Islamic banks eager to capitalise on Energy Sukuk-III

KARACHI: Meezan Bank Limited Chief Executive Officer Irfan Siddiqui talked about potential and trends in Islamic bonds market during an email interview with The News.

Q: Is the market rife with enough liquidity to capitalise on a third energy sukuk?

A: Currently, the circular debt of the power sector has surpassed Rs1.8 trillion. Given the significant cut down in discount rate and oversubscription of the latest tranche of Pakistan Energy Sukuk - II at very attractive bids, raising the third tranche of Rs200 billion by the end of this year would be a favourable move for the government as well as the economy.

The initial issuance of Pakistan Energy Sukuk had enabled the government to reduce the circular debt of the power sector by offloading liabilities of various entities in this domain. In order to ease the circular debt, the government had initially planned 3 tranches of Pakistan Energy Sukuk, each of Rs200 billion, bringing the total to Rs600 billion. Two tranches of Rs200 billion have already been issued in 2019 and 2020 and have greatly facilitated the government in reducing the burden and that too at very attractive financing rates.

Q: How do you see the shift towards Islamic instruments in the recent past?

A: The shift is likely to have a positive impact on the economy. In contrast to conventional bonds, Sukuks can help diversify the investment portfolio and can be used as an effective instrument for risk reduction. Previously, the government had been raising funds through conventional banking instruments which are evident from the huge size of outstanding T-Bills and PIBs.

The positive tendency towards Islamic financial instruments in the past two years, especially through Pakistan Energy Sukuk and GoP Ijarah Sukuk is indeed commendable. I do believe that the development of the securities market will also promote competition between the financial sectors.

In order to launch a series of GoP Ijarah Sukuk, valuation for the assets of Jinnah Terminal Sukuk – coming to Rs750 billion was performed, out of which Rs198 billion has already been issued and another two Sukuks worth Rs50 billion and Rs47 billion are also planned for issuance in the future.

Additionally, the two tranches of Rs200 billion Pakistan Energy Sukuk issued in 2019 and 2020 respectively have proven to be defining moments for the development of Islamic markets in Pakistan. The Sukuk received overwhelming response from Islamic Financial Institutions and the second tranche was oversubscribed by 1.7 times which signifies the current demand and need of Islamic banks for such instruments.

Q: Has Sukuk market been established in Pakistan?

A: Sukuk market is consistently gaining ground in Pakistan. The reopening mechanism is expected to be introduced from the month of August. It is expected to bring depth in the Pakistani Sukuk market and would improve tradability of Sukuk as well. Having said that this is a new process being introduced in the Sukuk market, and therefore the implications of the same with respect to the market’s response are yet to be seen.

In a conventional context, reopening of a security implies issuing additional amounts of a previously issued security. The reopened security has the same maturity date and the coupon rate as the original security. However, for the Islamic finance industry, the structure of reopening of government Ijarah Sukuk would be similar to that of a fresh issue i.e. an additional share of land would be sold to the Sukuk holders by the government and the Sukuk holders would then lease the same to the government for monthly rental payments.

Upon maturity the government would purchase the land from the Sukuk holders against spot payment. However, since the rental payment dates, maturity date and rental rate of this Sukuk would be kept the same as the original issue therefore both issues would be treated as a single issue in the Sukuk market.

Q: What new normal has the coronavirus brought about for Islamic banks?

A: The coronavirus pandemic has put many countries on virtual lockdown. However, the government and the State Bank of Pakistan have been very responsive to the changing financial conditions and have introduced several relief packages in an attempt to mitigate the economic impact of this pandemic.

I truly believe that with challenges come opportunities for growth. The coronavirus pandemic has provided the banking and finance industry with a perfect opportunity to transition towards a branchless/ online banking model, which would spearhead the growth of Islamic banks in future.

Given the various relaxations, relief packages as well as concessional refinance schemes introduced by the SBP to promote growth in priority sectors of the economy, my expectation is that delinquencies and their impact will become lower and more manageable.