Pakistani banks have two addictions: consumer deposits and government debt. They use the former to buy the latter, making easy dough with a few clicks on the Bloomberg terminal every month.

No wonder the Islamic banking industry has long demanded — even to the exclusion of everything else — that they be invited to the party. But Islamic banks don’t just want their piece of cake. They want a separate cake of their own that tastes as good as the one eaten by their counterparts from the conventional bloc of the banking industry.

Their longstanding demand that there be a robust and liquid Islamic debt market has finally received due attention from the PTI government. It decided to roll out sukuk, or Islamic bonds, of Rs600 billion in three tranches of Rs200bn each to raise liquidity for reducing the circular debt in the power sector.

Two of the three issues have taken place so far, but Islamic banks are not happy. In fact, they are furious.

“What we want are government-guaranteed sukuk whose yield is equivalent to that of PIBs. But every time there is a sukuk issue, the government ends up raising money at a cheaper rate,” said Irfan Siddiqui, CEO of Meezan Bank, Pakistan’s largest and most profitable Islamic bank.

Investments of Meezan Bank amounted to Rs306.5bn at the end of June, up 42.6 per cent from the preceding quarter.

‘Don’t save money by pushing us up against the wall,’ says Meezan Bank CEO Irfan Siddiqui

Issued in June, the second Pakistan Energy Sukuk (PES) generated funds for the government at the rate of six-month Karachi Interbank offered Rate (Kibor) minus 10 basis points (0.1pc).

It was the first time the government managed to raise liquidity at a rate below Kibor. This means the government will save Rs1.8bn on its debt repayment every year until the instrument’s maturity a decade later.

“Two days ago, the finance adviser said at a ceremony the government would save Rs18bn in 10 years. I always tell the government: don’t save money by pushing us up against the wall. Give us an instrument that is comparable to conventional instruments,” he told Dawn in a recent interview.

So why did his bank invest eagerly in the sukuk if the yield was lower than expected? After all, Meezan Bank has invested Rs120bn in the first two tranches of PES.

“The only benefit to us was that we got to invest money that was otherwise lying idle,” he said, adding that the bank sometimes has up to Rs30bn parked with the central bank for months because it does not have Shariah-compliant investment avenues.

The difference in the yields of PES-II and the conventional bond issued at the same time was 70 basis points, according to Mr Siddiqui.

In other words, the government short-changed Islamic banks by 0.7pc as it issued a far more liquid conventional debt paper of the same tenor at a higher rate around the same time.

Mr Siddiqui said his repeated requests to the government that Islamic banks be offered long-term debt instruments at a fixed rate fell on deaf ears when interest rates were high. Meanwhile, conventional banks piled up high-yielding PIBs — a move that is now fuelling their bottom lines even though the benchmark interest rate has sunk to 7pc from the recent high of 13.25pc.

“Now that the rates have gone down, they have asked us to invest in long-term papers. We’re doing it because we don’t have any other choice,” he said.

Mr Siddiqui believes the difference in the yields of conventional and Islamic bonds will gradually erode as the government issues more sukuk.

From the government’s perspective, it makes sense to develop the Islamic debt market, which offers cheaper funds at least for the time being. But it doesn’t seem to have many unencumbered, unpledged assets that it can use to sell sukuk.

The Meezan Bank CEO hinted at some spectacular finds, saying people should expect big sukuk offerings soon. “Asset identification is not easy. They have identified some huge assets, which I cannot comment on right now. But there is a possibility they may soon bring assets worth Rs1 trillion to the sukuk market,” he said.

Published in Dawn, The Business and Finance Weekly, September 14th, 2020