KARACHI: The cash-strapped government has selected three assets to be used to issue local-currency-denominated Islamic bonds in an effort to meet its financing needs and boost Islamic banking in Pakistan.
These assets include the Islamabad Expressway (from Faisal Mosque Chowk to T-Chowk near Rawat), the Islamabad Metro (Islamabad Portion), and the Islamabad Sports Complex.
The State Bank of Pakistan (SBP) announced the transaction structure related to the issuance of Ijara Sukuk.
"(Included are) the identified underlying assets of the Capital Development Authority, along with the identified, unencumbered, and undisputed land of CDA surrounding the identified assets," stated the circular from the State Bank of Pakistan. "These lands would be identifiable by survey numbers and area, and would be identified as the proposed assets to facilitate the issuance of GoP Ijarah Sukuk," it added.
According to the SBP, the Islamabad Motorway (from Faisal Mosque Chowk to T-Chowk near Rawat) will serve as the underlying asset for the inaugural Sukuk issue. Other specified assets may be utilized based on the provisions of the transaction structure and the government's needs.
Bankers project that this will be a significant Sukuk program, with the government aiming to raise up to Rs700 billion through the auction of domestic Islamic bonds. The bonds will have terms of one, three, and five years, with fixed and variable rates of return.
The first auction of this Sukuk will take place on June 22.
By issuing Sukuk, the government may be able to reduce the cost of servicing its domestic debt. Bankers state that the government can secure lower rates from Islamic banking compared to conventional financing options like T-bills and PIBs.
The SBP will conduct an auction to identify Sukuk investors. Non-competitive bidders may also submit bids for the Sukuk. For this purpose, non-competitive bidders will authorize any of the primary bidders by signing an authorization form, as stated by the SBP.
The government aims to eliminate the interest-based financial system by 2027. As part of its objective to increase the share of Islamic banking from 20 percent to 35 percent in the next two years, the State Bank of Pakistan has guaranteed assistance to banks planning to convert their business operations to an Islamic mode.
In a groundbreaking decision issued last year, the Federal Shariat Court ruled that the current interest-based banking system contradicts the basic principles of Islamic law.
The court ordered the government to facilitate all loans using an interest-free basis and to enact fresh laws and modify existing ones promptly in order to introduce Islamic banking nationwide.
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