Economic growth: Development of Sukuk market brings positive impact: experts

LAHORE: Development of Sukuk market has a positive impact on the economic growth of the country, as one unit increase in Sukuk volume and Sukuk density registers an increase in economic growth of 0.5% and 1.7% respectively, said banking sector experts.

Sukuk are considered to be less risky and more stable instrument as compared to conventional bonds and correlation among most of Sukuk securities are less or negative, which helps in diversifying their risk.

The instrument of Sukuk is fast becoming popular in Pakistan throughout the public and private sectors. The latest entry is that of Hub Power Company Limited, which is set to issue Rs 6 billion Sharia-compliant Sukuk.

According to experts, Sukuk is a kind of bond structured to be acceptable under Islam. It enables the government to tap into an entirely new capital market. It is an innovative financial instrument with a flexible structure based on Islamic financial contracts, unlike bond which is based on the structure of a loan imposed with interest. It is believed that Sukuk differs considerably from the conventional bonds in terms of risks related to investment.

Adeel Nasir, an Islamic banker, said innovation and adaptation is a constant factor in the growth of Sukuk bonds in Pakistan, which are becoming popular with every passing day. He said trading in Sukuk is considered to be more stabile as compare to conventional bonds.

Tariq Javed, another banker, said that Sukuk is a powerful and effective product because of its practical and Sharia-compliant nature. He said Sukuk is a new trend appearing on the global scene in 2002. He said the investors analyze Sukuk bonds in terms of risk-and reward-sharing and wealth concentration as well as circulation trends worldwide. However, he stressed on re-aligning the structure of Sukuk bonds to attract new investments.

Umar Farooq, an economic expert, said thatSukuk has been in the market for two decades, as debt marketing is developing in Pakistan. The investors show keen interest in gauging the level of risk involved in it, he added.

According to him, more and more investors are being attracted by Sukuk bonds because of the features like lighter indebtedness, benefits of avoiding external monitoring, and tax incentives, besides the religiosity issue.

However, a financial market expert Zohra Jabeen pointed out that there is a perception that firms that prefer Islamic debt and issue Sukuk are financially more unstable, and exposing to higher insolvency risk as compared to the bond issue firms.

Mujeeb Beig, a banker, said that by using assets-backed Sukuk, Pakistan can ensure increase in agriculture, industrial, and exportable goods that support the current account deficit. Also, he said, it would be helpful in elimination of unfavorable balance of payments, removal of fiscal deficit and leads towards the sole objective of sustainable economic growth of Pakistan.

Copyright Business Recorder, 2020