KARACHI: The cash-strapped government is saving billions of rupees on account of raising financing through selling Islamic financial instruments like Ijara Sukuk that are priced cheaper than what the conventional banks are offering, experts said.
Prime minister Shehbaz Sharif’s government, which is struggling to keep the country’s fiscal deficit in check as part of its staff level agreement with the International Monetary Fund (IMF) was able to save about Rs 17 billion during last calendar year by selling Islamic bonds called Sukuk worth over 1.77 trillion rupees, said an Islamic bank executive.
“Our economic managers’ transitioning from costly and interest-based treasury bills and investment bonds to Sukuk has resulted in a significant cost savings for the government,” he said adding that the Islamic banks were offering more competitive rates than their conventional peers to the government.
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“The Islamic banks offer more competitive rates, especially for large-scale funding, that make them attractive across various sectors,” the executive said.
That’s why, he said, adding the government has started raising billions of rupees through selling Sukuk at Pakistan Stock Exchange at very competitive fixed and variable rental rates.
Citing the two latest Sukuk auctions the central bank conducted on August 16 and July 25, the Islamic banker said the Shariah-compliant banks offered rates that were cheaper as much as 1.02 percent than cut-off yields the conventional banks charged in comparative auctions.
The government raised funds at 17.22 percent and 15.99 percent through selling one-year Sukuk in the said auctions as compared to 18.24 percent and 17 percent for the respective market treasury bills and Pakistan Investment Bonds auctioned in the same period.
“This performance challenges the belief that Islamic banks charge higher rates,” the executive argued and added that the strategic deployment of innovative Sukuk structures has empowered the resource-constrained government to manage its domestic debt.
In their consistent competition for funding needs from the state-owned entities like Punjab’s food department, Pakistan Agricultural Storage & Services Corporation Limited (PASSCO) and Trading Corporation of Pakistan (TCP), the Islamic banks outperform their conventional rivals in terms of offering more competitive borrowing rates especially for large-scale financing, he said.
“In private sector financing, Islamic banks remain competitive, providing financing to corporations, commercial enterprises and small and medium enterprises at the industry-standard rates.”
Under its five-year strategic plan, the State Bank of Pakistan (SBP) plans to transform Pakistan’s existing interest-based financial system into Shariah-compliant one.
The Federal Shariat Court of Pakistan in 2022 directed the government to adopt Islamic financing modes while borrowing from its internal or external lenders and convert Pakistan into an “equitable, asset-based, risk sharing and interest-free economy” by the end of 2027.
Referring to latest media reports, the official said the Islamic banks were also offering competitive house and car financing to its customers, charging up to 21.25 percent profit rates on average.
“Their market share is therefore increasing significantly every year,” the banker said.
Similarly, he said, the conventional banks were lending money to their customers at an average KIBOR plus 4.5 percent that is equivalent to approximately 21.5 percent.
It is important to mention here that the SBP in its latest monetary policy meeting slashed the interest rate to 19.5 percent that is a benchmark for the rate of bank borrowings.
“The government’s focus on issuing Shariah-compliant Sukuk to replace interest based borrowing is a positive move for the growth of Islamic finance in Pakistan”.
Copyright Business Recorder, 2024