The government should promote this industry by taking bond market-friendly measures in more or less the same way as introduced by Malaysia.

Senior Anchor Business Plus
Mar 05 - 11, 2007

If we look five years back Islamic bond market did not even exist and then Malaysia raised highest $600mn in the year 2002 followed by Qatar in September 2003 - raising the ever-highest $700mn through Islamic bonds to make the overall Islamic bond industry size equal to $1.7bn in 2003 and thus people started forecasting that the number and size of Islamic bonds will increase at a vibrant pace in the years to come. They proved absolutely right as the total size of Islamic bonds now stands at around $50bn. Though with this size the Islamic bond market is still not comparable to huge conventional bond market, one can still safely say that Islamic bond market is no more a niche player rather it has become a developed industry.

The structure of the Islamic bonds is so attractive that the governments and companies of non-Islamic Western and Asian countries have also shown their interest in raising money through the issuance of Islamic bonds. China is expected to issue its Sukuk. Singapore and London are working on a framework to participate in this fast growing industry. Indonesia is expected to pass a bill for international Sukuk as presently only domestic Sukuks are issued there. International banks in Japan, France, Germany, UK and Switzerland actively participated in Islamic bonds and it is very obvious from these facts that it is not just the faith that is leading to the growing size of Islamic bonds but it is its structure that lures both Islamic and non-Islamic investors. Besides the attractiveness of Islamic bonds, petro dollars of Islamic countries are also one of the reasons of non-Islamic interest in Islamic bonds. Analysts believe that currently there is a huge potential in Islamic bond market because out of total size of $50bn, Malaysia has the major share with $35bn where Islamic bond sales are estimated to be as much as two-thirds of all corporate bond offerings. Gulf is expected to remain the centre of attraction in the coming days and due to its ability to issue more bonds, its share will increase in the total size and as a consequence absolute size of entire Islamic bond industry will shoot up. The growth rate in Middle East has been around 45% year-on-year since 2001.

Ijlal Ahmed Alvi, CEO International Islamic Financial Market, is very optimistic about the future of Islamic bond market and expects it to touch $200bn mark in next five years. According to him, bonds worth $35bn are already in pipeline as of November 2006. He expects Saudi Arabia and Gulf countries to dominate the growth in Islamic bond market due to huge infrastructure activities. Dubai Ports, Customs and Free Zone sold the largest-ever $3.5 billion Sukuk, 11 percent of it was sold to European investors. Around half of it was sold to non-Islamic investors. According to estimates, roughly $17 billion worth of Islamic compliant bonds were sold in 2006 and analysts still believe that there are not enough papers available in the market and there is so much demand for the future bond issues.

After Pakistan's return to international bond market in 2004 as sanctions were imposed in 1998, the Pakistan government issued $600mn Sukuk in 2005. The response was overwhelming for the Sukuk and due to improvement in credit ratings by the international agencies on behalf of good economic performance in previous years, the premium that Pakistan has to pay on its bonds over US treasuries has reduced and therefore Pakistan is expected to make its way to issue more bonds in the international market and a reasonable portion of that can be in Islamic mode.

On corporate side, despite so much growth in international Islamic bond market, Pakistan's participation is relatively very subdued. As only WAPDA issued Sukuk worth $134mn and then recently Dubai Islamic Bank arranged $85.3 million worth of Sukuks for two companies in Pakistan - the Karachi Shipyard and Engineering Works (KSWE) and the Sui Southern Gas Company (SSGC). According to Mr. Alvi, Pakistan can easily tap as much as $1.5bn through Islamic bonds and steps should be taken by corporations to incarcerate their share from this booming industry.

It is very disappointing that despite tremendous growth in financial sector in previous years Pakistan could not develop a debt market with depth and liquidity. The government did not take any initiatives to develop a proper debt market where corporations can raise their funds. Instead the government kept borrowing from SBP instead of raising money through PIBS and did not focus on developing an avenue through debt papers which could be viable for government and corporate bonds. Thus on corporate level there is a culture to rely on bank borrowing even in this high interest rate scenario. If a developed debt market were at its place, which could offer depth and liquidity to interested parties, then a Murahaba-based interbank market could find an existing platform in the conventional mode and thus a domestic debt market could easily be developed based on Islamic principles. If Malaysian companies can raise 84 percent of the total debt through Islamic debt papers then the same trend can also be developed in Pakistan since the government has been trying to promote investments in Pakistan so that future growth targets can be achieved by maintaining the investment to GDP ratio

Pakistan needs to make huge investments in infrastructure development and the government should definitely consider Sukuk to raise money because infrastructure is the just right use of Sukuk, for Islamic mode of financing is about creating the assets and getting return from them and hence infrastructure development can ideally be done by issuing Sukuk. In the next two to three years, Islamic countries like Bahrain, Kuwait, Qatar, Saudi Arabia, United Arab Emirates and Oman are looking at more than $50 billion in (infrastructure) financing and a big portion of this is expected to be financed through Sukuk. The government has a vision to make Pakistan a trade corridor in future and it requires huge investments in ports and also huge investment is required in water, power and oil and gas, hence the government can tap this financing through issuance of Islamic bonds.

The Pakistan government should promote this industry by taking bond market-friendly measures in more or less the same way as introduced by Malaysia. Malaysian government relaxed rules on the sale of local-currency bonds to stimulate the domestic capital market. Malaysian prime minister showed great commitment in the promotion of Islamic bonds by announcing that Malaysia would cut taxes on ringgit-bond income and would ask pension funds to double allocations to local funds. Furthermore, the government committed an exemption for foreign investors from capital gains taxes on ringgit-denominated conventional and Islamic-based government bonds. Three international lenders - World Bank, International Finance Corporation and Asian Development Bank - offered debt in the Malaysian currency. On the other hand Pakistan allowed institutions to invest in NSS (national saving schemes) so that the government could finance its fiscal deficit by tapping low cost money without any consideration that it would further hamper the growth of the already struggling debt market. Considering the benefits and potential of Islamic debt market the Pakistan government should also give relaxations so that funds and institutions should actively participate in local bond issues. Furthermore initiatives should be taken to make bonds so lucrative that it should attract foreign investors no matter how much risk they associate to the stability of Pakistani rupee in future.