Pakistan’s central bank expands local currency sukuk sales

Feb 8 (Reuters) – Pakistan’s central bank is expanding issuance of local currency Islamic bonds (sukuk), auctioning 100 billion rupees ($955 million) worth of three-year paper this week, a much-needed tool for the fast-growing Islamic banking sector.

The central bank plans to offer another 100 billion rupees worth of sukuk in April, according to its auction calendar.

If successful, the two auctions would exceed the total amount of sukuk the central bank has sold in the previous three year period.

Pakistan’s Islamic banks have expanded rapidly along with growth of sharia-compliant banking across the Middle East and Southeast Asia, but the sector still lacks some of the money market instruments available to conventional lenders.

Islamic banks follows religious principles such as bans on interest and pure monetary speculation, which rules out their use of short-term financial instruments such as treasury bills and repurchase agreements.

In the 12-month period ending in September, Pakistan’s 22 Islamic finance institutions have added 409 billion rupees in assets, a 36.2 percent growth rate, central bank data shows.

The sector now holds a 11.2 percent share of total banking assets, up from 9.9 percent a year earlier.

Profitability, however, remains below the banking industry average, partly due to higher expenses as Islamic banks expand their branch networks and a lack of compliant investment options.

This week’s auction will also be the first time the central bank issues sukuk with a fixed rental rate, which will be paid on a semi-annual basis, compared to the variable rental rate it has used since it began sukuk auctions in 2008.

The central bank issues sukuk based on a structure known as ijara, a sharia-compliant sale and lease-back contract.

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This week’s auction uses Karachi’s international airport as the underlying asset for the transaction, with the maximum value of the programme being 197.4 billion rupees, central bank said in its tender notice.

This means the central bank would have to identify additional government assets if it wants to maintain future sukuk issuance volumes under an ijara format.

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