In countries
like Pakistan the governments facing shortage of revenue, indulge in borrowing
to meet their developmental expenditures. While the conventional banks have
been the key beneficiaries of such borrowing, Islamic financial institutions
(IFIs) face serious liquidity management problems as these can’t invest in Riba-based
instruments like Treasury Bills and Pakistan Investment Bonds. Issue of
Sovereign Ijara Sukuk and corporate Sukuk on one hand offers an opportunity to
invest in Riba-free instruments and on the other hand opens a venue for IFIs
to manage their liquidity in a more prudent manner. Over the years the
Government of Pakistan (GoP) has successfully mobilized funds for the
infrastructure project and the latest being mobilization of over Rs49 billion
equivalent to US$495 million though another Ijarah Sukuk.
Through this
Sukuk the State Bank of Pakistan (SBP) has mobilized funds against M-3 Motorway
for a period of three years. This is the first Sukuk that has been issued
during the current fiscal year (2014-15). M-3 is a 52 kilometer long strip of
motorway situated in Punjab that connects Faisalabad with M-2 near Pindi Bhattian.
This Sukuk
has been issued in accordance with the provisions of the Ijara Sukuk Rules
2008. As per transaction mechanism, profit on the GOP Ijara Sukuk will be based
on the rental rate benchmarked against the latest weighted average yield of the
6 month Market Treasury Bills or 6-month PKRV (as per FSCD circular 13 dated
September 06, 2008). In addition, the rental rate as mentioned may be adjusted
based on the difference between estimated supplementary rental and actual
maintenance expenses of the underlying asset.
Further, it
was also decided that for this particular issue of Sukuk (M-3), the total
auction participation of a single Primary Dealer (PD) would be capped at Rs 25
billion or 20 per cent (whichever is the lower) of Total Demand and Time
Liabilities-Islamic (excluding FE-25 deposits) of the respective PD Islamic
bank / Islamic window of that particular PD. For this purpose, Total Demand and
Time Liabilities-Islamic as of 28th March, 2014 were used. The central bank
also reserved the right that in case any PD breached the aforesaid limit, it
could cancel all or some of the bids of the bank concerned.
The Islamic Banking Department of SBP shall be responsible for monitoring: 1) proper execution and 2) the legal documentation as per approved Shariah structure, to ensure Shariah compliance and seamless management throughout the tenor of the Sukuk and at the time of maturity of the Sukuk. The SBP has advised all the designated PDs for the Sukuk to ensure meticulous compliance with the instructions issued.
The Islamic Banking Department of SBP shall be responsible for monitoring: 1) proper execution and 2) the legal documentation as per approved Shariah structure, to ensure Shariah compliance and seamless management throughout the tenor of the Sukuk and at the time of maturity of the Sukuk. The SBP has advised all the designated PDs for the Sukuk to ensure meticulous compliance with the instructions issued.
Sukuk is an
alternative Islamic finance instrument for conventional bonds. This is a
certificate that represents ownership in underlying real asset(s). Islamic law
does not permit interest and hence conventional coupon paying bonds are
impermissible as per Islamic law. However, Islamic law allows sale and lease of
real assets and the resulting income in the form of profit on sale or rental
income stream on lease of assets. Holders of Sukuk share the lease or profit
income generated from the ownership of real assets that the Sukuk certificate
represents.
Sukuk has
emerged as an instrument of choice after 2008 financial crisis. Not only Muslim
countries, but non-Muslim majority countries are also taking interest in it. UK
treasury has issued a Sukuk worth £200 million. It became the first sovereign
state outside the Muslim world to issue an Islamic bond.
In Pakistan,
capital markets are not as developed and most of the formal sector financing
takes place through banks. Due to political instability and policy
inconsistency, usually, the long term investments are not very popular among
the investors. In the last few years, only a handful of IPOs had been made. The
bond market is also very small and dominated by sovereign issues than corporate
bonds.
While
investors had found comfort with bank investments even though these do not
offer inflation beating returns, most savers with adequate risk apatite look to
invest in secondary market for equities. Karachi Stock Exchange has been
offering immaculate that encourages investors to invest in liquid stocks for
parking their surplus money.
There are
many reasons why corporate bond market did not develop as per expectations in
Pakistan. The national savings scheme instruments issued by the GoP offer very
attractive yields and these are almost risk free. Some national saving scheme
instruments are also tax-free and hence after-tax yield on such instruments are
even higher as compared to the corporate bonds.
In Pakistan,
prior to the latest issue, 78 Sukuk had been issued amounting to Rs 637.43 billion.
Out of these 32 Sukuk issues of Rs 100.10 billion have been fully redeemed. The
GoP had issued Ijarah Sukuk in the past to meet its escalating borrowing
requirements. Entities like Water & Power Development Authority (WAPDA) and
Sui Southern Gas Company Limited (SSGC) had also issued Sukuk in past. Karachi
Shipyard and Engineering Works also issued an Ijarah Sukuk in 2007.
Sovereign
Ijarah Sukuk issued by the GoP have been structured in such a way that it
allows the government to utilize surplus liquidity of IFIs. The Sukuk holders
are also able to earn Shariah compliant income. It also facilitates Islamic
banks to manage their liquidity as well as meet statutory liquidity requirement
stipulated by the central bank of Pakistan.
Within the
corporate sector, Sitara Chemical Industries Limited, Wateen Telecom, Engro
Chemicals, Dawood Hercules, Century Papers & Boards, Attock Generation,
Arzoo Textile, Liberty Power, Amreli Steels, Eden Builders, Quetta Textile,
Pakistan American Fertilizers, PEL and Kohat Cement are some of the companies
that had issued Sukuk in past. Out of these, only one private sector entity Maple
Leaf Cement defaulted on Rs8 billion Sukuk in 2009.
Recently,
K-electric (formerly KESC) issued Rs6 billion Sukuk that were to be listed Karachi
and Lahore stock exchanges. There was no Pre-IPO placement and the entire
amount of Sukuk issue was offered to retail investors and it was fully
subscribed in a matter of few hours.
Through issue
of more Sukuk, the investment class assets universe will expand and it will also
enable those seeking Riba-free return to effectively diversify their
portfolios. Treasuries of Islamic banks will also have an expanded set of
investment avenues. It will increase liquidity of these Sukuk and generate
wider interest among all investors in the economy to consider investing in
these investment vehicles.