KARACHI: The overwhelming success of the first-ever auction of Ijarah Sukuk on the Pakistan Stock Exchange (PSX) in the outgoing week has given rise to speculations that depositors are likely to withdraw their investments from Islamic banks and invest directly in government debt for better returns.

As opposed to the earlier practice where only commercial banks would place bids for the government debt, its auction on the PSX allows the general public to bypass banks and directly make risk-free investments.

Speaking to Dawn on Saturday, Meezan Bank Ltd Senior Executive Vice President Ahmed Ali Siddiqui said he doesn’t expect a drop in the deposits of Islamic banks on the pretext of depositors moving their funds from savings accounts to the PSX.

“Most people maintain savings accounts for daily transactions. They don’t keep their money with us for investment purposes,” said the representative of the country’s largest Islamic bank with deposits of over Rs2 trillion.

Pakistan Domestic Sukuk Company Ltd, which is a wholly-owned subsidiary of the Ministry of Finance, issued the one-year Ijarah Sukuk with the Islamabad portion of Islamabad Metro as its underlying asset. 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.

Investors, particularly the general public, participated in the maiden auction so enthusiastically that the realised amount clocked in at a whopping Rs396.3 billion for the offer size of only Rs30bn. The cut-off yield remained 19.5 per cent — which is 1.9 percentage points lower than the one-year conventional treasury bill cut-off rate of 21.4pc witnessed in the last auction, according to Topline Securities CEO Mohammed Sohail.

Mr Siddiqui of Meezan Bank Ltd said depositors of Islamic banks wishing to “invest” their funds are offered tailor-made products that pay profit rates that’re comparable to other investment options.

“Those products are separate from our savings accounts,” he said, insisting that easier access to direct investment in government debt won’t lead to depositors moving their funds to the PSX.

Speaking to Dawn, Al Meezan Investment Management Ltd CEO Mohammad Shoaib said the Islamic asset management industry welcomes the auction of Islamic bonds on the PSX platform because it’ll popularise Islamic instruments of debt among the general public.

“It’s a misconception that customers of Sharia-compliant asset management companies (AMCs) will switch to direct investing in Sukuk via their brokerage accounts. AMCs are the go-to option for retail investors globally, and Pakistan is no exception,” said the CEO of the AMC with assets under management of roughly Rs400bn.

Published in Dawn, December 10th, 2023