Pakistan’s largest sukuk issuance raises Rs371 billion

KARACHI: The government has raised a record Rs371 billion, or over $1.29 billion, from the sale of Ijarah Sukuk, tapping strong demand from local Islamic banks and making it the largest issuance of Islamic bonds in a single auction since the Sukuk program’s launch in 2008.

Bankers said the government generated this amount via the settlement of Sukuk on August 7 (Monday). On August 3, various banks participated in the auction for investment in the Government of Pakistan Ijarah Sukuk.

Six denominations were open for bidding in the Sukuk, which included one-, three-, and five-year fixed-rate Sukuk, and one-, three-, and five-year variable rate Sukuk.

The government intended to raise a total of Rs240 billion from the auctions, however, the Sukuks were oversubscribed by over 200 percent, with total bids received equivalent to over Rs508 billion (approximately $1.77 billion), according to bankers.

On the basis of the announced cutoff rates, Sukuk equivalent to Rs371 billion were issued under five denominations, while all bids were rejected against the five-year fixed rate denomination.

The rental rate against the above Sukuk varied from 18.49 percent per annum to 23.62 percent per annum, depending on the tenure of the Sukuk. The rental payment is to be made on a half-yearly basis with Sukuk redemption at maturity.

The underlying asset utilized for Sukuk issuance was Islamabad Expressway, on which an Ijarah Sale and Lease Back transaction was performed. The underlying Shariah Structure of the Sukuk was approved by the Shariah Advisory Committee of the State Bank of Pakistan, while the transaction was led by Meezan Bank Limited alongside Dubai Islamic Bank Pakistan Limited and Bank Alfalah Limited as Joint Financial Advisor to the transaction.

Ahmed Ali Siddiqui, the head of Shariah Compliance at Meezan Bank, said the government now places more emphasis on issuing Sukuk than on interest-based borrowing, which benefits the economy, saves the government cost, encourages financial inclusion, strengthens the Islamic banking sector, and aids in the government's compliance with the Federal Shariat Court's ruling that interest must be removed from the economy.

With Islamic banks reporting healthy asset growth, demand for local currency sukuk has increased. By 2025, the SBP wants to increase the share of Islamic banking to 35 percent.

Presently, the share of the Islamic banking industry is 20 percent. The government implied that it would convert the current interest-based banking system to an interest-free model by December 2027 when it declared last year that it would implement the Federal Shariat Court's ruling.