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Floating Sukuk bonds

Floating Sukuk bonds

In a bid to boost foreign exchange reserves up to $15 billion by December 31, 2014, the government has successfully floated Sukuk bonds worth $1 billion in the international market.The initial plan was to raise $500 million, but the Islamic bonds received overwhelming response of $2.5 billion from international investors, nearly five times more than the target amount. However, the government accepted offers only of $1 billion at a profit rate of 6.7 percent for a five-year tenure. The price is 50 basis points lower than the five-year Euro bond which was priced in April 2014.

Sukuk is a legal instrument and Arabic name for financial certificates or cheque and is referred to the Islamic equivalent of conventional bond. However, unlike fixed income or interest bearing bonds, Sukuk securities are structured to comply with the Islamic law and principles of investment without paying any interest. In this method, Sukuk owner collects profit as a rent and not as interest. The government wanted to raise the country’s foreign exchange reserves to $15 billion from current $13.228 billion through Sukuk bonds and receiving fourth and fifth tranches of $1.1 billion from the International Monetary Fund (IMF) until December 31, 2014. Achieving the target of $15 is a prerequisite to qualify for loans from the International Bank for Reconstruction and Development.A statement by the Finance Ministry reveals that the 35 percent subscriptions came from Europe, 32 percent from the Middle East, 20 percent from North America and 13 from Asia.

According to Finance Minister Ishaq Dar, thebonds will save the country around Rs 5 billion annually in debt servicing asthe State Bank will receive the proceeds of the Sukuk bond and it will use the rupee proceeds of an equivalent amount to pay the domestic debt.

There is a reason to support this kind of innovative financial instrument but cautiousapproach is also necessary because investors may incur losses in case of default. However, popularity graph of interest-free Islamic banking is on the rise all over the world and it is hoped that Sukuk bonds will prove to be beneficial for the government as well as for the investors.