Observer Report Islamabad
The cabinet recently approved the issuance of Islamic sukuk and leases to promote Islamic banking system (IB) in the country.
The cabinet approved the summary of the Finance Ministry on the issuance of sukuk bonds, while adding that Finance Ministry may fix more assets in it.
The Ministry of Finance had suggested mortgaging Islamabad-Peshawar Motorway, Pindi Bhattian-Faisalabad Motorway, and Islamabad Expressway along with two major airports, Islamabad and Lahore for issuance of sukuk.
The Finance Ministry, in a summary, has stated that to support the government’s budgetary position and promote Islamic banking industry in the country, the Finance Division intends to take forward its domestic and international ljara Sukuk programsme.
Sukuk are Shariah-compliant borrowing instruments structured to pay returns on investment as rent instead of interest by utilising an underlying asset. In case of ljara Sukuk, tangle, assets are utilised to structure the transactions.
Till date, the Finance Division has undertaken 32 domestic and four international ljara Sukuk transactions amounting to Rs1,573 billion and US$ 3.6 billion respectively.
Further, the government issued two “energy Sukuk” of PKR 200 billion each in March 2019 and May 2020, respectively, to settle power sector arrears.
These Sukuks were issued against the assets of salected government-owned power generation and distribution companies.
MI Motorway, M2 Motorway, M3 Motorway, and Jinnah International Airport have been approved for domestic ljara Sukuk in the past.
At present, MI and M3 Motorways are unencumbered while at present, the Islamabad-Chakwal section of M2 Motorway is unencumbered.
After approval of the Federal Cabinet in its meeting dated 31 March, 2020, the government initiated a domestic ljara Sukuk program of Rs756 billion by utilising the unencumbered land of Jinnah International Airport (JIA), Karachi.
The asset is almost fully utilised with issuance of domestic Ijara Sukuk worth Rs636 billion, and structuring of Islamic Naya Pakistan Certificates (INPCs) of around Rs59 billion.
As JIA, Karachi will be exhausted shortly; there is an urgent need to identify new unencumbered assets to ensure uninterrupted issuance of Ijara Sukuk in the domestic as well as international capital markets.
The continuity in issuance of domestic Sukuk will also enable the government to meet its target of having 10 percent Shariah-compliant instruments in domestic securities by the end of fiscal year 2023 (Medium-Term Debt Management Strategy 2019/20-2022/23). At end-December 2020, this was at 3.8 percent.
The Federal Cabinet in its meeting dated 26 January, 2021 directed the Finance Division to identify options of underlying assets for Sukuk issuances.
The Finance Division; accordingly, identified M-1 arid M-3 motorways. Islamabad Expressway, and Islamabad and Multan International Airports and requested the Ministry of Communication/NHA and the Aviation Division/Civil Aviation Authority (CAA) to grant necessary permissions to utilise these assets for Ijara Sukuk issuances. The Aviation Division and CAA have not responded.
Ministry of Communications, while assuring its cooperation, has asked the Finance Division to consider compensating NHA with appropriate asset utilisation fee for its assets (Annex-VII), which is totally unprecedented.
In next year’s domestic and external financing plan, the need for raising additional resources to the tune of Rs1.2 trillion and USS 3.5 billion has been proposed.