KARACHI: The Ministry of Finance is issuing for the first time a one-year Islamic bond through the Pakistan Stock Exchange (PSX) on Friday to raise Rs30 billion.

As opposed to the earlier practice where commercial banks would place bids for the government debt, the new method will allow the general public to participate directly in the bond auctions.

This is expected to bring the interest or profit rate on the government debt down because of mass participation from a cross-section of investors, including retail ones who’ll get to make risk-free investments through the stock exchange easily.

Moreover, the listed status of the government debt will enable investors to buy and sell the bonds on the exchange just like ordinary shares.

“We expect the yield on these Sukuk to be between 20-22 per cent in Friday’s auction,” wrote Topline Securities Ltd CEO Mohammed Sohail on social media platform X.

The Ministry of Finance recently approved amendments to the rules governing the issuance, registration, trading and transfer of government debt securities through capital market infrastructure institutions, such as the PSX, National Clearing Company of Pakistan Ltd and Central Depository Company Ltd.

The one-year Ijarah Sukuk will be issued by Pakistan Domestic Sukuk Company Ltd (PDSCL), which is a wholly-owned subsidiary of the Ministry of Finance.

The Ijarah Sukuk will be issued at a discount from the face value. Investors can place a single bid for the face value — which is the amount payable on the maturity date of the Sukuk — of Rs5,000 or its multiple.

The auction will follow a single-price methodology i.e. all bids whose prices are equal to or higher than the cut-off price — which is the bid price accepted by the Ministry of Finance — will be treated as successful bids.

The underlying asset for the Ijarah Sukuk is the Islamabad portion of Islamabad Metro, which is owned by the Capital Development Authority. The underlying asset is a must for Islamic bonds. Unlike conventional debt that’s raised on the word of the sovereign, Ijarah Sukuk generate funds by leasing out physical assets like highways, airports, dams, power plants or large public parks.

Potential investors will submit their bids in the auction system mentioning the investment value per Sukuk along with the proposed annual Ijarah rental amount.

The sum of these two should be equal to the face value per Sukuk. The bid will also include the total investment that the potential investor is willing to make in the Sukuk.

The auction screen will be made available to the Debt Management Office of the Finance Division by the PSX to evaluate the investors’ bids and decide the cut-off investment value per Sukuk and the Ijarah rental amount.

Some analysts believe 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 on the books of the federal government.

As opposed to Rs26.2 trillion of the government’s conventional marketable securities like Pakistan Investment Bonds and treasury bills, the outstanding stock of Ijarah Sukuk at the end of FY23 was only Rs3.1tr, according to SBP data.

The federal government plans to raise a total of Rs90bn by holding three auctions of Ijarah Sukuk worth Rs30bn each on the PSX between December 8 and Feb 20, 2024.

Published in Dawn, December 8th, 2023