Pakistan opens up Islamic bond market to retail investors with first listed sukuk

KARACHI: The Pakistan Stock Exchange (PSX) will host its first-ever auction of a one-year listed local currency sukuk on December 8 (Friday) to diversify government funding sources, boost Islamic finance, and develop a Shariah-compliant capital market.

The government plans to raise a total of Rs90 billion through three government Ijarah sukuk auctions between December 2023 and February 2024, according to the dates and target size released by the exchange. On Friday, there will be the first auction.

The sovereign sukuk will be backed by Islamabad Metro (Islamabad Portion) and use the Ijarah structure, a sharia-compliant sale and lease-back of underlying assets. The joint financial and Shariah advisors for the issuance are Meezan Bank Limited, Dubai Islamic Bank (Pakistan) Limited, BankIslami Pakistan Limited, and Bank Alfalah Limited.

According to information provided by PSX, all eligible investors are those who meet the requirements outlined in the Government of Pakistan Sukuk Rules 2008 (amended in 2023) and as announced by the Ministry of Finance on November 17, 2023. These include individuals, institutions, trusts, funds of all kinds, corporate bodies such as banks and non-banking finance companies, insurance, and Takaful companies, regardless of their residential status.

International Islamic banks and financial institutions, foreign investors, non-resident Pakistanis, and Roshan digital account holders are all eligible to bid in the auction.

According to analysts, the launch of a listed sukuk via the local exchange will contribute to the development of the Islamic bond market in the country and draw retail investors to investments that adhere to Shariah. Additionally, this will encourage the government to rely more on the issuance of Islamic debt instruments rather than conventional ones to raise funds. But to effectively promote this sukuk, the government must hold roadshows and awareness campaigns.

“In a major development, the government of Pakistan has decided to conduct a 1-year Ijarah Sukuk Auction at Pakistan Stock Exchange (PSX) on Friday (Dec 8, 2023),” said Mohammed Sohail, the CEO at Topline Securities.

“This is the first time that such a #bond auction will happen at PSX. Earlier banks used to do this,” he added. “The government is targeting to raise Rs30 billion ($105 million) through 1-year Islamic paper at discount (zero coupons). These bonds will also trade at PSX and will help in the much-needed development of the bond market in Pakistan,” Sohail said.

“Now, thousands of retail investors who invest in stocks through Brokers can also buy these sukuks. We expect the yield on these sukuks to be between 20-22 percent in Friday auction.” There are certain obstacles in the way of Pakistan's Islamic debt market's growth and development. The largest obstacle is still converting public debt into instruments that comply with Shariah. Up until recently, a significant barrier to the regular issuing of asset-based Sukuk was the absence of sufficient sovereign assets, according to analysts.