Sukuk at PSX

The resounding success scored by the government’s Ijara Sukuk issue launched on the Pakistan Stock Exchange (PSX) last week leaves no doubt that this is an idea whose time has come. The sovereign Sukuk issue seeking to raise Rs30 billion was oversubscribed by almost 16 times, attracting investment offers totalling Rs479 billion. Notably, this level of interest by investors materialized at a cut-off yield of 19.52 per cent – 248 basis points below the average return on one-year T-bills.

This speaks to the huge appetite that exists in the market for Sharia-compliant modes of investment, as well as to the restoration of the investors’ trust in the government. Equally, it is a thumping endorsement of the government move to bring government securities to the bourse, diversifying their investor base away from large institutional investors towards the common investor.

Pakistan’s Islamic banking sector has been a great taker of Islamic modes of financing, and Sukuk as an Islamic mode of securitization has been available to their customers for many years. Introduction of the Ijara Sukuk by the government was mooted at the Council of Islamic Ideology at its meeting on May 30, 2005. As such, Sukuk is not a new phenomenon for Pakistan by any means.

However, the last time the government issued a Sukuk bond in 2016, it was offered to international institutional investors. Even at that time, the $1 billion issue was oversubscribed 2.4 times, with $2.4 billion being offered in investment by large international banks although the government settled with the $1 billion it had originally sought.

If we look at the market share gained by Islamic consumer banking in Pakistan in recent years, there remains no doubt that the common Pakistani is bullish on the Islamized modes of savings and investment offered by Islamic banks. Small wonder then, that every bank worthy of its name in the country has opened a highly visible Islamic banking operation. According to State Bank of Pakistan (SBP) data, assets of the Islamic Banking Industry (IBI) witnessed an all-time high quarterly increase of Rs836 billion during the quarter April to June, 2022 and crossed the six-trillion mark to reach Rs6,781 billion by end June, 2022. This impressive growth came from net investments and financing, respectively posting a quarterly rise of Rs470 billion and Rs269 billion. The quarter also saw the largest quarterly leap in the deposits of Islamic banks, to the tune of Rs610 billion, reaching Rs4,856 billion by end June, 2022. This clearly means the market was ripe for a public offering of an Islamic security by the government, not only to help satiate this vast public appetite for Islamic investment but also to offer Islamic banks an additional avenue to direct their deposits to.

Still, offering government debt on the bourse is a quantum leap forward for Pakistan’s economy and public finance at many levels. For starters, it advances the object of capital formation in a big way, marrying savings and investment with the sentimental value of nation building and the religious compulsion felt by many to adhere to Islamic modes of investment. But the largest gain by far is the democratization of investment by including small investors into the mix side by side with institutional investors. This is part of a wider initiative to bring the primary market auction of government securities to PSX, and was enabled by a change in rules by the federal cabinet to enable government debt to be raised from the capital markets. The Sukuk issue was the first item on a quarterly auction calendar, published by PSX in coordination with the Ministry of Finance. The calendar surfaces government plans to raise a total of Rs90 billion through a series of three Sukuk issues through February 2024. All three issues will be backed by securitization of Ijara or ownership of the part of the Rawalpindi-Islamabad Metro that runs in the federal capital territory. The real significance of the development is that the government can now look forward to domestic borrowing at truly market-driven rates rather than ones dictated by a few large institutional investors. This is hands down a win-win situation: A win for the treasury, which now has a much larger investor base, and a win for the retail investor, who can participate in national capital formation like never before.