KARACHI, December 4, 2024: Pakistan’s Sukuk market witnessed remarkable growth in 2024, with the government raising Rs2 trillion through 15 auctions conducted via the Pakistan Stock Exchange (PSX) auction system. This strategic financial maneuver has not only provided cost-effective borrowing options but also showcased the increasing confidence of investors in Islamic financial instruments.
Highlights of Sukuk Issuance in 2024
- Record Fundraising:
The government raised Rs353 billion in the final auction of the year held on December 3, 2024, marking the largest amount raised in a single auction. Notably, 60% of the funds from this auction were allocated to 10-year Sukuk, reflecting growing demand for long-term Islamic investments. - Tenor-Wise Breakdown:
- 5-Year Sukuk: Dominated with 38% of the total funds raised (Rs0.8 trillion). Among these, variable rate Sukuk (VRR) accounted for 74%, and fixed rate Sukuk (FRR) contributed 26%.
- 1-Year Discounted Sukuk: Secured 28% (Rs548 billion), making it the second-largest contributor.
- 3-Year and 10-Year Sukuk: Represented 16% and 19% of the funds, respectively.
- Strong Investor Interest:
Total participation in the Sukuk auctions reached an impressive Rs6.2 trillion, nearly three times the government’s target of Rs2.1 trillion. - Cost-Efficiency via Sukuk:
- The 1-Year Sukuk yielded an average cut-off 90 basis points (bps) lower than conventional 1-Year Treasury Bills (T-Bills), with a peak discount of 184 bps observed in the November 6, 2024 auction.
- For 3-Year and 5-Year Sukuk, yields were 60 bps and 9 bps lower, respectively, compared to conventional PIBs, while 10-Year Sukuk yields matched those of PIBs.
Innovative Sukuk Products Introduced in 2024
The momentum in Sukuk issuances stemmed from regulatory amendments approved in October 2023, which revised the rules governing Market Treasury Bills and Government Ijara Sukuk. These changes allowed:
- Enhanced flexibility in issuance, trading, and transfer of Sukuk.
- Broader participation by retail and institutional investors.
- Reduction in borrowing costs through expanded investor outreach.
The first auction under these amendments was held on December 8, 2023, where the government raised Rs28.9 billion at a rental rate of 19.5%, significantly below the prevailing 21.2% yield on 1-Year T-Bills, saving over 150 bps.
In early 2024, the government launched 3-Year and 5-Year Sukuk (VRR and FRR) alongside 1-Year Sukuk, receiving bids nearly five times the target. The fixed-rate Sukuk for these tenors closed with cut-off yields as low as 16.05% (3-Year) and 15.49% (5-Year), outperforming secondary market rates.
Strategic Benefits of PSX Sukuk Auctions
- Cost Reduction: Lower yields on Sukuk helped the government save on borrowing costs, crucial for managing fiscal challenges.
- Diversified Investor Base: The new framework attracted a mix of institutional and retail investors, deepening market participation.
- Boost to Islamic Finance: The preference for Sukuk over conventional instruments underscores the growing demand for Sharia-compliant products in Pakistan’s financial ecosystem.
Looking Ahead
The Sukuk market is poised to play a pivotal role in meeting Pakistan’s funding needs while promoting Islamic finance principles. With the introduction of innovative products and strong investor confidence, 2025 promises further growth in Sukuk issuance, offering cost-effective and sustainable borrowing solutions for the government.
