Pakistan Sports Complex to be used as underlying asset for Rs150 billion sukuk issuance

KARACHI The government has planned to raise Rs150 billion through the sale of Islamic bonds, or sukuk, in the next three months, as it seeks to finance its widening fiscal deficit with cheaper and Shariah-compliant sources of funding.

According to a central bank auction calendar, the government aims to generate Rs80 billion from the sale of three different tenors of floating-rate sukuk and Rs70 billion from fixed-rate sukuk in November-January.

The government will generate Rs80 billion through the sale of the variable rental rate one, three, and five-year government's Ijara Sukuk between November 2023 and January 2024. During the same time frame, the government also intends to auction Ijara sukuk with fixed rental rates for three and five years to raise Rs70 billion.

The Islamic bonds will be backed by the assets of the Pakistan Sports Board, which owns and operates various sports facilities across the country, the State Bank of Pakistan (SBP) said in a separate document outlining the structure of the sukuk.

"The underlying Asset ('The Asset') [i.e. Islamabad Sports Complex also known as Pakistan Sports Complex] may be used as per the requirements of GOP [Government of Pakistan] to be ascertained at the time of issuance of Sukuk," the SBP said.

Bankers confirmed that the Pakistan Sports Complex asset will be utilised for the sukuk issuance, for which the SBP has set auction targets. Given that the Pakistan Sports Complex's underlying asset has the ability to raise Rs300 billion, a senior banker anticipates further sukuk issuances in the coming months.

The government also amended the rules governing Ijara sukuk, stating that any investors may place non-competitive bids in the sukuk auction, except development finance institutions, investment banks, and scheduled, specialised, and microfinance banks.

To comply with the Federal Shariat Court's ruling that interest must be removed from the economy, the government now places more emphasis on issuing Sukuk than on interest-based borrowing. This helps the economy, saves money for the government, promotes financial inclusion, and strengthens the Islamic banking sector.

The share of Islamic banking in the total banking sector's local government borrowings has grown dramatically. Data indicates that as of June 2023, 8 percent of all domestic borrowing was made up of sukuk, which is a significant increase from the almost zero percent recorded in 2018. Furthermore, the Islamic share of the government's borrowings for commodity operations has reached 40 percent, and in certain circumstances, even 50 percent, and the Islamic finance sector currently represents nearly 15 percent of the domestic debt of public sector companies.

The SBP also plans to transform existing conventional banks into Islamic banks. For this, it aims to design a roadmap for the transition towards Islamic banking and coordinate with banks for conversion to Islamic banking, according to its strategic plan 2023-2028.

Recently, the landmark judgment by the Federal Shariat Court, requiring Pakistan's banking sector to be Shariah compliant by 2027, has set an ambitious target for the Islamic banking industry.

The SBP-led initiatives for Islamic banking, including the development of legal, regulatory, and supervisory frameworks and the promotion of participatory modes of financing, have increased the share of Islamic banking in the overall banking industry manifolds over the years.

The market share of Islamic banking assets and deposits has reached 20 percent and 22 percent respectively and the number of Islamic branches has increased to 4,396 by December 2022.

Investments in government securities have recorded an average growth of 28.9 percent from 2020 to 2022). Much of this growth has emanated from new issuance of conventional government securities.

"In this backdrop, there will be a need to have a sufficient pool of government assets, with clear titles of ownership and potential to generate revenues, to help in issuances of Shariah-compliant government securities (to replace the stock of PIBs/ TBs).

However, the dearth of eligible assets can create a challenge in transforming the existing conventional stock of domestic public debt into Shariah-compliant instruments," the SBP said in a report.