Infrastructure Financing through Islamic
Finance in the Islamic Countries
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4.3.6.1. Islamic Banks
The Islamic banks participate in the financing of schools and houses. As of 31st December 2017,
the industry’s financing of schools and houses has amounted to about USD 55.22 million
(Annual report 2017, Management Account Dec. 2017). Islamic banks have mainly employed
Ijarah wa Iqtina and Istisna as modes of financing these types of infrastructure needs. Noble
Hall Academy and Bima Housing Estate are classical cases of such financing by the Islamic
banks in the Federal Capital. Given the huge infrastructure financing gap, enormous
opportunities exist for Islamic banks in terms of infrastructure financing. However, the sector
is being challenged by a number of factors which limit their ability to finance infrastructure
development. Firstly, the regulatory prudential requirement capped the limit to which an
Islamic bank can be exposed to a single obligor at a maximum of 20% of its Shareholders’
funds unimpaired by losses. Additionally, aggregate large exposures in any Islamic bank
should not exceed eight times the Shareholders’ funds unimpaired by losses (PG 2010).
Secondly, similar to the conventional banks, granting financing with longer maturities as
required by infrastructure investment will pose a serious challenge to Islamic banks.
4.3.6.2. Islamic Capital Market
The industry’s current involvement in infrastructure financing is put at about USD 289.33
million derived from Sovereign and Subnational Sukuk. The Subnational Sukuk financed the
construction of schools while the Sovereign Sukuk was deployed to the construction of 25
priority roads around the country (Udoma 2018). These Sukuk were Ijarah-based Sukuk. The
huge infrastructure financing gap as well as the long-term nature of infrastructure investment
present great prospects for Sukuk issuance in Nigeria. Both sukuk issuances were
oversubscribed, indicating the high demand for an alternative form of investment. Both sukuk
were Ijarah-based and their features were briefly presented as case studies below.
4.3.6.3. Case Studies
Case Study: Subnational Osun Sukuk
The Osun State Government issued the first Sukuk in the country in 2013 in order to raise
funds for the purpose of building schools. The State Government, through a Special Purpose
Company (Osun Sukuk Company Plc), issued the first Sukuk worth N11.4 billion ($37.28
million) on the 8th of October 2013 under the Osun State N60 Billion Debt Issuance
Programme to fund the development of 20 High Schools, 2 Middle Schools and 2 Elementary
Schools in the state (Oladunjoye (2014)).
The Osun Sukuk Company Plc was incorporated by Osun State Government as a Special
Purpose Company (SPC) for the issuance of the Sukuk. The Sukuk was structured as Al-Ijarah.
The SPC issued the Sukuk certificates to the investors and the proceeds realized represented
the cost of the construction of the Schools, being the Ijarah assets which are in held in trust on
behalf of the investors by the SPC. The investors have no recourse to any assets of the SPC
other than the Sukuk assets and they can freely trade the Sukuk on the secondary market. The
SPC under an agency agreement appointed the Osun State Government (OSG) to engage a
construction company to construct the schools, obtain all government approvals, manage the
operational and financial aspects of the construction for a prescribed fee, and transfer the
agreed cost of construction to the OSG. The SPC forward-leased the schools to the State
Government against rental payments which would be remitted to the issuer to make