Fearing lower tax and non-tax revenue and higher expenditure due to coronavirus spread across the country, Finance Division has decided to raise over Rs 700 billion through issuance of Ijarah Sukuk through a consortium of Islamic banks by pledging the assets of Jinnah Airport Karachi, sources close of Finance Advisor told Business Recorder.
The federal cabinet approved the proposal early this week after the Finance Ministry acknowledged that former governments of PPP (2008-2013) and PML (N) (2013-2018) saved Rs 51 billion on domestic interest savings by issuing the Ijarah Sukuk against assets.
Finance Ministry in its proposal to the Federal Cabinet stated that in order to support the Government's budgetary position and promote the Islamic financial industry in the country, Finance Division intends to issue Ijarah Sukuk in the domestic capital market.
The asset identified to structure the transaction is the unencumbered land of Jinnah International Airport, Karachi. Ijarah Sukuks are Shariah compliant borrowing instruments, structured to pay returns on investment as rent instead of interest by utilizing an underlying tangible asset.
According to the Ministry, transaction follows the Islamic sale, lease arid buy back structure in the following manner: (ii) a tangible unencumbered asset is identified and valuated; (ii) asset is sold to investors (Sukuk holders); (iii) Sukuk holders then lease the asset back to the seller for use on payment of rent; and (iv) on maturity, the asset is bought back by the seller from the Sukuk holders.
Finance Division is of the view that Ijarah Sukuk transactions create charge on the utilized asset in contrast to the Government's conventional domestic borrowing instruments like Pakistan Investment Bonds (PIBs) or Treasury Bills (T-Bills) which create charge on the Government's consolidated fund.
The domestic Ijarah Sukuk program of the Government started in September 2008 and nineteen transactions amounting to over Rs. 936 billion in total have been carried out so far. All these transactions were structured by utilizing the following assets: (i) Peshawar - Islamabad Motorway; (ii) Islamabad - Lahore Motorway ; (iii) Faisalabad - Pindi Bhatian Motorway and; (iv) Jinnah International Airport Karachi.
Additionally, in March 2019, the Government of Pakistan, through Power Holding (Pvt) Ltd, issued a Rs. 200 billion 'Pakistan Energy Sukuk-1' which also has an Ijarah structure, utilizing assets of Government owned power generation and distribution companies.
The sources further stated that a summary seeking approval for issuance of domestic Ijarah Sukuk utilizing the Jinnah International Airport, Karachi was last placed before the Cabinet in its meeting held on December 10, 2019 wherein the Cabinet directed to provide information on the cost of Shariah complaint borrowing undertaken by the Government in the past and whether such borrowing resulted in any cost savings as compared to conventional borrowing.
Finance Ministry further stated that in comparison to conventional borrowing, the domestic Ijarah Sukuk program has saved the Government around Rs. 51 billion on account of domestic interest servicing.
The total interest servicing on Sukuk will stand at Rs. 234 billion for the period September 2008 to June 2020 as compared to Rs. 285 billion had the Government raised the same amount of debt through conventional bonds. The weighted average interest cost of Sukuk remained 1.9 percent lower than that of conventional bonds (8.3 percent compared to 10.2 percent).
"In the wake of emerging economic situation due to the Coronavirus, the tax and non-tax revenues are projected to be lower than initial estimates while expenditures are likely to increase.
This may result in higher budget deficit and, therefore, there is an increasing need for resource mobilization through domestic borrowing. The liquidity available with Islamic banking industry can be an important and relatively cheaper source of funding," the sources quoted Finance Ministry as saying in its summary.
The Ministry further stated that the other benefits of Sukuk issuances include: (i) taking affirmative action towards the Constitution's goal to eradicate Riba and to the Senate's Resolution which calls on the Government to take steps to abolish Riba; (ii) lowering the cost of financing to the Government; (iii) supporting development of Islamic financial industry, including banks, mutual funds and Takaful industry by providing a level playing field to the industry; (iv) providing Shariah compliant investment avenues for individuals and business that make faith-based investments; and (v) lesser speculation as the transactions are backed by tangible asset.