According to the Fitch Rating Dubai data, the global Sukuk issuances surged by 36.1 per cent in 2021 to $252.3 billion from $ 174.64bn in 2020. The growth momentum has continued despite Covid-19 and economic challenges.

The main players in the Sukuk market are central banks, governments and multilateral institutions. It is interesting to note that Malaysia, Indonesia, Turkey and Pakistan accounted for $230.2bn (91pc) of total Sukuk deals and have emerged as leading players in developing Islamic capital market instruments.

According to the data reported by the International Islamic Financial Market Sukuk report 2021, over 11,000 Sukuk have been issued globally, amounting to $1.42 trillion by 36 countries. The Sukuk issuance from Malaysia, Saudi Arabia and Indonesia lead in the Muslim world, while western players like the USA, UK, Japan, Germany, Singapore and France have occasionally entered the market to tap sharia-based investors.

Sukuk are normally defined as certificates of ownership (or shares) of a business, real asset or service that confines to Islamic commercial law and are a convenient sharia-compliant way for generating liquidity for entities, project financing and government funding needs. Sukuk are highly suited for and widely used by governments to generate local and international funding under a sharia-compliant mechanism while avoiding interest. Sukuk are redeemable at maturity; however, they can be traded in the secondary market in the case of tradeable Sukuk.

The Sharia-complaint instrument is an effective tool for financing sovereign needs cost effectively

The government of Pakistan first entered the global Sukuk market in 2005 with the issuance of $600 million Sukuk, while the domestic Sukuk programme was launched in 2008. According to the State Bank of Pakistan data, till June 2022, the government has successfully issued Ijarah Sukuk amounting to Rs3.25tr in the domestic market.

In 2020, the Ministry of Finance aggressively revived the Sukuk programme after almost three years. As a result, from April 2020 to June 2022, the government issued Ijarah Sukuk of more than Rs2.315tr (approximately $13bn) in the domestic market. These issuances not only helped the government reduce its borrowing cost compared to conventional instruments but also helped develop Sharia-compliant avenues for the government in the domestic Islamic capital market.

In January 2022, the government of Pakistan again entered the international market with the issuance of $1bn Pakistan International Sukuk, the purpose of which is to generate dollar funding from international avenues. With this issuance, the total global Sukuk issuance from Pakistan reached $4.6bn to date. This also shows the potential of Sukuk for raising dollars to meet the sovereign funding needs on Sharia-compliant principles.

The outlook for the domestic Sukuk market is very positive. The government is looking to increase the share of Sukuk in the market under the existing Ijarah Sukuk programme of around Rs1.5tr in the medium term. It is also exploring new concepts like asset-light structure, green Sukuk and sustainable Sukuk to increase the share of Sharia-compliant instruments in government securities by the end of 2022-23.

The successful issuance of Pakistan Energy Sukuk-II of Rs200bn has been the largest Pakistan Stock Exchange (PSX) security that was issued via book-building. Currently, Rs470bn worth of Sukuk (government and non-government) are listed on PSX.

In addition to institutional investors, the general public, pension funds and corporates can also invest in Sukuk with the help of the Investors’ Portfolio Securities Account managed by scheduled banks/dealers or the Central Depository Company on behalf of their customers.

The benefits of Sukuk are immense, both for the issuer and the investor. They provide a convenient source of large amounts of financing, generating much-needed liquidity for institutions, especially governments, that hold large amounts of illiquid assets.

Another benefit is their Sharia-compliant nature which provides an attractive avenue for investments by Sharia-compliant institutions and taps investors with Islamic preferences for investing since riba avoidance is often a major concern of many investors in Pakistan.

Sukuk can tap a broader market than conventional bonds, as it also includes investors with a Sharia compliance mandate, resulting in heavily over-subscribed government Sukuk issues in Pakistan. Also, being backed by assets and providing a fixed income stream, they are a less risky investment avenue than the equity market.

Due to the high demand for Sukuk owing to excess liquidity with Islamic financial institutions, they are more cost-effective for the government as compared to conventional t-bills and Pakistan Investment Bonds. Moreover, government Sukuk are a better investment avenue for Islamic finance institutions, which have been facing a shortage of high-quality investment avenues.

Sukuk, being asset-backed, can contribute directly towards the generation and growth of real economic activity if they are issued for developing new infrastructure projects like dams, solar parks, green energy initiatives, hospitals, motorways etc. They are also more secure as compared to conventional bonds. Moreover, the sale of assets can meet investor cashflows, which reduces default risk.

Fresh Sukuk issuances can contribute to the documentation of the economy as more investors are attracted to its Sharia-compliant nature. Therefore, a larger portion of government financing needs must be met with the regular issuance of Sukuk.

Sukuk can also attract financing for infrastructure development projects and can be targeted toward the retail segment to develop Islamic capital markets and contribute to financial inclusion. In addition, green Sukuk and Sustainable Development Goals-linked Sukuk need to be explored, which will help to promote sustainable economic growth.

Mr Siddiqui is the director of the IBA Centre for Excellence in Islamic Finance and Ms Tariq is a research associate

Published in Dawn, The Business and Finance Weekly, September 5th, 2022