The planned 7-year paper would be the first sukuk bond to be issued in Africa's second-biggest economy and is part of a 60 billion naira debt raising programme by Osun State, which started last year, the banking source told Reuters.
Nigeria is home to the largest Muslim population in sub-Saharan Africa, with around half of its 160 million people members of the Islamic faith. It is also home to one of Africa's fastest growing consumer and corporate banking sectors.
The Osun bond will be issued through a book-building process which will earn a return for sukuk holders via a semi-annually paid rent structure called the Ijara, the source said, targeting local pension funds and international investors on the bond.
Local credit rating agency Agusto & Co has assigned an A rating to the note which will be listed on the Nigerian Stock Exchange, said the banking source, adding that Osun was waiting for Securities and Exchange Commission (SEC) approval to start marketing the bond.
In March, Nigeria's SEC approved new rules allowing firms to issue Islamic bonds, a move aimed at attracting Middle Eastern investors.
The south western state of Osun, which is home to around 2.3 million people, issued a 30 billion naira bond last December priced at 14.75 percent, maturing in 2019.