukuk. Sukuk are certificates that represent a proportional undivided ownership right in tangible assets or pool of assets that comply with the principles of Islamic finance. They do not pay interest but generate returns through actual transactions such as profit-sharing or leasing.
The Sukuk market is a fast growing one, reflecting increased investor interest in the instrument. According to the International Financial Services London (IFSL) 2010 research, recent years have shown that there is an appetite and demand for investment in Sukuk that goes well beyond Islamic investors among those investors that wish to gain exposure to diverse but high quality assets. An illustration of this growing interest is the concluded sovereign offering of Sukuk by the Malaysian Government which was over-subscribed by over 4.5 times in just six days, where a total of USD 9 billion in orders was received for a deal size of USD 2 billion. This was distributed globally with 29 percent of the Sukuk distributed to the Middle East, 27 percent to Malaysia, 22 percent to the rest of Asia, 14 percent to Europe and the remaining 8 percent to the United States.
Sukuk issuance has been by both corporate and public entities in both Muslim and non-Muslim countries. The private sector arm of the World Bank, the international Finance Corporation last issued its Sukuk in 2009 and it plans to issue Sukuk in the future every few years. The German Federal State of Saxony-Anhalt issued USD 123 million Sukuk as early as 2004 and more recently, General Electric (GE) issued USD 500 million lease-based Sukuk in November 2009. Japan after passing laws that allow banks to do Islamic finance is set to issue a sovereign Sukuk. Three different Japanese multinationals have issued both dollar-denominated and local currency denominated Sukuk out of Malaysia.
Sukuk have been used extensively for infrastructure projects in the oil and gas sector, water, power and transportation. They have served as alternatives to government funding or private debts for private concessionaires. Examples include Malaysia’s USD 5.87 billion Sukuk to develop the nation’s water infrastructure, and the Qatar- UAE Dolphin Project involving the production and processing of natural gas from Qatar and transportation of the dry gas by sub-sea pipeline across joint UAE- Qatari waters to the UAE, beginning in 2006.
The CBN has granted a license to Jaiz Bank for Islamic banking, the SEC has registered a number of Islamic Fund Management companies, and a number of insurance operators have opened windows for Islamic insurance, Takaful. All these types of institutions plus Pension funds wishing to cater for a section of their clients that are averse to interest-based financial products, are in need to alternative capital market products that are interest-free, which is a role that would be played by the Sukuk products. All efforts should be geared to see Nigeria develop as a global financial centre in the region, much like Hong Kong, Malaysia, Singapore, Dubai, the UK, etc , all of which have developed as Sukuk centres.
IDRIS JIBRIN
