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ISLAMABAD: Ministry of Finance (MoF) has sought Federal Cabinet's nod to issue domestic and international Ijara Sukuk with the unencumbered land of D-9 Park, Islamabad as the underlying asset, valued at Rs 930 billion with the support of three banks - Meezan Bank, Bank Alfalah and Dubai Islamic Bank.

Finance Ministry, in its proposal to the Federal Cabinet, has stated that to support the Government's budgetary position and promote Islamic banking industry in the country, it intends to issue Ijara Sukuk in the domestic and international capital markets. Sukuk are Shariah-Compliant borrowing instruments and are structured to pay return on investment as rent instead of interest by utilizing an underlying asset. In the case of Ijara Sukuk, a tangle asset is utilized to structure the transaction.

Till date, the government has executed 31 Ijara Sukuk transactions amounting to Rs 1.498 trillion. These issuances utilized the following assets for structuring purpose; (i) M1 Motorway; (ii) M2 Motorway; (iii) M3 Motorway and ;(iv) Jinnah International Airport, Karachi.

In addition to four transactions, the government issued an Energy Sukuk of Rs 200 billion in May 2020 to settle power sector arrears. This Sukuk was transacted through a competitive process managed by the Pakistan Stock Exchange (PSX) and overseen by the Securities and Exchange Commission of Pakistan (SECP). Assets of selected government-owned power generation and distribution companies were utilized. As the issuance was oversubscribed, the government introduced the cost of borrowing to 6-month KIBOR minus 0.10 percent per annum of a similar transaction executed last year. The resultant cost saving is around Rs 18 billion over the ten-year life of the Sukuk. Being first ever debt transaction conducted through a stock exchange it has set the stage for future debt issuance by public and private sector entities in a similar manner.

The Sukuk market is growing at a rapid pace around the world and is becoming the preferred choice for issuers as it allows for competitive pricing due to its asset backed structure. It also diversifies the investor base, as it generates particular interest in investors preferring Shariah complaint investments.

After approval of the Cabinet in its meeting of March 31, 2020, the Government initiated a domestic Ijara Sukuk programme of Rs 750 billion by utilizing the unencumbered land of Jinnah International Airport, Karachi. The programme is being run successfully and Rs 562 billion has been raised so far. The asset is expected to be fully utilized in the next few months. The issuance cost of these Sukuk, carrying floating rates, has been lower than the conventional bonds of similar maturity issued during this period as well as from the benchmark rates (weighted average T-bills rate).

As the Jinnah International Airport, Karachi is expected to be fully utilized in the next few months, there is an urgent need to identify and utilize a new unencumbered asset to ensure uninterrupted supply of Shariah-complaint instruments throughout the current financial year and beyond. The continuity will also enable the Government to meet its target of having 10 percent Shariah-compliant instruments in domestic securities by the end of FY23 (Medium-Term Debt Management Strategy 2019/20 - 2022/23). This proportion was at 2 percent at the end of FY20.

The asset identified to support the ongoing Ijara Sukuk programme is the unencumbered land of F-9 Park, Islamabad. The domestic Ijara Sukuk transactions will be executed with the support of a consortium of three banks, namely Meezan Bank, Bank Alfalah and Dubai Islamic Bank, which were engaged as financial advisers on May 8, 2018 for a period of 5 years through an open competitive process following the Public Procurement Rules, 2004. For international Sukuk issuances, the selection of financial advisers is at an advanced stage.

Capital Development Authority (CDA) has no objection to the utilization of the unencumbered land at F-9 Park, Islamabad for Ijara Sukuk issuances. The asset has been valued at around Rs. 930 billion. All transactions will be undertaken in coordination with the State Bank of Pakistan and after clearance of the documents by Law & Justice Division and the Office of the Attorney General for Pakistan for international transactions.

The Finance Ministry has requested the Federal Cabinet to accord approval to the proposal under Rule I6(l)(d) of the Rules of Business. 1973 for issuance of domestic and international Ijara Sukuk with the unencumbered land of F-9 Park, Islamabad as the underlying asset. The size, tenor and rental rate of issuances will be determined by the market response received at the time of each issuance.

Copyright Business Recorder, 2021

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