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Islamic bond market whimpering over the dearth of investment avenues

Published on 26th Oct, Edition 43, 2015


While investors have been increasingly fishing for Shariah-compliant investment options, conventional banks and asset management companies, in order to cater to the growing demand for Islamic products, were seen jumping into bandwagon.

Ijarah Sukuks are Shariah-compliant medium term investment instruments with 6-monthly (floating) profit payments guaranteed by the Government of Pakistan (GoP). SBP announces profits for Sukuk every 6 months. Facilities of further investment and premature encashment through reselling in the secondary market are available.

On the other hand, the management of K-Electric has caught the drift of stimulating the Islamic bond market in Pakistan where the investment avenues available have been slacking off for quite some time. Recently, K-Electric issued the prospectus for its retail Sukuk issue — the first Sukuk to be listed on local bourse, whose proceeds will be used to finance the permanent working capital requirements of the company according to the prospectus. And with this, the company also aims to reduce its dependence on bank credit.

Keeping in view the volatile economic scenario, the floating rate structure of the Sukuk offering linkage with KIBOR — will enable investors to rack up the benefits of rising interest rates.

Currently, Islamic bond market in Pakistan is whimpering over the dearth of investment avenues. This can be substantiated if an eye is passed on the corporate Sukuks presently available in the market, where numerous Corporate Sukuks have not been able to make timely payments and, therefore, have been placed under the non-performing category. And on top of this, the government seems to be hanging back from conducting auction for new issues of Government of Pakistan (GoP) Ijara Sukuks.

It may be noted that in the last auction of GoP’s Ijara Sukuk was held in March 2013 by the government and funds worth Rs89 million (excluding coupon payments) have been matured since then, while another Rs93 billion (excluding coupon payments) will mature before June 2014. Consequently, Islamic investors particularly institutions are left with thin options. In this regard, a senior fixed income fund manager in a conversation with this correspondent said that Islamic bonds are now being sold at premium in the market; this affirms the view that demand has surpassed the supply for such products. He even said that with the growing interest in Islamic products, government and entities ought to make sure that sufficient avenues are provided to Islamic borrowers to enable them to offer healthy returns to their depositors.

On the other hand, the All Pakistan Business Forum (APBF) has warned the government of piling of highly expensive debt, which may sink the country further into a debt trap, as the current regime has acquired loan of about 3.5 billion dollars by launching Eurobonds at excessive markup rate of 8.25 on average in just two years.

APBF President Mr. Ibrahim Qureshi said that the government has rewarded the nation with gift in the shape of another commercial loan of $500 million on extraordinary high markup by launching Eurobonds recently. He said that it is surprising the same government has already sold $2 billion Eurobonds and Sukuks at 8 percent and 7 percent markup last year, implying the economic managers have acquired loan at more than 2 percent higher markup.


APBF President said that government has been exploring possibilities of financing its deficit from multiple sources like IMF, World Bank, domestic borrowing and now it has found the easiest, yet extremely expensive, solution of all, Eurobonds.

The extremely low level of foreign direct investment of just 1 billion dollar against $5 billion a few years back implied that foreign investors are not satisfied with the economic policies of the current government. That is why their response was poor. He said the government entered into a long-term commitment for short-term relief, which is illogical. He said that international loans are more expensive than domestic loans but government was increasing international loans, tilting loan portfolio towards expensive sources of funds and its implications will be felt in the future.

The Eurobonds will be paid off in dollars at the then prevailing rate. So the government earns in rupees but pays the loans in dollars and that too at the then prevailing rate. He added that current account continued to run in deficit despite the record plunge in oil prices which was the single biggest import of Pakistan.

Further declining of exports

Exports also continued to decline and the drop in exports is starting to reach alarming proportions. In the same way, an energy crisis is getting even worse with massive load shedding with continued delay in new projects. He said that no reduction is visible in line losses and receivables have reached record levels while circular debt have returned back to near record levels despite doubling of prices of electricity.

The government issued the bonds in a hurry with no time to do proper marketing. Even the African countries sovereign bond rates are lower than Pakistan’s. Kenya in it’s first-ever issue last year raised $1.5 billion at a yield of 6.875 percent. Similarly, Sri Lanka just a few months back raised $650 million at a pricing of 6.125 percent which is 2.5 percent lower than Pakistan’s markup rate.

The government should work on a sustainable way of building reserves and to focus on economic growth and come up with export boosting policies. The external debt servicing reached close to $7 billion in fiscal year 2014, which is almost 35 percent of the reserves Pakistan. The country paid $6.820 billion in debt servicing in FY15, including $5.910 billion as principal amount and $915 million in interest payments.

Surprisingly, 47 percent of whatever the government generates in revenue is going to pay off debt against 44 percent of the previous year, which should not be more than 30 percent.

APBF President said the debt situation was alarming and the government must review its reckless borrowing behavior. The government must stop reckless international borrowing and minimize reliance on foreign debt in future. Future of the country’s Sukuk market looks bright, as things on economic front are moving in right direction.


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