National Savings mulls revival of retail Ijara sukuks to lure small investors

KARACHI: State-owned National Savings Organisation geared up its efforts to revive a platform to enable small investors to invest in asset-based shariah-compliant Ijara sukuk, officials said. 

The officials said the structure, including its price, size and tenure, of the retail Ijara sukuk is yet to be decided. That who would be the issuer is even unclear, they added.

A source said the work for issuing the product is at conceptual stage. “Once, the bond market assessment, consultation with stakeholders and other requirements get completed, the National Savings will engage shariah advisor, legal experts, government agencies and fund managers to structure the retail paper,” said the source.

An official said structuring retail sukuk is very different than floating institutional sukuk. “The biggest challenge is to get the Islamic sukuk structured for the retail investors and that’s what the top management of National Savings is working on currently.”

A source, who is close to the development, told The News that retail sukuk is not under consideration of the government.  “However, there’s a considerable demand for this product and National Savings is exploring the possibilities of structuring it to begin with and then decide on its other features,” said the source.               

Bankers said the incumbent government is also considering to issuing retail bonds to lure small savers. However, this proposal is pending because of the government’s current strategy to borrow from the banking system to meet its spending requirement rather than diversifying saving instruments and alternative sources of financing deficit.

The State Bank of Pakistan (SBP) data showed the government issued a total of 18 domestic sukuk between 2008 and 2016, targeting mainly institutional investors, like banks to meet budget requirements.  The government raised Rs668.6 billion from these papers. Alone last year, it secured Rs196.6 billion through issuing two sukuks.

The government also raised an amount of Rs232.09 billion from the savings schemes during 2015/16 against the inflows of Rs337.05 billion in 2014/15.

“Recently, the SBP also suggested the government to introduce Ijara sukuk for retail investors as it’s a big avenue for investment for our overwhelmingly people who don’t want to indulge in interest-based transactions, which are clearly prohibited in Islam,” a head of treasury at Islamic bank said.

“Ijara sukuk requires documents and underlying tangible assets to back the full transaction amount and that precondition can’t be easy for the government [issuer] to fulfill.”

Sources said currently the government is not in a mood to identify assets against retail Ijara sukuk.  

“We are trying to convince the government that retail sukuk widens the appeal of Islamic finance,” an official said on condition of anonymity. “It’s a right time to tap shariah-compliant buyer for debt by issuing retail bonds.”

Officials said retail investors may be eager to participate in domestic sukuk market by investing small saving instruments issued by the government. “In a low interest rates scenario, the returns on Islamic retail products could be far better than conventional savings alternatives,” said a banker.

Market observers said in comparison to other countries, Pakistan has a relatively very small percentage of banking population – 16 percent. “This means that around 84 percent of the population in Pakistan doesn’t use banking channels for their transactions and therefore their wealth remains unaccounted for,” said an expert.

Besides, the experts added that National Savings Organisation failed to mobilise deposits from the savers despite offering higher return on different saving products.

Investors put more cash holdings into alternative investment channels, including equity market, gold and real estate since interest rates are at decades-low. 

National savings, as percent of gross domestic product, remained stagnant at 14 percent for the last two years.

The savings inflows dropped to $78.723 billion in July-Oct 2016/17 from $105.83 billion during the same period of last fiscal year.