Through the first-ever auction of the Short-Term Government of Pakistan Hybrid Sukuk, the federal government has been able to mobilize Rs239.325 billion. This is an important step forward for Pakistan's Islamic capital markets. The successful Pakistan Hybrid Sukuk auction worth Rs239 billion received bids totaling Rs770.234 billion in face value; this means that the bid-to-cover ratio was around 3.2 times more than what was accepted.

This auction was conducted by Pakistan Stock Exchange on behalf of Ministry of Finance where in Hybrid Sukuk has a mixture of fixed and floating rates that have been deliberately designed to suit various risk-reward profiles of institutional investors.

Auction Results - Acceptances for all Four Tenors

The combined total of bids received for all the four tenors stood at Rs770.234 billion in face value, which was Rs741.287 billion in realized value, out of which the Government accepted Rs239.325 billion. This high rate of bid-to-acceptance is an outcome of robust institutional interest as well as prudent policy on the part of the Government regarding acceptance of bids at suitable yields.

Why This Hybrid Structure is Important

This hybrid structure of Pakistan Hybrid Sukuk auction Rs239 billion is specially structured to expand the Shariah-compliant borrowing of the government by a product catering to the needs of multiple investors at the same time:

• Components with fixed rates: cater to the needs of investors wanting guaranteed returns over a period, especially those like Islamic banks who need their asset liability to match with a fixed-rate liability structure.

• Components with floating rates (VRR): 10-year Variable Rental Rate Sukuk caters to the needs of investors willing to take the risk of long-dated products but not of interest rate moves because of its floating coupon linked to a reference rate. The spread of 18.99 basis points over the 11.3904 percent reference rate ensures extra return to the investors for taking the risk of duration.

Strong Institutional Response — Reasons for Its Emergence at This Point in Time

The strong market reaction to the Pakistan Hybrid Sukuk auction of Rs239 billion was due to two reasons working in convergence:

• Better liquidity environment: Pakistan's financial system has been witnessing better liquidity environment following the changes in monetary policies by the SBP and strong remittance flows which have enhanced deposits in the banking sector.

• Continuous demand from Islamic investors: The Islamic banking sector of Pakistan has seen a lot of growth in size; with Islamic banks and Islamic windows of conventional banks running larger balance sheets which need Shariah-compliant investments on a large scale. Sovereign Sukuk form the natural benchmark for Islamic bank portfolios.

A Milestone of Collaboration Among Institutions

The Pakistan Hybrid Sukuk auction of Rs239 billion is a testimony to collaboration among the various institutions in Pakistan’s financial regulatory system, namely:

• Ministry of Finance: instrument structure and issuance authority
  

• State Bank of Pakistan: monetary and banking system coordination
  

• Securities and Exchange Commission of Pakistan: capital market regulatory structure
  

• Pakistan Stock Exchange: auction facility

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Implications for Pakistan’s Islamic Capital Market

The first Pakistan Hybrid Sukuk auction amounting to Rs239 billion is successful and has provided a new means of financing for the government which augments its other traditional auctions such as the Treasury Bills and Pakistan Investment Bonds. With the continued growth of Islamic banking in Pakistan which already amounts to approximately 20 percent of the entire banking assets and is expanding at a faster rate compared to traditional banking, the demand for Sukuk by the government will continue to rise.

A government that can easily reach this demand via properly structured Sukuk will reduce its cost of finance, widen its sources of investors, and help to develop the Islamic capital market of Pakistan – all these in one single step, which have been achieved via Pakistan Hybrid Sukuk auction of Rs239 billion.