Bloomberg/Singapore/Islamabad
Pakistan plans to take advantage of 36% annual growth in the nation’s Islamic banking assets by resuming sales of sukuk to lenders, after a reduction in aid contributed to the rupee’s drop to a record low.Sukuk sales, halted since May 9, will start again in the coming quarter, Masroor Qureshi, head of debt management at the Finance Ministry in Islamabad, said in an interview on August 19, without saying how much would be issued. The government, which sold a record Rs189bn ($2.2bn) of debt that complies with Islam’s ban on interest in the fiscal year ended June 30, may also broaden the range of maturities it issues to include seven-year debt, he said.The nation is turning to Islamic securities to plug a hole in its finances after the killing of Al Qaeda chief Osama bin Laden in May strained relations with the US, which has provided Pakistan with $14.6bn in economic and military assistance since 2005. The country may raise money more cheaply after the central bank cut its key interest rate to 13.5% last month for the first time since November 2009, and as Middle Eastern banks expand their Pakistan operations.“Pakistan needs the funds and investors need more sukuk,” said Asif Ali Qureshi, executive director at Invisor Securities Ltd in Karachi, the country’s financial centre. “The government’s financial needs are large. Last year’s auctions were oversubscribed. That means the demand is there.”Meezan Bank Ltd, Pakistan’s biggest Shariah-compliant lender, and NBP Fullerton Asset Management Ltd, both based in Karachi, said they would find the debt attractive at yields of around 13.1%. Pakistan’s three-year sukuk traded at that yield yesterday, according to Abdullah Ahmed, the head of treasury at Meezan Bank.“I don’t see any problem for the market to absorb up to 200bn rupees of sales this year,” Ahmed said in an interview on Monday.The International Monetary Fund stopped disbursing money to Pakistan in May 2010 after the country failed to meet conditions attached to an $11.3bn loan granted in 2008. The IMF told Pakistani officials in May this year that the government needs to keep cutting the budget deficit and to encourage more lending to companies.The US said on July 11 that it was withholding about $800mn in military aid to Pakistan, from an annual total of $2bn, because it suspects elements within the army harboured bin Laden. US special forces killed the Al Qaeda leader in Abbottabad, near the country’s most prestigious military academy, in a May 2 raid.The rupee has weakened 1.5% this year and touched a record low of 87.12 per dollar yesterday. The benchmark Karachi Stock Exchange 100 Index has plunged more than 13% since the end of June as the nation struggled to attract funds.Pakistan’s Islamic banking industry assets climbed to Rs560bn last fiscal year, Syed Wasimuddin, a spokesman for the State Bank of Pakistan in Karachi, said in an interview on August 17. Funds managed by Islamic banks represent 7.3% of the nation’s total banking assets, he said.Sukuk sales helped Pakistan finance about 18% of its fiscal deficit, which swelled to 5.7% of gross domestic product in the year through June. The government is aiming to reduce the gap to 4% of GDP this year through June 2012, which may convince the IMF to resume its aid programme.Bids exceeded the amount of debt on offer at all four government sukuk auctions last fiscal year. State Bank of Pakistan sold Rs45.8bn of three-year Ijara Sukuk at 13.48% in May, the same rate as its benchmark non-Islamic six-month treasury bills.Global sales of sukuk, which pay asset returns to comply with Islam’s ban on interest, have climbed to $16.8bn so far this year, from $9.9bn a year earlier, according to data compiled by Bloomberg.The difference between the average yield for sukuk and the London interbank offered rate narrowed five basis points, or 0.05 percentage point, to 239 yesterday, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index. Average yields declined two basis points to 3.51%.Shariah-compliant bonds gained 6.8% this year, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index, while debt in developing markets rose 6.9%, JPMorgan Chase & Co’s EMBI Global Composite Index shows.Islamic lenders including Albaraka Banking Group, Bahrain’s largest publicly traded Islamic lender, and Meezan Bank, owned by Kuwait’s Noor Financial Investment KSCC, have more than doubled the number of branches they have in Pakistan in the past three years to about 800 at the end of June, according to central bank data.Until now, Pakistan has only issued three-year sukuk. In the fourth quarter, the government is considering selling bills due in less than one year, or issuing five- or seven-year Shariah-compliant debt, the Finance Ministry’s Qureshi said.“Demand from Islamic banks is still strong,” he said. “We didn’t go for an auction this quarter because we’re in the middle of finalising government assets that will back these securities. It’s a cumbersome process.”