Driving infrastructure devt through non-interest financing

During the last administration, the government borrowed massively to finance the development of the country’s dilapidated infrastructure. However, financial experts have advocated non-interest financing to develop its infrastructure; BENJAMIN UMUTEME writes.

Non Interest (Islamic) Finance is not a religious product/service restricted to Muslims alone but a series of financial products developed to meet the requirements of a specific group of investors.

It is built on principles that uphold a positive ethical message derived from the holy Quran and the Sunnah, moral considerations, fair and just trading practices. This includes the avoidance of ribah (interest and gharar), contractual and legal uncertainty, as well as leniency to debtors where the borrower can prove mitigating circumstances. Also avoided are investments in forbidden commodities such as alcohol, tobacco and companies whose debt exceeds one – third of its assets.

Its principles are built on the generation of wealth from legitimate trade and asset based investment. Risk should be shared between the capital providers and the expertise. Under non-interest finance, capital and labour are conceived as a single factor of production. Just as it is expected, that investment should have a social and an ethical benefit to the wider society beyond “pure return.”

Non-interest finance helps in the furtherance of financial inclusion, attracting foreign Direct Investment as well as attracting investment products amongst several others.

With its myriad of challenges the country faces in addressing its massive infrastructure deficiency, analysts say Nigeria’s fiscal authorities could turn to non-interest financing to bridge its infrastructure gap.

The Debt Management Office puts Nigeria’s total public debt stock as at June 30, 2023 at N87.38tn ($113.42bn). According to the debt office the surge was occasioned by the N22. 71 trillion ways and means advances obtained by the federal government from the Central Bank of Nigeria (CBN). And many financial experts say a large proportion of the debt was collected in the name of financing infrastructure development by the Muhammadu Buhari-led administration.

But the question many are asking is despite the huge sums borrowed, the country’s infrastructure remains decrepit.

Non-interest funding 

Speaking at the first annual Securities Exchange Commission Nigeria international forum on the non-interest capital market which was held recently in Abuja, Minister of Finance and Coordinating Minister of the Economy Wale Edun said the federal government was considering the non-interest market as a means of resolving funding challenges and reduce the country’s debt-to-revenue ratio.

The minister noted that with fiscal exhaustion being experienced by the country, a non-debt and equity financing mechanism that does not require payments of interest is the only way to go.

Edun reaffirmed the government’s commitment to fine-tuning sustainable forms of financing in line with the global climate action agenda, as well as the participatory opportunity provided by equity and non-interest finance to develop infrastructure.

He said, “Non-interest financing is a critical part of funding and that is because as we all know, we are faced with three crises right now which are the climate, and biodiversity.

“But there is also a debt crisis in major countries and of course, the available solution is non-debt, equity and financing mechanisms that will eliminate the pains of paying interest on loans. Rather, it is better to have a participatory opportunity that equity and non-interest finance gives.

“And so what we are saying here is a critical piece of the solution to the crises of the world currently, including the fact that for the rapid and inclusive growth this administration desires, we need to have green projects so we don’t only need to have projects funded by equity.

“As we all know, our debt service levels and revenue to debt service ratio are so high and currently constrained. There is fiscal exhaustion in many parts of the world and there is also a need to finance green projects. So the only way to grow our economy is not just relying on foreign direct investments, and domestic investments but tap into the world of non-interest financing.”

Critical role

On his part, the director-general of the Securities and Exchange Commission (SEC), Lamido Yuguda, said non-interest financing can play a critical role as the federal government looks to bridge the country’s huge infrastructure gap.

According to him, with almost N1 trillion raised through Sukuk to finance 5000 kilometres of critical roads and bridges, non-interest financing was the way to go for Nigeria.

Yuguda said the oversubscription of the most recent 6th Sovereign Sukuk by 435% underscores investor confidence, showcasing the strategic role of Sukuk in infrastructure development and financial inclusion.

“We are all aware that sukuks backed by assets promote risk sharing in high-risk projects, offer flexibility in project stages and foster public-private partnerships.

“Therefore, Sukuks are a good structure for infrastructure financing, as they clear the issuer’s balance sheet of debt, given that the investors own the assets to be financed and share in the gains from such assets. This is really an attractive capital market instrument to be explored by both corporates and governments at all levels.

“The non-interest capital markets have a huge role to play in the current economic program being pursued by the administration of His Excellency, President of the Federal Republic of Nigeria, Chief Bola Ahmed Tinubu, GCFR. We are of the belief that the country’s economy cannot reach its target size without a lot of investments in critical infrastructure. Indeed, with the high debt-service to revenue ratio, sukuks present a viable alternative to other modes of financing.

“The non-interest capital markets have a huge role to play in the current economic program being pursued by this administration. We believe that the country’s economy cannot reach its target size without a lot of investments in critical infrastructure. Nigeria has the potential to join the league of global Islamic finance jurisdictions if we could address issues, such as inadequate awareness

“Nevertheless, the government must be visionary and place a premium on the kind of project it intends to deploy non-interest finances on as a way of demonstrating prudence.

“On the other hand, non-interest finance comes with its own terms and conditions that are very unique and business-like in nature. Here we are talking about a financing facility that may not accommodate moratorium, buy back or even due payment date extension factors.

“We acknowledge the fact that parties involved would deliberately fashion out the best possible terms and conditions suitable and mutually beneficial to all parties. Instructively, as earlier pointed out, non-interest financing is a great deal to help address our infrastructure gaps as well as reduce fiscal imbalance in our economic and governance system, yet we must take such a facility with the depth of ensuring it is business-like.”