The issuance of sukuk bonds worth $1 billion by Pakistan at the rate of return of 5.5 per cent per annum is being celebrated by the economic managers of the country. Finance Minister Ishaq Dar has termed it a historic achievement because this is the lowest rate offered ever to the investors. In the past, the country has never sold bonds below six per cent.

Furthermore, Dar claims the rate could have been even lower if the relations between India and Pakistan had not been that bad. Wherever Pakistani delegation went for road shows, they were asked stiff questions about the deteriorating conditions along the Line of Control (LoC). But even then, he says, the investors showed overwhelming confidence in the country’s economy and subscribed to these sukuk bonds with great enthusiasm.

As per details of the transactions, 38 per cent from these sukuks were subscribed by institutions from the European Union (EU), 27 per cent from North America and 27 per cent from Middle East and seven per cent from Asia.

The government of Pakistan issued these bonds against a portion of Lahore-Islamabad motorway valued at $1.6 billion. The government sources say the sukuk bonds could be worth this amount but they wanted to show that they were not too desperate to seek loans.

Against this backdrop, there is a lot of criticism from different quarters, especially the opposition parties, that the government is pledging state institutions just to satiate its hunger for international loans. They claim that failing to raise or maintain their foreign reserves especially when exports and foreign remittances have plummeted, it has found an easier way to raise money.

Economic experts have come up with different explanations and reservations about this issue.

Muhammad Zubair Mughal, Chief Executive Officer (CEO) of Al Huda Centre of Islamic Banking and Economic (CIBE), states that the criticism about pledging state assets for issuance of sukuks is not justified. He says it is a basic principle of Islamic banking that every instrument shall be backed by tangible assets. He says these assets are not pledged but underlined, meaning the investors become the rightful claimants of shares earned from these assets.

Citing an example, Mughal says years ago First Wapda Sukuk Company issued sukuks during Mangla Dam raising project. He says turbines were bought from the proceeds and given on rent. The rental hence received was shared among the investors as profit on this investment, he adds.

The opposition camp has however challenged the government claims that the country’s economy is faring well and subscription of sukuks by foreign institutions is a proof of that. The say it is unfortunate that the government is raising money at a time when the IMF loan programme is going to conclude. They question the rationale behind celebrating the success of raising $1 billion, which is just a loan acquired by the government to avoid default on international payments.

Another objection raised by critics is that they have pledged motorway that is not earning profit. So, how can they claim that the return offered on this investment is halal profit and not interest, they question.

Zubair Mughal explains the concept and states that in this case the government can consider the toll tax and earnings from commercial service areas as pure profit to be shared among buyers of sukuk bonds. He says the initial cost that was incurred on construction of motorway is not counted in this case to calculate profit.

Mughal says, "Selling sukuks suits the government as the terms are not as tough as imposed by multilateral institutions like World Bank, Asian Development Bank, International Monetary Fund etc. Besides, it does not have to follow dictates like reforming their system, reduce subsidies, privatise State Owned Enterprises (SOEs) and so on."

He says the government-backed sukuks have a ready demand for the reason that Islamic banks are always seeking for shariah-compliant instruments to manage their liquidity. These banks have deposits but they sometimes find it hard to invest in the absence of Shariah-compliant options, he adds.

Regardless of the attraction and acceptability of sukuk bonds, it is the purpose behind launching them that irks many. For example, Saleem Mandviwalla, a former finance minister, is concerned that sukuk bonds will increase the foreign debt of Pakistan which is already at the disastrous level. "The government must clarify how it will pay such loans and what are its long-term plans to get rid of foreign debt burden," he questions.

However, Mahmood Awan, a US-based economist of Pakistani origin supports this option provided the objective is to improve the efficiency of SOEs and not to increase the burden of foreign loans. He says sukuks are among the best ways of financing large enterprises that are beyond the ability of a single party to finance.

He says Chinese are the biggest buyers and beneficiaries of sukuks in Malaysia. Besides, he says, British banks have the highest portfolios of sukuks as they succeeded in attracting huge Shariah-compliant investments from Gulf and other regions.

Pakistan owns huge public enterprises with assets worth trillions and should make best use of them to make them efficient, he suggests.