KARACHI: The Ministry of Finance is expected to issue the country’s first-ever 12-month Ijara Sukuk or Islamic bonds next month — a move that’s part of the renewed push for Sharia-compliant debt instruments as the banking industry begins its transition to an interest-free system.

However, some analysts have raised doubts about the ability of the country to completely replace treasury bills and Pakistan Investment Bonds (PIBs) with their Islamic variants within the stipulated timeframe for one simple reason: the government seemingly lacks the physical assets required for Sharia-compliant debt instruments.

Unlike conventional debt that’s raised on the word of the sovereign, Ijara Sukuk generates funds by leasing out physical assets like highways, airports, dams, power plants or large public parks.

There’re not enough unencumbered large infrastructure projects or even land that can sufficiently back the huge volume of Ijara Sukuk transactions needed to fully replace the conventional debt. About 95 per cent of the total outstanding stock of roughly Rs48 trillion debt on government books is conventional.

Former deputy governor of the State Bank of Pakistan (SBP), Riaz Riazuddin, wrote in a recent article in Dawn that the government doesn’t have real assets because land is a provincial subject. While national debt is on the books of the federal government, land that can most effectively be used as the underlying assets for Islamic bonds is owned by provincial governments.

“The federal government should devise ingenious ways of utilising provincial assets to issue further Ijara Sukuk,” he wrote.

Speaking to Dawn, former SBP governor Dr Ishrat Husain said he disagrees with the view that the country lacks assets for Ijara Sukuk transactions.

“We have not done any inventory of the valuation of assets. Assets of the National Highway Authority (NHA) would run in hundreds of billions of dollars. Look at our airports, look at our ports, railway land, land owned by the Civil Aviation Authority (CAA), Evacuee Trust Property Board etc,” he said.

Geo-tagging, which is the process of adding geographical information about a location to a digital map, must be the basis for any conclusion about the availability of unencumbered assets for Islamic bonds, he said.

“There’s a tremendous volume of assets that’s not been revalued. We have to first establish our inventory and then see the extent of encumbrances. I don’t think encumbrances are stifling growth of the Sukuk market,” he added.

Ahmed Ali Siddiqui, who serves as director of the Centre for Excellence in Islamic Finance at the Institute of Business Administration, told Dawn the use of assets under the control of government-backed bodies like NHA and CAA for Sukuk transactions is becoming easier with the passage of time.“Ijara Sukuk worth Rs2.5 trillion have been issued in the last four years. Auctions are taking place every month regularly. There’re challenges, of course. But we’re gradually overcoming them because of better coordination within government departments,” he said.

Published in Dawn, January 29th, 2023