Five years after Sitara Chemical Industries Ltd. sold Pakistan's first local sukuk, the market for Islamic bonds in the 97% Muslim nation has finally perked up.
Bankers say the stream of new deals is likely to continue apace as borrowers tap into demand from the country's swelling number of Islamic financial institutions. They also forecast an increase in the variety of structures on offer. Pakistan is one of only a handful of countries to have issued Islamic bonds on the international market, raising US$600 million from five-year sukuk in 2005, but has left the domestic scene to private and state-backed corporations. Nevertheless, a trickle of deals in the last year or so has swelled to a wave recently. Accurate numbers are hard to come by since the vast majority of offerings are private rather than public deals but according to the Islamic Finance Information Service, Pakistan companies raised PKR17.225 billion last month alone out of the total PKR39.4 billion sold since Sitara kicked off issuance in July 2002. Last month also saw power company Attock Gen Ltd. raise PKR8.580 billion from the country's first syndicated Islamic project financing. Companies are preparing to hit the market with at least PKR24.5 billion more sukuk in coming months. Islamic bonds are structured in accordance with Shariah, or Islamic law, and differ primarily from their conventional counterparts in that they don't pay interest, which Muslims consider to be usury. Instead, lenders receive a regular payment linked to the performance of underlying tangible assets. In recent years, sukuk issuance has exploded in places like Malaysia and, more recently, the Middle East but has been slower in countries like Indonesia, the world's most populous Muslim nation, and Pakistan although both governments have said they are keen to bolster Shariah financing. The Pakistan borrowers headed to the market include cement manufacturers Javedan Cement Ltd. and Kohat Cement Co., textile companies Shahraj Fabrics Pvt Ltd. and Amtextile (Pvt) Ltd. and real-estate firm Eden Developers (Pvt) Ltd. But in the absence of a central government benchmark, the government is also encouraging state-backed companies to tap the market. Many of these have or are pursuing a crucial government guarantee which is especially attractive to Islamic banks looking for investments eligible for inclusion in their statutory liquidity reserves. Conventional banks typically invest in standard interest-bearing Pakistan government bonds but compliance with Shariah means Islamic banks can't do that. In the wake of two deals from state utility Wapda, Karachi Shipyard & Engineering Works, National Industrial Parks Development and Management Co. and House Building Finance Corp. are in the market for a combined PKR9.2 billion and there is talk that Pakistan Agricultural Storage & Supplies Corp. is seeking PKR10 billion in funds through Islamic bonds. | |
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Most of the deals have been structured using the ijarah leasing structure or the diminishing musharakah principle, whereby ownership of a joint venture passes from one partner to another. Coupon-style payments are derived from the leases or the profits generated from the joint venture. However, bankers say new structures are on the way in Pakistan. The cash-strapped national carrier Pakistan International Airlines, for one, is looking to follow up a recent PKR2 billion sukuk, backed by aircraft, with another Islamic bond as part of its bid to raise PKR26 billion to support restructuring and modernization. Meezan Bank, which expects to get the mandate for a PKR6 billion offering, promises a new structure since the airline has insufficient tangible assets to back another deal. Fear that the idea may be snatched by rival bankers means details are scant, however. A wider variety in maturities, beyond the typical five-years, is also on the way. "We are gearing up to take care of longer tenors primarily for the power sector," said Irtiza Kazmi, head of syndications and capital markets at Dubai Islamic Bank in Karachi. "We are also looking at different currencies. It's not that far away. It's a matter of months, if not weeks," he said, adding the bank was looking at structuring a U.S. dollar-denominated sukuk for a Pakistan company that would be targeted at Middle East buyers. Behind the recent flurry in sales is the recent establishment of Islamic banks and windows - Islamic units of conventional banks - all ravenous for Shariah-compliant assets to put their cash to work. Pakistan awarded the country's first Islamic banking license in January 2002 to Meezan Bank and the country now has 19 Islamic banking providers with five fully fledged Islamic banks, according to the State Bank of Pakistan. It also has five Islamic mutual fund operators worth around PKR11 billion, although more are on the way. Companies are also keen to expand while the Pakistan economy is blossoming. Pakistan's economy grew 6.6% in 2006 and is forecast by the Asian Development Bank to expand by 7.0% this year. | |
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