The government has raised new domestic debt totalling Rs119 billion by selling one to five-year Sukuks (Shariah-compliant bonds) at the Pakistan Stock Exchange (PSX). This financing, secured at reduced rates, is intended to help bridge the widening budget deficit.
The Ministry of Finance surpassed its target of Rs100 billion during the 12-monthly Sukuk auction held on Thursday, achieving relatively higher financing. Financial institutions offered a substantial Rs451 billion against the target, with lower return rates ranging from 14.38% to 18.83%.
Regular Sukuk auctions at the stock market are aiding Shariah-compliant financial institutions in expanding their market share by increasing their financing to the government, raising new deposits, and growing their client base.
The rates of return on Sukuk are comparable to those offered by conventional banks for one to five-year Pakistan Investment Bonds (PIBs). Initially, the government secured financing at lower costs through Sukuk sales at PSX compared to PIBs offered by conventional banks.
Detailed data shows that the government borrowed Rs34.47 billion by selling one-year discounted Ijara Sukuk with a return rate of 15.99%. This rate is 1.23% lower than the previous auction due to a downward trend in the central bank's key policy rate. Additionally, Rs1.18 billion was raised through three-year Sukuk with a fixed return rate of 15%, which is 63.83 basis points lower than the prior auction. Another Rs21.14 billion was raised through five-year Sukuk at a fixed rate of 14.38%, which is 61 basis points lower than the previous auction
The Ministry of Finance also secured Rs28.18 billion through three-year Sukuk with a variable return rate of 18.59%, 1.35% lower than the reference rate of 19.94%. Another Rs34.49 billion was borrowed through five-year Sukuk with a variable return rate of 18.83%, 1.11% lower than the reference rate.
In an interview with The Express Tribune, Ahmed Ali Siddiqui, a top official at Meezan Bank, highlighted the rapid growth of Shariah-compliant banks. The market share of Islamic banks in deposits increased to 23.2% in the quarter ending March 2024, up from the previous quarter ending December 2023. Their share in financing also rose to 28% in the same period.
The regular Sukuk auctions have allowed Islamic banks to attract new deposits from clients, overcoming previous delays that had led banks to reject new deposits. According to the latest Islamic bulletin for the quarter ending March 2024, the State Bank of Pakistan reported a Rs170 billion (or 4%) increase in net investments by Islamic banking institutions compared to the previous quarter.
This growth in net investments was largely driven by funds invested by Islamic banking institutions in various domestic Government Ijarah Sukuk (GIS) issued by the government. The breakdown shows that Islamic banks (IBs) contributed Rs109 billion to the increase, bringing their total to Rs2,962 billion. Similarly, the net investment portfolio of Islamic banking branches (IBBs) grew by Rs61 billion, reaching a total of Rs1,443 billion by the end of March 2024.
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