KARACHI: The listing of Shariah-compliant securities at the Pakistan Stock Exchange (PSX) marked a significant milestone for Pakistan’s capital markets as the Government of Pakistan raised approximately Rs 2,000 billion ($7 billion) through these Sukuk (Islamic bonds) in the outgoing year 2024, offering an innovative and Islamic avenue for financing.
This development not only attracted a broader investor base, including those seeking Shariah-compliant investment options, but it also enabled the government to secure funding at yields lower than those of conventional bonds, analysts said.
“This reflects the growing appetite for Islamic financial instruments and highlights the potential of Pakistan’s capital markets to evolve and cater to diverse financial needs,” Muhammad Sohail, leading analyst and CEO of Topline Securities said.
Auction for Ijarah Sukuk: PSX raises Rs202bn against Rs250bn target
Such initiatives reinforce the importance of deepening the market for Islamic finance in the country, aligning with global trends and providing a more cost-effective funding mechanism for the government, he added.
In the total 15 auctions, conducted using PSX auction system, the largest quantum of funds were raised in last auction of 2024, which took place on Tuesday, December 03, 2024, fetching Rs 353 billion with 60 percent funds raised in 10 year Sukuk.
Tenor wise, 38 percent of the funds or Rs 0.8 trillion were raised in 5 year Sukuk, of this variable rate Sukuks were 74 percent and fixed rate were 26 percent.
Second largest amount was raised in 01 year discounted Sukuk amounting to Rs 548 billion or 28 percent of the total raised amount.
In 10 year and 03 year Sukuk, the government raised 19 percent and 16 percent of the funds raised in PSX Sukuk auction system during 2024. In all 15 auctions, the government received participation of Rs 6.2 trillion against total target of Rs 2.1 trillion and raised amount of Rs 2.0 trillion.
Rental Rate (Yield) on 01 year discounted Sukuk: Cut-off yields on 12M Sukuk have remained on average lower by 90bps than conventional 12M T-bill with highest discount of 184bps witnessed on November 06, 2024 Sukuk auction in which government raised second highest amount of Rs 339 billion with Rs 116 billion from 12M Sukuk. Yield on 01 year Sukuk came down from 19.5 percent to 10.99 percent.
Cut-off yields on 3/5/10 year Sukuk on average have remained lower by 60/9bps/nil than conventional 3/5/10 Year PIBs secondary market yield on the date of auction with highest discount of 82bps was witnessed in May 09, 2024 auction. Cut-off yields on 3/5/10 year Sukuks came down by 134-455bps in 2024.
In October 2023, the Care Taker Federal Cabinet had granted its approval to amend the Government of Pakistan Market Treasury Bills 1998 and Government of Pakistan Ijara Sukuk Rules 2008.
These amendments aimed to enhance the efficiency and provide flexibility for issuance, registration, trading and transfer of Government Securities through any institution. Furthermore, these changes were also supposed to help the Government to expand its investor base, make participation easier for diversified investors i.e. retail etc. and eventually reducing the cost of borrowing by enhancing the subscribers’ base. In line with these changes, the Government of Pakistan conducted first primary auction of 01 year discounted GOP Ijara Sukuk (GIS) through PSX auction system on December 08, 2023 with target of Rs 30 billion.
In the first auction in 2023, the government received bids of Rs 396 billion (realized value) with rental rate of 18.5-33.42 percent for 01 year GIS, 13x of the amount targeted by the government. However, the government picked up Rs 28.9 billion at cut-off rental rate of 19.5 percent. At that time, in secondary market, 01 year T-bill was yielding 21.2 percent, thus reducing government cost by over 150bps.
Since then all auctions of 01 year GIS Sukuk are done through PSX auction system.
Thereafter, first auction of the 03 year and 05 year GIS in both variable (VRR) and fixed rate (FRR) were conducted on January 23, 2024 alongside the 01 year discounted GIS. The target set for 03 year and 05 year (in both VRR and FRR) was Rs 60 billion cumulatively.
However, auction witnessed participation of Rs 296 billion in the first auction of 03 year and 05 year Sukuks, 5x of the government target. The government picked up Rs 81 billion in this auction for 03Y and 05Y maturity Sukuks. The fixed rate Sukuk cut-off was 16.05 percent and 15.49 percent for 03Y and 05Y, respectively 02-79bps lower than secondary market 03Y and 05Y PIBs rate of 16.84 percent and 15.51 percent, respectively.
On floater side, in the first auction the spread over the reference rate was +15bps, while this spread lowered further in subsequent auctions and reached -89bps in last auction.
Copyright Business Recorder, 2024
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