CBN makes Sukuk Bond attractive to state government

…Approves guidelines for granting liquid asset status  

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 Central Bank of Nigeria (CBN) has approved “Guidelines for Granting Liquid Asset Status to Sukuk Instruments Issued by State Governments”.

The apex bank aim is to enhance the diversification of sources of funding for development at the sub-national levels.

The CBN in the new guidelines released signed by Director, Financial Markets Department, CBN, Dr. Alvan Ikoku 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.

CBN stated that 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.

“Accordingly, to ensure the sustainability of this development, the Central Bank of Nigeria (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 new guidelines said, Sukuk issuance shall be backed by a law enacted by the relevant State House of Assembly, specifying that a sinking fund to be fully funded from the consolidated revenue fund account of the state be established.

It stated that, the state government should have in place a fiscal responsibility law, with provisions for public debt management, in order to enhance investor confidence.

On utilisation of proceeds, it said, 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.

According to the new guidelines, tenor of the Sukuk for the state government shall be limited to a maximum maturity of ten years, in order to be considered for liquid asset status.

To be able raise the fund, CBN said the state government shall provide evidence of approval from both the SEC and the Federal Minister of Finance for the issuance of the Sukuk.

“The maximum investment a bank shall make in any Sukuk issuance of a state government or its agencies is limited to 10 per cent of the total amount outstanding of that Sukuk. This is an investment limit per issue and not per issuer.

The aggregate portfolio of a bank in Sukuk issued by state governments and their agencies shall not exceed 30 per cent of the bank’s total portfolio in debt securities. Debt securities for this purpose include: Nigerian Treasury Bills, FGN Bonds, FGN-guaranteed notes, sovereign debt notes, and any other Nigerian sovereign debt securities, CBN bills, bonds collateralised with FGN bonds, state government bonds, state government agency bonds, corporate bonds and dated preference shares.

The underwritten positions of the state government Sukuk shall not be regarded as investments and, therefore, will not be considered in determining these limits. However, a monthly return on the underwritten positions and the sell-off strategy shall be rendered to the Director, Banking Supervision Department (BSD) of the CBN”, CBN Sukuk guidelines said.

Guidelines For Granting Liquid Asset Status To Sukuk Instruments Issued By State Governments