Concerned over excessive investment in prize bonds and vanishing public interest in the once popular Defence Savings Certificates, the Central Directorate of National Savings is now looking for ways to diversify national savings products.

CDNS officials say National Savings Schemes (NSS) need restructuring to obtain the twin objectives of boosting government non-bank borrowing and keeping its cost at par with, or lower than, bank borrowing.

For the last three fiscal years, investment in prize bonds has exceeded net investment in 10-year DSCs, five-year regular income certificates (RICs) or three-year special Savings certificates (SSCs).

CDNS Officials say National Savings Schemes need restructuring to obtain the twin objectives of boosting government non-bank borrowing and keeping its cost at par with, or lower than, bank borrowing

Net investment in RICs and SSCs even turned negative in FY16 when net purchases of prize bonds rose past more than half of the total sales of all NSS instruments combined.

During the first four months of this fiscal year, too, prize bonds accounted for a little more than 50pc of the total investment in NSS, and net investment in DSCs, RICS and SSCs remained negative, according to the statistics posted on the SBP website.

All this is happening partly because prize bonds are an easy way of parking tainted money and partly because the rates of return on NSS, except for long-term Pensioners Benefit Account (PBAs) and Behbood (Welfare) Savings Certificates (BSCs) (meant for senior citizens, widows and pensioners), have become unattractive for small investors.

Market observers say people’s interest in DSCs, RICS and SSCs are also declining because they now have the opportunity of higher interest earnings in mutual funds.

It is in this backdrop, that CDNS is developing a plan to launch Ijarah Sukuk or Islamic bonds at the retail level. Once this plan, which is in the initial stage, is developed fully with input from all stakeholders, the ministry of finance would make a final decision on how to go about it.

After the government’s approval and after completion of the legal framework, CDNS would probably be mandated to manage these Shariah-compliant bonds as part of their Savings products portfolio.

“In case we get the government’s nod to launch retail Ijarah Sukuk, we’ll have room for restructuring other national Savings products, particularly those in which fresh investment is not coming in a big way,” an official of CDNS told this writer from Islamabad on phone.

“And it’ll also make it possible to pause and think about whether too much investment needs to be allowed to come in via prize bonds at the same cost or by making them less-expensive for the government in whatever way we can.”

There could be several ways of making these bonds less-expensive but one sure way is to reduce the amount of prize, or the number of prizes offered, on bonds of various denominations.

But even if prize bonds are left untouched while restructuring a few or some NSS products, the potential of launching retail Ijarah Sukuk is huge. The reason for this is that over the years bias for Shariah-compliant Savings and investment products has grown, particularly among the class of people who park money in NSS, officials say. And this is evident from growing deposits of Islamic banks to larger investment in Islamic funds.

Officials familiar with the idea of launching retail Ijarah Sukuk say that key features of the planned Islamic bonds including their price, size and tenure are yet to be finalised.

As the combined efforts of the fiscal and monetary authorities are focused on documenting the economy, central bankers say diversifying the product base of national savings is the need of the hour. Raising non-bank funds through prize bonds was an old idea that warrants a rethinking in the light of the present day ground realities. These bonds have served as a conduit for whitening black money and promoting money speculators.

They say the SBP is willing to help the government or any organisation, including CDNS, to launch retail Ijarah Sukuk.

Sources in CDNS say that adding the planned Ijarah Sukuk to the national Savings products portfolio has lots of challenges, some of which are related to their structuring — like finding the underlying assets behind the Sukuk issues and making them attractive for small investors in an environment when mutual funds are growing fast.

But there are other issues as well like seeking banks’ cooperation in retailing these bonds through their branches or managing the sales of planned Sukuk via online accounts. The selling of NSS products through banks has led to increased investment in them but retailing Ijarah Sukuk through stockbrokers and fund managers could also be considered, the sources opine.

Whether the CDNS’s plan to experiment with retail Ijarah Sukuk as a product of national savings gets through or not, analysts say the need for restructuring the NSS portfolio cannot be ignored. Net investment in NSS (including all products and prize bonds) has totalled Rs570bn, which is equal to only about 22pc of the two-year government bank borrowing of Rs2.612tr.

Meanwhile, the SBP has recently decided to allow CDNS direct membership of the clearing house to help it promote its products and facilitate investors of NSS. Indirect settlement of CDNS accounts at the clearing house via banks used to cause delays and hardship for such investors.

But from now onwards, banks are supposed to accept, at their counters, the profit coupons/withdrawal slips of three major products of the NSS: the PBA, BSC and Savings accounts (SA). Banks will then submit these coupons and slips to the clearing house for timely clearing.

Published in Dawn, Business & Finance weekly, January 30th, 2017