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

The current request by President Bola Tinubu to the National Assembly for approval to lift $20.52 billion and €1.045 billion in contemporary 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 vital tasks throughout varied sectors of the economic system, the announcement has understandably generated appreciable concern amongst Nigerians.

These issues 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 impression of such borrowing on infrastructure growth and the rising proportion of presidency income dedicated to servicing current debt. The basic 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 ample 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 overall. This represents an outstanding 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 reliable questions on debt sustainability and the developmental returns on borrowed sources. More importantly, Nigeria’s debt problem shouldn’t be assessed completely by way of the traditional debt-to-GDP ratio. Although this ratio could seem average by worldwide requirements, the extra rapid fiscal constraint is the nation’s capability to generate ample income to service its obligations. Debt service has, in current years, consumed an exceptionally excessive proportion of presidency income, averaging in extra of 70 per cent over the interval into consideration. This leaves progressively much less fiscal area for infrastructure, schooling, healthcare and different important public companies.

The composition of Nigeria’s debt portfolio additionally raises vital 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 overall, 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 standard authorities securities, notably devices that aren’t essentially tied to particular infrastructure tasks, contrasts sharply with the comparatively insignificant contribution of devices particularly designed to finance identifiable developmental investments. This is to not recommend that every one standard authorities bonds are unproductive or that their proceeds can’t finance capital expenditure. Rather, it highlights the necessity to rebalance the debt portfolio in direction of financing devices that set up a clearer connection between borrowed funds and identifiable growth tasks.

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 will help diversify the sources of presidency financing, they’re usually not structured round particular infrastructure belongings or tasks. Their proceeds could also be utilized to broad budgetary functions, relying on the phrases of the issuance and the federal government’s acknowledged financing targets.

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 by way of 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 change dangers. They additionally reinforce the necessity to rethink the composition and construction of future exterior borrowing quite than regularly counting on standard debt devices with out ample consideration to the developmental use of their proceeds.

It is towards this background that better consideration ought to be given to Sukuk instead 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 growth tasks, thereby making a financing framework in which the aim of borrowing is extra clear and the appliance of proceeds might be extra successfully monitored. This makes Sukuk notably related to a rustic looking for to handle a major infrastructure deficit whereas concurrently rebuilding public confidence in authorities borrowing.

Nigeria shouldn’t be ranging from scratch in this regard. The Federal Government launched its Sovereign Sukuk programme in 2017, and successive issuances have been deployed principally in 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 tasks. 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 highway infrastructure. These experiences show 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 by way of the Federal Government’s current Sukuk programme present an vital foundation for scaling up its use. The roads financed by way of successive issuances show 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 impression on the nation’s infrastructure deficit.

An vital consideration is that Sukuk financing shouldn’t be restricted to the home capital market. Both home and overseas loans might be sourced by way of Sukuk constructions. The Federal Government might subsequently discover worldwide sovereign Sukuk denominated in US {dollars}, euros or different appropriate currencies to mobilize long-term financing from worldwide banks, standard institutional buyers, sovereign wealth funds, pension funds and different world funding establishments. The proposed exterior borrowing of $20.52 billion and €1.045 billion affords a chance to look at whether or not a major proportion of the financing necessities may very well be raised by way of worldwide sovereign Sukuk quite than relying completely on standard exterior loans.

Different Sukuk constructions may very well be deployed relying on the character of the tasks. Al-Ijarah Sukuk might finance current or identifiable infrastructure belongings by way of leasing preparations, whereas Al-Istisna Sukuk may very well be used to finance the development of latest infrastructure akin to roads, bridges, and energy amenities. Al-Musharakah might assist commercially viable infrastructure investments involving partnerships between authorities and personal buyers. The flexibility of those constructions makes it doable to develop a diversified infrastructure financing programme quite than depend on a single financing mannequin. A fastidiously designed worldwide sovereign Sukuk programme might additionally entice buyers who may in any other case not take part in Nigeria’s standard Eurobond issuances, thereby broadening the nation’s financing choices and investor base.

More importantly, the enchantment 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 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 ample details about the tasks 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 growth. Sukuk will help change this narrative, supplied that its project-linked options are supported by efficient institutional and contractual safeguards.

Each issuance ought to establish the tasks to be financed, their places, authorized 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 function automobiles ought to be established to manage the transactions and supply clear reporting and governance preparations.

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

Indeed, Sukuk can present a sensible financing mechanism for advancing these targets by establishing a extra seen connection between the sources mobilized and the capital tasks for which they’re meant. However, Sukuk ought to complement, quite than substitute for, full compliance with the Act. The reality {that a} mortgage is raised by way of 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 also 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 tasks, markets and different important public infrastructure. States with viable revenue-generating belongings or identifiable public infrastructure tasks might develop their very own Sukuk programmes, topic to the required authorized approvals, credit score assessments and investor necessities.

This would deepen the home capital market, present institutional buyers with extra funding alternatives and scale back unique dependence on standard financial institution loans and authorities bonds. It would additionally encourage better 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 shouldn’t be whether or not borrowing by the federal government ought to cease altogether. A rustic with huge infrastructure deficits and growth aspirations can’t moderately anticipate to finance all its necessities from present income. Borrowing, when correctly structured and prudently managed, might be an vital instrument of financial transformation. The extra basic problem is the standard, function, construction and accountability of the borrowing. Nigeria should transfer away from a debt administration strategy that locations disproportionate emphasis on how a lot cash might be raised in direction of one that provides equal, if not better, consideration to what the cash will finance, how it will likely 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 basic rethink of the nation’s financing technique. Rather than an entire resort to standard loans, the Federal Government ought to undertake a severe evaluation of the proportion of its proposed infrastructure financing that may be mobilized by way of worldwide Sukuk.

The National Assembly, in contemplating the proposed borrowing plan, also needs to request a comparative evaluation of standard exterior loans and Sukuk, together with their respective prices, compensation obligations, overseas change implications, underlying asset necessities and accountability mechanisms. This would allow legislators to think about not solely the quantity Nigeria intends to borrow but in addition the financing constructions that may finest assist the supply of the tasks 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, affords a chance to attain this goal. The comparatively small Sukuk issuances undertaken to date have helped finance identifiable highway infrastructure and demonstrated the instrument’s sensible relevance to Nigeria’s growth wants. A considerable growth of the programme might make a a lot better contribution to infrastructure growth, whereas broadening the investor base and strengthening project-level transparency.

All stated, authorities borrowing shouldn’t merely create extra liabilities for future generations; it ought to create enduring belongings that enhance productiveness, broaden financial alternatives and lift residing requirements. Sukuk, correctly structured and transparently administered, will 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 also be a member of Daily Trust Board Of Economists.