Bond Is A Financial Instrument Not Political


My involvement in the establishment of the branch of the Nigerian Stock Exchange in Abeokuta prompted me to dabble into the bond issue in Ogun State, despite the level it has degenerated to.

I had the privilege of sitting beside the president of the Nigerian Stock Exchange, Oba Otudeko during the commissioning of the Ilorin branch of the Nigerian Stock Exchange. I said “sir, Kwara State with one ex-president has a branch of the Nigerian Stock Exchange, whereas Ogun State with four ex-presidents, and a serving president of the Nigerian Stock Exchange cannot boast of one”. He asked “can you do the runnings,” and I said yes. I accepted, he linked me up with Mrs. Yosola Akinbi, Economic Adviser to the Governor. We started and it was established.

Bonds are a species of loan. As evidence of the loan, the borrower issues a certificate which in most cases the investor will receive pre-determined rate of interest, called coupon plus the guarantee of repayment in nominal or cash terms at some future date.

What distinguishes bond from other loans is that they are transferable or negotiable. A bank normally keeps a conventional loan on its book until it is repaid, hence there is a continued relationship between the lender (a bank) and the borrower. A Bond on the other hand need not be held by the original lender (the investor) until it matures. Instead, it can be sold to another person or institution provided there is an adequate secondary market. This allows trading to take place in bonds which have been issued some time before. The original buyer of the security is able to liquidate the investment and is not “locked in” for the life of the bond. Bonds have lower interest rate than conventional loans of the bank.

The listing requirements for Local and State Government Bonds include:
•Detailed profile of the State/Local Government
•Feasibility report on the specific projects to be financed
•All Bonds must be project-tied
•A copy of the edict or law authorising the issue

Ogun State bond is not an exception. State/Local Governments are encouraged to patronise the Capital Market because of the enormous opportunities. Sura market on Lagos Island was financed by a bond issued by Lagos Island Local Government. Sand filling of Maroko was equally financed by bond issued by Lagos State Government. Many states including Bayelsa, Kwara, Lagos among others have issued one bond or the other. Those that expressed their views including Prof. Tella have only exercised their freedom of speech as entrenched in the 1999 Constitution. See Section 39(1) chapter IV.

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Ogun State Government is protected by virtue of Section 1b (1)(a) chapter 11 of the 1999 Constitution. Argument canvassed by Prof. Tella and others that Bond should not be raised to pay debts and that existing debts be verified are valid. The government on its own side said it wanted to use part of the bond to pay debts and  the rest for projects is equally protected. However, it is a parameter that a bond must be tied to a project.

The question is, is a debt a project? Financially, debt is a project and therefore  can be project-tied. Government can raise bonds to reduce financial burden of a state to prevent the economy of the state from being suffocated. If the monthly interest payment is over N400 million it amounts to about N5 billion annually.

Raising of bond would create economic breathing space and allow the state to function efficiently. However, it is the duty of the state government to state vividly the full details of the state financials to the members of the public: the reason why bond is required, what part of the bond would be used for debt payment and what projects would be executed with the balance and various areas of their locations.

The overall interest of the entire citizens of Ogun State should be considered when packaging the bonds. It should be noted that raising of bonds involves serious marketing in the capital market, therefore bond market should not be destroyed and damaged in Ogun State because individuals, institutional investors, foreign and local companies are the potential targets for bond marketing.

Ogun State is blessed with abundant human and natural resources that can take us to greater heights.

•Tayo Bello, a Capital Market     Consultant and Economist, Writes from Lagos. [email protected]

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