In response to rising external vulnerability, Pakistan has generated $2 billion so far this fiscal year through the issuance of international bonds, compared to a budgetary target of $3.5 billion for the current fiscal year 2021-22. Pakistan raised $1 billion with a Eurobond in July 2021, and another $1 billion is expected to be raised in January 2022 through a Sukuk Bond.
Pakistan issued the Sukuk Bond in 2014-15 to raise $1 billion at a fixed rate of 6.75 percent. In October 2016, Islamabad issued a $1 billion five-year Sukuk Bond at a rate of 5.5 percent, and again in December 2017 at a rate of 5.625 percent.
Despite the government’s assurances that the country’s economy has steadied, the highest-ever rate on Sukuk Bonds is now being offered. Many independent economists have stated that issuing Sukuk Bonds before reviving the IMF program is illogical.
If the IMF had been involved, the price could have been lower. Pakistan has done everything possible to reclaim the IMF, but it makes no sense to boost the expense of long-term debt.
For the introduction of the $1 billion Sukuk Bond, the government put an asset-backed guarantee of Motorway (M-2) sections. For the issuance of the Sukuk Bond, it has established a Special Purpose Vehicle (SPV).
Pakistan has always used the Malaysian model for releasing international bonds because it is linked to the US Treasury through LIBOR (London Inter-Bank Offered Rates) to provide a mark-up to investors. The construction index is designed in the Dubai model, with the markup connected to an increase or reduction in the construction index of any asset.
The State Bank of Pakistan holds about $17 billion in liquid foreign reserves for Pakistan. The SBP’s foreign currency reserves shrank by $562 million last week.
Despite receiving inflows of $3 billion from Saudi Arabia and $2 billion from the IMF in recent months, the foreign currency reserves have decreased by almost $3 billion. The country’s current account deficit grew to $9.1 billion in the first half of the current fiscal year (July-Dec), and if present trends continue, it may reach $18 billion. However, Pakistani authorities believe that POL prices on the international market will fall in the coming months, and that logistical costs by sea would fall as well, easing the overall strain on imports.
What exactly is a sukuk bond?
A sukuk is an Islamic financial certificate that complies with Islamic religious law known as Sharia, analogous to a bond in Western banking. Because the standard Western interest-paying bond structure is not permitted, a sukuk issuer simply sells a certificate to an investor group and then uses the proceeds to purchase an asset in which the investor group has a direct partial ownership interest. In addition, the issuer must make a contractual pledge to buy back the bond at par value at a later date.
In Pakistan, how may I invest in sukuk?
Non-Resident Investors: Foreign investors can invest in the GOP Ijara Sukuk by opening an IPS account, just like local investors. Foreign investors must also create a Special Convertible Rupee Account (SCRA) with any Pakistani Authorized Dealer.
How does a sukuk function?
Sukuk (also known as a “Islamic bond” or a “Sharia-compliant” bond) is an Islamic financial certificate that reflects a percentage of ownership in a portfolio of qualifying current or future assets. The issuer then purchases the asset with the revenues from the certificates, giving investors a portion of ownership.
Is sukuk kosher?
Islamic-compliant securities differ from traditional fixed-income securities in two ways. The first is the structure of the security, and the second is the necessity that the financial instrument be assessed by an Islamic religious organization before to issuance to determine its halal status.
Sukuk Structure
Profit-sharing financing, in which the lender accepts some business risk, is favored by Islamic economic thinking. As a result, both investors and issuers of investment certificates share in the risks and rewards of the business. Investors typically split gains and losses proportionally to their ownership interests in the certificates (similar to shares).
Sukuk must follow Islamic investing guidelines to be considered halal.
The investment certificate must demonstrate a legal or beneficial ownership interest in a business enterprise’s assets.
This necessitates that the certificate’s structure reflects the issuer’s lawful transfer of ownership of the underlying assets to the investor.
Payments to certificate holders are depending on the underlying assets’ net profitability.
The issuer cannot guarantee the security’s investment return, such as a coupon rate, or set a predefined price, such as a principal value, at the conclusion of the investment certificate’s duration; hence, a meaningful risk-return connection cannot be established.
Traditional bondholders, on the other hand, receive cash flows that are unaffected by the amount of profit or loss earned from the funds raised through bond issuance.
Bondholders, unlike shareholders, receive income that has been pre-determined and agreed upon.
As a result, creditors avoid direct exposure to the underlying assets’ or business enterprise’s uncertainties or dangers.
Rather, their risk is linked to the issuer’s creditworthiness.
In other words, creditors are not directly exposed to the dangers that the company they finance faces.
Interest-based bonds are “risk-transferring” rather than “risk-sharing” arrangements because of this.
6
Furthermore, if the market value of the security’s underlying asset or business enterprise appreciates, sukuk investors may get a larger value at the end of the investment certificate’s lifetime.
Bondholders only get their initial principle (or par value) back when the security matures.
You want consistent income
A sukuk pays its investors on a regular basis (e.g., annually, semi-annually, or quarterly). Sukuks are a suitable investment if you need reliable income on a regular basis because the payments are fixed and pre-determined.
The fund manager may deliver these payments to you in the form of monthly, quarterly, semi-annual, or annual dividends if you invest in a sukuk fund.
You need to lower the risk in your portfolio
You may need to reduce your risk as you become older by increasing the number of low-risk investments in your portfolio. This is because, if their portfolios suffer significant losses, older investors have less time to recover. Sukuk are less volatile than other asset classes like shares, therefore investing in them might help you reduce risk in your portfolio. When markets are volatile, this helps to protect your portfolio.
You need to preserve your capital
If you’re planning to cash out your investments soon say, in a few years you should prioritize capital preservation. This entails safeguarding your assets and preventing damages.
Investing in sukuk is an excellent strategy to protect your money. Unlike stocks, which can rise or fall in value, the value of a sukuk does not change unless you sell it on the secondary market (to other investors) for a higher price. You will receive your principal investment if you wait for the sukuk to mature.
Who is eligible to invest in sukuk?
Eligibility
- Individual clients with a total net personal asset value of more than Ringgit Malaysia Three Million (RM3,000,000) or its foreign currency equivalent.
- Based on the most recent audited accounts, companies having total net assets exceeding Ringgit Malaysia Ten Million (RM10,000,000) or its equivalent in international currencies.
In Pakistan, what are Sukuk bonds and how do they work?
Sukuk Certificates reflect proportional beneficial ownership and can be thought of as an Islamic Bond for a specified length of time, with the risk and return linked to cash flows generated by a specific asset owned by the investors, i.e. Sukuk holders. Assets must be tied to sukuks.
In Pakistan, how do I obtain a Naya certificate?
How to Make Money Investing Investors will make their request using the Bank AL Habib Roshan Digital Account website, including information such as account number, tenure, currency, and investment amount. Customers’ Roshan Digital Accounts will be deducted for future purchases or certificates from SBP.
What exactly is an Ijara Sukuk bond?
Is a traditional Fixed Coupon bond with a Par + Coupon bond classification. Sukuks are not scripted and can be exchanged freely in the secondary market. They are also transferrable.
What is a sukuk (Islamic bond)?
SUKUK denotes “contracts” or “promissory notes” in Arabic. It is an Islamic financial certificate that has many of the characteristics of a conventional bond but adheres to Sharia standards.
Sharia is a body of Islamic religious law that governs all areas of Muslims’ daily lives. Muslims can use Sharia law as a set of rules and guidelines to help them make crucial life decisions, such as finances and investments.
The issuer of an SUKUK effectively sells a certificate to an investor group and then uses the money to buy an asset in which the investor group has a direct partial ownership interest. In addition, the issuer must make a contractual agreement to buy back the SUKUK at par value at a later date.
The following are the key distinctions between SUKUK and conventional bonds: