KARACHI: It is worth mentioning that Pakistan has made a historic move by making its debut issue of short term asset light sovereign hybrid Sukuk, which is an innovative transaction involving a combination of the Ijarah and Commodity Murabaha structure in one single deal. Meezan Bank acted as Joint Financial Advisor on Meezan Bank sovereign hybrid Sukuk Pakistan, working in consultation with its Shariah board along with the Ministry of Finance.
The asset-light structure of the transaction is the most significant innovation; it addresses a basic problem in traditional sovereign Sukuk issuance, where the government needs to commit tangible assets as an underpinning for each transaction. The hybrid structure increases the government's capacity to issue Sukuk without reducing the government's pool of underlying assets.
Tranche by Tranche Results – All Four Tenors
For the three-month tranche, the strongest demand signal was sent as it received bids worth PKR153 billion on a target of PKR25 billion and accepted PKR80 billion at an average yield of 11.4413 percent, which is oversubscription about 3.2 times of accepted bids. The fact that the government accepted more than three times of the targeted amount shows that it was a good quality demand.
The Structural Innovation — Asset-light and Why It Is Important
Asset-light structure which incorporates two Shariah-compliant financing mechanisms has become the technologically most important element of the Meezan Bank sovereign hybrid Sukuk Pakistan structure:
Ijarah (Lease): Shariah-compliant lease agreement between government as the lessee and Sukuk investors as lessors, whereby the rental payment from the government serves as the underlying return must have physical assets to act as the leased asset.
Commodity Murabaha: Cost-plus finance mechanism utilizing commodity market transactions as the underlying transaction no need for dedicated physical assets belonging to the government, creating the "asset-light" property.
Hybrid arrangement brings about flexibility to the government that is not present in either one individually — Ijarah in its simplicity for investors used to asset-based Islamic finance and Commodity Murabaha in its scalability where the volume is beyond the capacity of physical assets.
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These institutions have to be recognized specifically because without the existence of the settlement and market structure that is able to process the transaction for Sukuk in a sovereign manner, a well-structured transaction will fail to be conducted effectively. Their involvement in the transaction of the Meezan Bank sovereign hybrid Sukuk Pakistan made its successful operation possible.
What Does This Issuance Set Up for Islamic Financing in Pakistan?
While this issuance will be useful in raising funds for the Pakistan government, it sets up the following:
Sovereign benchmarks: the three-month and six-month yields created through this issuance are sovereign benchmarks for the Islamic money market of Pakistan, which did not have such short tenor sovereign benchmarks before.
Ability to borrow for the government: due to the asset-light structure, the Ministry of Finance of Pakistan has an issuance avenue for Sukuk that is scalable without being constrained by the asset requirement that constrained conventional sovereign Sukuk issuance volumes.
Islamic liquidity management: with the increased number of Islamic banks in Pakistan holding a growing share of total banking sector assets and requiring liquidity management under Shariah, these institutions will be able to manage their liquid asset portfolio using sovereign instruments compliant with their liability structures.
Credibility of international Islamic financing: successful execution of a sovereign hybrid Sukuk that was oversubscribed by 3.2 times sends a message to the Islamic capital market players about the depth of the Sukuk market in Pakistan.
The sovereign hybrid Sukuk of Pakistan arranged by Meezan Bank is a building block: a building block which has been constructed by Meezan Bank and other financial regulatory authorities of Pakistan in order to lay down the groundwork for Islamic capital markets infrastructure.