EDITORIAL: A historic moment for the Pakistan capital market arrived last week. Unfortunately, however, it did not get great fanfare. For the first time, the government had issued a Sukuk (Islamic bond) through an auction on Pakistan Stock Exchange (PSX), which is going to be traded in the secondary market. This indeed is a much necessary baby step towards developing the debt capital market.
The credit goes to the finance ministry, especially caretaker Finance Minister Dr Shamshad Akhtar, who has always advocated development of debt capital market while central bank and commercial banks have been found to be less enthusiastic about opening the avenue for retail investor. In the first ever 1-year Ijara Sukuk, there was an overwhelming participation of Rs479 billion as against the target of Rs30 billion, and the government fetched Rs36 billion at the cut-off yield of 19.52 percent.
Now the government is planning to issue Sukuk every month. Seeing the appetite, the government should consider larger issuances, going forward. The idea is to build 3-month, 6-month and 12-month sukuk market through auctions on the PSX whereas the larger tenor issues, for the present, be retained to be managed by State Bank of Pakistan.
The ideal condition would be to have conventional issuances of T-bills through PSX as well. However, that would be an extremely ambitious move as there might not be enough demand for T-bills. Furthermore, the general appetite of retail consumers is in Shariah-compliant products and that too in smaller maturity papers. Thus, 3-month to 12-month Sukuks are likely to be in demand. It’s a matter of how much supply the government can have to slowly replace its T-bills. Sukuks are asset-backed instruments, and that may have limitations. In this auction, Islamabad Metro (Islamabad portion) is the underlying asset, which was valued at Rs48 billion. In the next auction, there would be another government of Pakistan-owned asset. To expand the base, the work is in progress on the assets to back the Sukuk structure where the current assets of government-owned entities can be used to secure Sukuks on a recurring basis such as petroleum commodity inventory of PSO (Pakistan State Oil). That will expand the pie and perhaps would be able to absorb as much issuances as the market demands.
With this, Murabaha Sukuk can be issued by the government for shorter 3-month and 6-month durations as Ijara Sukuk perhaps cannot be issued below 1 year. The government should speed up asset-light structure. The market is hungry, and this can attract many retail consumers. The objective of developing the secondary market is to be achieved by issuing big-ticket items. Rs36 billion is too low an amount and not much is being traded in the initial few days.
It seems that a group of investors has bought this issue and is likely to keep this till maturity. Bigger and frequent issues are likely to develop the secondary market in a meaningful way. The other objective is to have better price discovery of government papers. The Sukuk issuance is at about 2 percentage points discount to same tenor T-bills. That will reduce the government’s cost of borrowing. And that will lower the options for commercial banks to deploy; lately, the banks are raising deposits and investing in government papers. Lowering the offering of government papers to banks would compel them to provide credit to the private sector liberally, which is commercial banks’ supposed role. Although the much-awaited transition to a fully developed secondary market for government debt for trading on the bourse will take some time, the first raindrop has fallen from a cloud.
Copyright Business Recorder, 2023
Comments
Comments are closed.