GoP Ijarah Sukuk: better investment option?

In Pakistan, we are fortunate in that our economy is endowed with a variety of both conventional and Islamic financial services and products. While the conventional financial services cater to a wide array of investors, bank depositors, loan recipients, and financiers since the inception of the State of Pakistan, the Islamic financial services have over the years gained immense traction and momentum, particularly since the foundation of Islamic finance was laid in the country in late 1970s and the 80s. Islamic finance has gained immense popularity because, as a nation, we are significantly inclined towards our religious values which have multiple influences over various aspects of our lives.

Keeping our Islamic values in perspective, the Government of Pakistan (GoP) introduced the GoP Ijarah Sukuk (GIS) as an asset class to raise capital while presenting an option to investors to invest Islamically and ethically. GIS is a Shariah-compliant investment option and is a variant in that respect to the other Government Debt Securities (GDS) available such as Market Treasury Bills (MTBs or T-Bills) and Pakistan Investment Bonds (PIBs). Needless to say, MTBs and PIBs are conventional GDS.

In a major development in the financial landscape of Pakistan, in December 2023, the Primary Market auction of GoP Ijarah Sukuk started to take place on the stock exchange platform. This was the first time in the history of Pakistan’s capital market, that the GoP Ijarah Sukuk was auctioned through the state-of-the-art auction system made in-house by the Pakistan Stock Exchange (PSX). Previously, this fell within the ambit of the State Bank of Pakistan. The auction for GIS through PSX allows for greater transparency, access to a larger number of participating investors, and an efficient price discovery.

The GIS issued through the capital market platform was made possible subsequent to the Federal Cabinet approving the amendments to the existing Government of Pakistan Market Treasury Bills 1998 and Government of Pakistan Ijara Sukuk Rules 2008. These amendments enable the Government to conduct GIS auctions through PSX and the capital market institutions comprising of the National Clearing Company of Pakistan Limited (NCCPL) and Central Depository Company (CDC), collectively known as Capital Market Infrastructure Institutions (CMIIs).

The GoP Ijarah Sukuk is essentially an Islamic instrument which offers stable returns with growth potential for investment over tenors of 1, 3, 5, or 10 years with fixed or variable rate of returns, having a denomination of Rs 5,000/- and its multiples thereof. The one-year GIS profit/ rental frequency is fixed and paid at maturity, whereby the fixed rental rate is determined at the time of the auction. The Fixed Rental Rate (FRR) GIS is available in tenors of 3, 5 & 10 years. It pays rental/ profit on a semi-annual basis at a fixed rate determined at the time of auction. The Variable Rental Rate (VRR) GIS also offers tenors of 3,5 & 10 years. It pays the latest 6 months weighted average MTB rate plus/ minus spread on semi-annual basis. The spread is revised after every six months based on the benchmark rate of the prevalent 6-month weightage average T-Bill Yield.

Investors – whether local, non-resident Pakistanis (NRPs) or foreign – can participate in the Primary Market auction and/ or Secondary Market investment of Government Ijarah Sukuk. Local investors can invest through their brokerage accounts, NRPs can invest through their Roshan Digital Accounts, and foreign investors can do the same through their Special Convertible Rupee Account (SCRA) via their brokerage accounts.

In the Primary Market auction held through the Stock Exchange platform, there are two types of bidding formats, Competitive and Non-Competitive bids. In a Competitive bid, an investor specifies the price or bid rental or spread at which s/he wishes to purchase the Ijarah Sukuk. Non-Competitive bidding is for investors who are willing to invest at the price/rate set in the competitive bidding process. Non-Competitive bidders do not specify the price/ rental or spread of the security. The price or terms are negotiated through the competitive bidding process, based on the demand and supply. Investors can participate in the auction process with as little as Rs 5,000 per investor. For the maximum amount, there is no set limit in Competitive bidding; however, for Non-Competitive bidding, the upper limit is 0.25% of target auction amount or Rs 500 million, whichever is lower.

PSX notifies the auction calendar and relevant details such as term sheets, Sukuk structure, and auction results, among other information, at its website in ‘Government Debt Securities-Primary Market Auction’ section.

From January 2024 onwards, the Primary Market auction of the following types of GIS takes place at-least once every month, through the capital market institutions, specifically the CMIIs:

* Short-term Fixed Rate Discounted (FRD) GIS: 12 months FRD GIS

* Variable Rental Rate (VRR) GIS: 3, 5 & 10 years VRR GIS

* Fixed Rental Rate (FRR) GIS: 3, 5 & 10 years FRR GIS

After the primary issuance, these Sukuk get listed at Pakistan Stock Exchange and investors can invest through the Secondary Market by opening their brokerage accounts with any brokerage firm eligible to trade in listed debt securities as well as GIS. To purchase (or sell) GIS on PSX platform, investors need to have a CDC Sub Account along with their brokerage account with the brokerage firms participating in GIS transactions. The Sukuk thus purchased will be held in custody in the Sub Account of the investor. Likewise, an investor can also sell or redeem their GIS in the market at the available market rates. Additionally, it is also possible for an investor to set a certain bid or offer to buy or sell their Sukuk respectively at a particular price when that price is reached in the market.

Investors, whether small or large, local, NRPs or foreign, are encouraged to invest in GoP Ijarah Sukuk whether on standalone basis or for diversifying their portfolios. Through this stable security, they can earn rental returns in accordance with Islamic tenets of finance and ethics. The GoP Ijarah Sukuk is a popular option of investment enjoying the trust and confidence of investors throughout Pakistan. This is evidenced by the fact that GoP Ijarah Sukuk amounting to more than Rs 2 trillion has been issued through primary market auction at PSX since December 2023, as well as the secondary market trading of GIS crossing Rs 100 billion. As it stands, Sukuk are an increasingly popular option of investment globally, considering that it is a key Islamic financial instrument which accounted for 24.94% (USD 0.842 trillion) of the global net worth of the Islamic finance industry by the end of the year, 2023. Additionally, the global Sukuk market registered an increase of 16% or USD 212 billion for the year 2023, signifying robust demand highlighted by oversubscription of Sukuk issuances in different markets across the world.