The Case for Scaling Up Sukuk Financing in Nigeria – Daily Trust

The latest request by President Bola Tinubu to the National Assembly for approval to boost $20.52 billion and €1.045 billion in recent exterior loans has as soon as once more introduced Nigeria’s rising public debt burden into sharp focus. Although the President has justified the proposed borrowing on the grounds of the nation’s huge infrastructure deficit and the necessity to finance important initiatives throughout varied sectors of the financial system, the announcement has understandably generated appreciable concern amongst Nigerians.

These considerations can’t be dismissed as mere opposition to authorities borrowing. They have to be considered towards the background of Nigeria’s debt accumulation over the previous decade, the comparatively restricted seen affect of such borrowing on infrastructure improvement and the rising proportion of presidency income dedicated to servicing present debt. The elementary query Nigerians are asking is whether or not borrowed funds are being effectively deployed, transparently managed and translated into tangible developmental outcomes.

Nigeria’s public debt statistics present adequate grounds for this concern. As at June 30, 2026, the nation’s complete public debt stood at ₦166.79 trillion, comprising home debt of ₦91.59 trillion, representing 54.91 per cent, and exterior debt of ₦75.20 trillion, equal to $54.52 billion, representing 45.09 per cent of the entire. This represents an exceptional enhance from the ₦11.24 trillion public debt inventory recorded in December 2014.

While a part of this enhance displays naira devaluation, and the securitization of beforehand accrued obligations, the size of the growth over a comparatively brief interval raises legit questions on debt sustainability and the developmental returns on borrowed sources. More importantly, Nigeria’s debt problem shouldn’t be assessed solely via the standard debt-to-GDP ratio. Although this ratio might seem reasonable by worldwide requirements, the extra fast fiscal constraint is the nation’s capability to generate adequate income to service its obligations. Debt service has, in latest years, consumed an exceptionally excessive proportion of presidency income, averaging in extra of 70 per cent over the interval into account. This leaves progressively much less fiscal area for infrastructure, schooling, healthcare and different important public providers.

The composition of Nigeria’s debt portfolio additionally raises necessary questions concerning the extent to which borrowing has been linked to productive funding. The Federal Government’s home debt inventory excellent by devices as at June 30, 2026, stood at ₦86.99 trillion. Of this quantity, discretionary FGN Bonds accounted for ₦64.84 trillion, representing 74.53 per cent of the entire, together with ₦22.11 trillion in securitized Ways and Means advances. By comparability, FGN Sukuk excellent amounted to solely ₦1.19 trillion, representing 1.37 per cent, whereas FGN Green Bonds accounted for a mere ₦47.36 billion, or 0.05 per cent. The overwhelming dominance of typical authorities securities, significantly devices that aren’t essentially tied to particular infrastructure initiatives, contrasts sharply with the comparatively insignificant contribution of devices particularly designed to finance identifiable developmental investments. This is to not recommend that every one typical authorities bonds are unproductive or that their proceeds can’t finance capital expenditure. Rather, it highlights the necessity to rebalance the debt portfolio in the direction of financing devices that set up a clearer connection between borrowed funds and identifiable improvement initiatives.

The exterior debt portfolio presents a associated problem. Of Nigeria’s exterior debt inventory of $54.52 billion, Eurobonds account for a major proportion, amounting to about $18.55 billion. Although Eurobonds present entry to worldwide capital markets and may also help diversify the sources of presidency financing, they’re typically not structured round particular infrastructure belongings or initiatives. Their proceeds could also be utilized to broad budgetary functions, relying on the phrases of the issuance and the federal government’s acknowledged financing goals.

Furthermore, Nigeria faces substantial future Eurobond compensation obligations. The excellent compensation schedule features a $1.5 billion bullet compensation falling due in November 2027, adopted by important annual maturities from 2028 via 2034, earlier than repayments resume in 2036 and proceed into 2051. These obligations underscore the significance of fastidiously managing the nation’s refinancing and overseas alternate dangers. They additionally reinforce the necessity to rethink the composition and construction of future exterior borrowing relatively than regularly counting on typical debt devices with out adequate consideration to the developmental use of their proceeds.

It is towards this background that larger consideration ought to be given to Sukuk in its place and complementary instrument for financing Nigeria’s infrastructure necessities. Properly structured Sukuk present a chance to hyperlink the elevating of funds to obviously recognized belongings and improvement initiatives, thereby making a financing framework in which the aim of borrowing is extra clear and the appliance of proceeds may be extra successfully monitored. This makes Sukuk significantly related to a rustic searching for to deal with a major infrastructure deficit whereas concurrently rebuilding public confidence in authorities borrowing.

Nigeria isn’t ranging from scratch in this regard. The Federal Government launched its Sovereign Sukuk programme in 2017, and successive issuances have been deployed principally in the direction of the development and rehabilitation of federal roads throughout the six geopolitical zones and the Federal Capital Territory. The programme has demonstrated that Sukuk can mobilize substantial home monetary sources for identifiable infrastructure initiatives. At the subnational stage, Osun State issued an ₦11.4 billion Sukuk in 2013 to finance the development of 26 colleges, whereas Lagos State subsequently accessed the Sukuk market to finance street infrastructure. These experiences display that Sukuk is a financing instrument that may be deployed by each federal and state governments, no matter the non secular composition of their populations.

The outcomes achieved via the Federal Government’s present Sukuk programme present an necessary foundation for scaling up its use. The roads financed via successive issuances display the sensible connection that may be established between public borrowing and bodily infrastructure supply. However, with excellent Federal Government Sukuk accounting for solely about 1.37 per cent of the home debt portfolio, its present scale stays too small to make a transformational affect on the nation’s infrastructure deficit.

An necessary consideration is that Sukuk financing isn’t restricted to the home capital market. Both home and overseas loans may be sourced via Sukuk constructions. The Federal Government may subsequently discover worldwide sovereign Sukuk denominated in US {dollars}, euros or different appropriate currencies to mobilize long-term financing from worldwide banks, typical institutional buyers, sovereign wealth funds, pension funds and different international funding establishments. The proposed exterior borrowing of $20.52 billion and €1.045 billion gives a chance to look at whether or not a major proportion of the financing necessities could possibly be raised via worldwide sovereign Sukuk relatively than relying solely on typical exterior loans.

Different Sukuk constructions could possibly be deployed relying on the character of the initiatives. Al-Ijarah Sukuk may finance present or identifiable infrastructure belongings via leasing preparations, whereas Al-Istisna Sukuk could possibly be used to finance the development of latest infrastructure resembling roads, bridges, and energy amenities. Al-Musharakah may help commercially viable infrastructure investments involving partnerships between authorities and personal buyers. The flexibility of those constructions makes it attainable to develop a diversified infrastructure financing programme relatively than depend on a single financing mannequin. A fastidiously designed worldwide sovereign Sukuk programme may additionally appeal to buyers who would possibly in any other case not take part in Nigeria’s typical Eurobond issuances, thereby broadening the nation’s financing choices and investor base.

More importantly, the attraction of Sukuk lies in its potential to strengthen transparency and accountability in the utilization of public borrowing. One of the principal causes for public scepticism in the direction of authorities borrowing is the perceived disconnect between the quantities borrowed and the infrastructure outcomes delivered. Nigerians are more and more involved that governments accumulate huge debt obligations with out offering adequate details about the initiatives financed, the quantities disbursed, the bodily progress achieved and the financial returns generated. This notion has weakened public confidence in borrowing as an instrument of improvement. Sukuk may also help change this narrative, offered that its project-linked options are supported by efficient institutional and contractual safeguards.

Each issuance ought to determine the initiatives to be financed, their places, permitted prices, implementing companies and anticipated completion durations. The proceeds ought to be paid into devoted, ring-fenced accounts and launched solely towards verified mission expenditure. Independent technical auditors ought to certify work accomplished, whereas periodic public disclosures ought to present data on funds raised, quantities disbursed, excellent balances and precise bodily progress. Where applicable, particular objective autos ought to be established to manage the transactions and supply clear reporting and governance preparations.

This strategy can be in keeping with the spirit and goals of the Fiscal Responsibility Act 2007. The Act establishes necessary rules for accountable fiscal administration, together with the requirement that borrowing be undertaken for capital expenditure and human improvement, topic to the relevant statutory circumstances. Section 44 particularly supplies that authorities borrowing ought to be utilized solely to capital expenditure and human improvement, whereas the Act additionally supplies for transparency, accountability and prudent administration of public sources.

Indeed, Sukuk can present a sensible financing mechanism for advancing these goals by establishing a extra seen connection between the sources mobilized and the capital initiatives for which they’re meant. However, Sukuk ought to complement, relatively than substitute for, full compliance with the Act. The reality {that a} mortgage is raised via Sukuk doesn’t routinely set up that the borrowing satisfies the statutory necessities. Proper mission appraisal, legislative scrutiny, debt sustainability evaluation, procurement compliance and expenditure monitoring stay indispensable.

There can be a compelling case for state governments to embrace Sukuk extra actively. Given the large infrastructure necessities on the subnational stage, state governments ought to discover home Sukuk issuances to finance roads, colleges, water initiatives, markets and different important public infrastructure. States with viable revenue-generating belongings or identifiable public infrastructure initiatives may develop their very own Sukuk programmes, topic to the mandatory authorized approvals, credit score assessments and investor necessities.

This would deepen the home capital market, present institutional buyers with extra funding alternatives and cut back unique dependence on typical financial institution loans and authorities bonds. It would additionally encourage larger self-discipline in mission choice, preparation and implementation, since profitable Sukuk issuance requires clearly outlined underlying transactions and credible financing preparations.

By and huge, the problem isn’t whether or not borrowing by the federal government ought to cease altogether. A rustic with huge infrastructure deficits and improvement aspirations can’t fairly count on to finance all its necessities from present income. Borrowing, when correctly structured and prudently managed, may be an necessary instrument of financial transformation. The extra elementary situation is the standard, objective, construction and accountability of the borrowing. Nigeria should transfer away from a debt administration strategy that locations disproportionate emphasis on how a lot cash may be raised in the direction of one that offers equal, if not larger, consideration to what the cash will finance, how will probably be spent and what measurable financial and social advantages will accrue to residents.

The proposed $20.52 billion and €1.045 billion exterior borrowing ought to subsequently present a chance for a elementary rethink of the nation’s financing technique. Rather than an entire resort to traditional loans, the Federal Government ought to undertake a severe evaluation of the proportion of its proposed infrastructure financing that may be mobilized via worldwide Sukuk.

The National Assembly, in contemplating the proposed borrowing plan, must also request a comparative evaluation of typical exterior loans and Sukuk, together with their respective prices, compensation obligations, overseas alternate implications, underlying asset necessities and accountability mechanisms. This would allow legislators to contemplate not solely the quantity Nigeria intends to borrow but additionally the financing constructions that may finest help the supply of the initiatives for which the borrowing is meant.

It goes with out saying that Nigeria doesn’t essentially have a scarcity of financing devices. What it urgently wants is a financing framework that restores confidence in the connection between public borrowing and public profit. Scaling up Sukuk, in each home and worldwide capital markets, gives a chance to attain this goal. The comparatively small Sukuk issuances undertaken to this point have helped finance identifiable street infrastructure and demonstrated the instrument’s sensible relevance to Nigeria’s improvement wants. A considerable growth of the programme may make a a lot larger contribution to infrastructure improvement, whereas broadening the investor base and strengthening project-level transparency.

All mentioned, authorities borrowing shouldn’t merely create extra liabilities for future generations; it ought to create enduring belongings that enhance productiveness, develop financial alternatives and lift residing requirements. Sukuk, correctly structured and transparently administered, may also help Nigeria transfer nearer to that goal.

Uche Uwaleke, a monetary Economist, is Director of the Nasarawa State University Institute of Capital Market Studies and President of the Capital Market Academics of Nigeria. He can be a member of Daily Trust Board Of Economists.