Govt raises Rs46b through Sukuk

The government has raised Rs46.44 billion through the issuance of Ijarah Sukuks under the new series launched in October 2022 to finance the budget deficit and promote Shariah-compliant banking in Pakistan. Speaking to the Express Tribune, Meezan Bank Senior Executive Vice-President and Head of Shariah Compliance, Ahmed Ali Siddiqui said, “Under the new series, the government has started issuing Ijarah Sukuk bonds against the assets of the National Highway Authority (NHA).”

The Ijarah Sukuks are Shariahcompliant bonds. The government issues the Sukuk to Islamic institutions which generate income by renting out the assets to the government. The latest rental Sukuk is a variable bond issued for a period of five years. Meezan Bank along with Dubai Islamic Bank and Al Falah Islamic Bank led the latest transaction as joint financial advisors to the Ministry of Finance. “The government may issue Sukuk worth around Rs600 billion against the NHA assets over the next few months,” estimated Siddiqui.

As “the government has targeted issuing Sukuk bonds worth around Rs1 trillion in the current fiscal year 2023,” it may identify new assets to issues more Sukuks in the next series later on. The ministry of finance has issued Sukuks worth Rs160 billion in the current fiscal year started July 1, 2022, including the latest one worth Rs46.44 billion. Under the previous series, in the prior six months (April – September 2022), the government issued Sukuks worth Rs624 billion against Civil Aviation Authority’s (CAA) assets, including Karachi, Lahore and Islamabad airports.

So far, the government issued the Shariah-compliant bonds worth Rs3.7 billion, including the one that matured, since the first Sukuk issued in 2008 in Pakistan. It was learnt that the outstanding amount of Sukuks in place are estimated to be around Rs2.44 trillion. The outstanding worth of Sukuk stands equivalent to a little over 12% of the domestic debt raised from local banks. The rest of the slightly less than 88% (Rs17.48 trillion) debt was raised through conventional banks. About a year ago, the government targeted raising debt from banks to 10% from Shariah compliant banks in its medium-term strategy.

A senate’s resolution passed in 2018, however, urged the government to increase its share of domestic debt from Shariah-compliant banks to 30%, which is far away from the current market share of 12%. Industry officials are of the view that, “The cost (rate of return) of Shariah-compliant bonds stands low compared to the one the government pays on conventional debt securities like T-bills and Pakistan Investment Bonds (PIBs)”. “In the recent months, the finance ministry has issued a Sukuk which costs (rate of return) 100 basis points less than the conventional bonds.

The low cost has saved millions of rupees in interest payments to the government,” an industry official claimed. The officials said, “Shariahcompliant banking is gaining traction in the country as more and more people, and businesses, shift to Islamic banking. On average, 1% of banking customers (deposits) are shifting to Islamic banking every year.” In terms of deposits, the market share of Shariah compliant banks has grown to over 19% at present, compared to 12-13% in 2015. Besides, their share in housing finance and car-financing hit the range of 50%-60% each.