Hybrid Sukuk: Transforming Pakistan’s economy through sustainable Islamic finance

Pakistan's launch of the Hybrid Sukuk can be regarded as a novel approach to Islamic finance amid rising debt burdens, uncertainties, and the need for ethical practices in today's financial system.

These Shariah-compliant instruments combine features of conventional and modern financing, thus providing for more flexibility and variety. Additionally, they eliminate the main issue affecting the implementation of sovereign Sukuk instruments: the lack of unencumbered government property.

The first Hybrid Sukuk issuance in Pakistan occurred in April 2026, indicating strong investor confidence in ethical and asset-backed financing instruments. The subscription reached Rs290 billion, surpassing the initial goal of Rs200 billion.

In terms of its structure, the issue comprised a 1-year discounted fixed-rate Hybrid Sukuk and a 10-year Hybrid Sukuk with a rental variable rate. They are part of the government's strategy to diversify its funding sources through Islamic financing instruments.

The mentioned project included the participation of the Debt Management Office (DMO) of the Ministry of Finance, the State Bank of Pakistan, and the Securities and Exchange Commission of Pakistan. Leading Islamic financial institutions have served as the joint financial advisors in this initiative.

Hybrid Sukuk is not merely a new financing instrument; it is also an example of how to ensure the resilience and fairness of financial systems in line with real economics. Given Pakistan's existing financial difficulties and the need to fund infrastructure development, the issuance of such a Sukuk is expected to benefit the country.

The evolution of Islamic finance in Pakistan

The development of Islamic finance in Pakistan began in the 1980s with efforts to make financial practices and institutions Shariah-compliant. Nevertheless, several legal obstacles complicated the introduction of this reform.

Furthermore, doubts about the reform's interest-free nature contributed to its failure. Ultimately, the Pakistani government introduced a parallel banking system in which both Shariah-compliant and non-Shariah-compliant financial organizations could function.

Since then, due to various actions taken by the State Bank of Pakistan, the proportion of Shariah-compliant financial assets in the country has increased significantly. Moreover, it was encouraged by the introduction of the MTDS for FY20-FY23, which required that 10 per cent of government securities be made Shariah-compliant by 2023.

Another benefit of developing the Sukuk market is the ability to address another issue related to Islamic financing in the country. Namely, the problem of liquidity surplus, along with the lack of Shariah-compliant financial instruments, can be easily solved through creating the Sukuk market.

The use of different sovereign Sukuk instruments will enable Islamic financial institutions to manage liquidity effectively while funding infrastructure projects. At the same time, this trend is also associated with the Maqasid al-Shariah purposes.

Pakistan’s Hybrid Sukuk Framework

The development of the Asset Light Sukuk (ALS) Framework in September 2021 represents an unprecedented development for Islamic finance in Pakistan. Whereas traditional Sukuk depend heavily on tangible government-owned assets, such as property and buildings, the new ALS Framework allows Sukuk to be backed by a range of assets, including receivables, development projects, and contractual structures.

The ALS Framework includes multiple Shariah-oriented structures that facilitate sovereign Islamic financing, such as Wakala, Istisna-Ijarah, and Musharaka-Ijarah. Such structures enable easy financing of large public infrastructure projects, such as healthcare facilities, transport infrastructure, and educational centers.

An unprecedented event occurred when Pakistan issued its first-ever Hybrid Sukuk on April 16, 2026. This particular issue was made through Pakistan Domestic Sukuk Company Limited (PDSCL) and registered on the Pakistan Stock Exchange (PSX). It is a hybrid of two different Shariah structures: Ijarah SLB and Commodity Murabaha.

Approximately 55 per cent of the underlying asset pool in this Sukuk consisted of Ijarah assets, while the remaining 45 per cent was allocated to Murabaha financing. It is a significant step for Pakistan because it allows it to comply with AAOIFI Shariah standards for sovereign Sukuk while overcoming the difficulties inherent in fully asset-backed structures.

One of the problems with asset-backed Sovereign Islamic finance in developing economies relates to the scarcity of the government's unencumbered assets. It limits both the number of potential Sukuk and their volume. However, by adopting an asset-light structure based on Ijarah leasing and commodity Murabaha, the government diversified its asset pool without violating Shariah requirements.

Such innovations help the government to diversify financing channels and increase the efficiency of its debt financing practices. The new hybrid Sukuk provides a great level of stability while still allowing for asset diversification. As a result, the government can achieve sustainability in its long-term financing activities.

There was a massive response from investors, which led to the issuance being oversubscribed multiple times. It was followed by the issuance of two Hybrid FRR Sukuk in April 2026, one with a three-year maturity and the other with a five-year maturity.

Strategic and economic significance

A hybrid Sukuk offers several advantages for the government and investors. Since the government will resort to alternative financing methods rather than borrowing as usual, the pool of investors will also grow. Through Islamic financing, ethical investors and firms that follow the principles of Islamic law can help the government enjoy greater stability when repaying loans.

Moreover, due to the backing of Sukuk by assets and its risk-sharing characteristics, Hybrid Sukuk is highly effective in providing financial stability. Compared to bonds, which are basically debt instruments, Hybrid Sukuk involve real assets and support productive economic activity. Consequently, there would be greater transparency, reduced speculation, and a stronger link between finance and production. The combination of Ijarah and Murabaha elements will also help issuers balance risk and return on investment while reducing market risk exposure.

Thirdly, the underlying ethics of Sukuk align with the current global trend towards sustainability and ethical investing. The focus on transparency, equity, and social responsibility is very much in line with ESG factors. Looking ahead, Hybrid Sukuk may serve as an ideal vehicle for financing renewable energy, health care systems, education, and green infrastructure development projects.

Finally, from a macroeconomic standpoint, the establishment of a well-functioning Sukuk market may help reduce sovereign debt costs, deepen domestic capital markets, and attract foreign direct investment. Malaysia and Indonesia are already demonstrating that Islamic capital markets can finance efficient infrastructure development as part of their national economic modernization processes.

Challenges and the road ahead

Unfortunately, despite numerous advantages, some important problems persist within the Pakistani Hybrid Sukuk market. Firstly, public awareness is quite low in this domain, while there is inconsistency in the interpretation of Shariah requirements, along with relatively expensive issuance procedures.

Secondly, some researchers have doubts about the risk-sharing aspects of certain Sukuk structures.

To promote the long-term development of the country's Sukuk market, policymakers should prioritize regulatory harmonization, the development of relevant institutions, and investor education.

The use of innovative technological solutions, like the issuance and trading of blockchain-based smart Sukuk and Sukuk tokenization, could also bring additional benefits.

The following policy recommendations seem to be most relevant in this situation:

1. Increase public knowledge concerning Islamic capital market products.

2. Support innovations in Sukuk issuances and trading systems through technology.

3. Develop incentives for green Sukuk aligned with “Maqasid al-Shariah”.

4. Foster cooperation with global Islamic finance institutions.

With these reforms implemented, Pakistan can become a prominent Islamic finance center in the region and promote sustainable economic development. The launch of the Hybrid Sukuk in Pakistan is a remarkable milestone in Islamic finance and in sovereign debt management more broadly. Thanks to this innovation, Islamic capital markets have obtained an additional instrument that enables financing that is both financially efficient and ethically responsible.

The interest in the Pakistani Hybrid Sukuk demonstrates that using Islamic capital market solutions to address various issues can yield positive results for all parties involved. Moreover, the creation of this kind of Sukuk reflects the values of “Maqasid al-Shariah”. By overcoming typical limitations related to available assets, this innovation has enabled Pakistan to create an alternative path for the development of sovereign Islamic financing.

The writer is a Vice President at Meezan Bank Limited.