KARACHI: The federal government will save approximately Rs 32 billion annually by raising funds through the Ijara Sukuk for budgetary requirements as it’s a cost-effective financing tool for the government as compared to traditional and conventional Market Treasury Bills (MTBs) and long-term Pakistan Investment Bonds (PIBs).

The government has increased its reliance on GOP Ijarah Sukuk to meet its budgetary needs as rate of Islamic bonds is lower than other conventional bonds and the national exchequer is saving billions of rupees annually.

Banking sources told Business Recorder that Sukuk investments have become a more cost-effective financing avenue for the cash strapped government as compared to traditional T-bills and PIBs.

Margin on PIBs declines

An amount of Rs 1.7 trillion was borrowed during the CY23 compared to Rs 1.34 trillion in CY22. During CY23, a major amount of Rs 1.67 trillion were raised through direct auction, while remaining Rs 30 billion were lifted through PSX.

Banking industry is expecting that the ministry of finance is likely to introduce Sukuk (Islamic bonds) of varied maturities through the PSX, leveraging the abundant liquidity from investors seeking Shariah-compliant returns at significantly more appealing interest rates than conventional offerings.

The entire Sukuk portfolio issued during CY23 is expected to save approximately Rs 32 billion on yearly basis for the Government of Pakistan. The banking industry is also anticipating that 2024 will witness a historic number of Sukuk issuances, resulting in additional savings in billions for the government on its borrowing through the Islamic finance instrument, Sukuk.

After the successful issuance and listing of Pakistan’s first sovereign Sukuk on the PSX valued at Rs 30 billion in December 2023 which met with an overwhelming investor response of Rs 400 billion, the government has once again raised Rs 87 billion through a PSX auction of Sukuk in January 2024 and investors expressed strong interest, offering close to Rs 500 billion.

The successful issuance and listing of sovereign Sukuks on the PSX, valued at Rs 30 billion and Rs 87 billion in two consecutive months, has paved the way for the regular issuance of Shariah-compliant instruments. This development holds the potential to stimulate the creation of new Islamic capital market instruments such as Sukuk Exchange-traded Fund (ETF) and Sukuk tokenization, said a leading banking analyst.

The 1-year Sukuk cut-off yield came to 19.49 percent, a slight decrease from 19.51 percent in the last auction. Similarly, the 3-year Sukuk cut-off was 16.05 percent, and the 5-year was at 15.49 percent. The banking industry has praised the strategic move by the Ministry of Finance, which has raised Rs 86 billion at highly discounted yield of 15.49 percent, 16.05 percent and 19.5 percent (under the fixed rate regimes), surprisingly below the policy rate of 22 percent and even lower than MTBs and PIBs rate.

In the last Sukuk auction of December 8, 2023, the federal government raised Rs 30 billion at a yield of 19.5 percent, which was 2.5 percent below the policy rate of 22 percent.

Another successful Sukuk auction managed by the State Bank of Pakistan, took place on November 30, 2023, where the government raised Rs 167 billion at yields as low as 15.75 percent and 16.19 percent, contributing to a total saving of at least Rs 4 billion for the government.

Subsequently the same Sukuk were reopened in the December 21, 2023, auction through the SBP, and the government raised an additional Rs 115 billion, again at a rate below the policy rate of 22 percent.

Remarkably, since 2020, the federal government has successfully raised nearly Rs 4.4 trillion through Sukuk issuances, all priced below prevailing policy rates.

However, the success of the recent Sukuk auctions also prompts the question of how Islamic Banks can offer rates as low as 15.49 percent and 16.05 percent in a monetary policy regime with a high policy rate.

A banker explained that current regulations oblige Islamic Banks to distribute profits to depositors based only on their earnings from the funds. Additionally, the absence of a Minimum Deposit Rate (MDR) requirement allows Islamic Banks to offer financing to the government at lower yields without the burden of paying unnaturally high profits to depositors.

The imposition of MDR on Islamic banks will result in escalation in the government’s borrowing costs and may reduce its capacity to secure economical funding through Sukuk.

The absence of MDR has been instrumental in empowering Islamic banks to furnish cost-effective financing, and the introduction of such a regulation could disrupt the current dynamics of Islamic banking, particularly in the context of Sukuk auctions.

Over the past decade, Islamic finance, especially Sukuk, has gained fame as an innovative financial instrument in the capital market. This period has witnessed a noteworthy surge in Sukuk, establishing itself as a distinctive tool that enables the Government to secure low-cost funding while upholding Islamic principles.

Copyright Business Recorder, 2024


Comments are closed.