Regulatory Alerts2016-10-06 | FMD/DIR/GEN/CIR/07/006Guidelines for Granting Liquid Asset Status to Sukuk Instruments Issued by State Governments
The Nigerian central bank, through its Central Bank of Nigeria (CBN) Financial Market Department, has provided guidelines on the issuance and approval process for State Government Sukuk to obtain liquid asset status. These guidelines stipulate that such Sukuk must meet specific criteria related to tenor, maturity, sinking funds, investment limits, approval, risk-weights, and general issues. Liquid assets are financial instruments that can be quickly converted into cash without causing significant losses or creating market imbalances. By obtaining liquid asset status, State Government Sukuk become eligible for certain benefits such as assignment of lower risk-weights for the capital adequacy ratio of banks. This designation also allows these securities to qualify as collateral in repurchase (repo) transactions at the CBN and count towards a bank's minimum liquidity ratio. To qualify for liquid asset status, State Government Sukuk must meet a set of requirements including having a tenor not exceeding 10 years, obtaining approval from both the Securities and Exchange Commission (SEC) and the Federal Minister of Finance, among other factors. Furthermore, banks are restricted to holding no more than 10% of the total amount outstanding of any single Sukuk issue and their portfolio in such securities should not exceed 30% of the bank's overall debt security holdings. These guidelines aim to promote transparency, financial stability, and the efficient functioning of Nigeria's financial markets. The Central Bank of Nigeria (CBN) retains the authority to review and update these guidelines as necessary.