Pakistan Plans Sukuk-Bill Expansion to Attract Gulf Banks: Islamic Finance

Pakistan, the world’s second-largest Muslim nation, plans to expand its Shariah-compliant banking industry and attract more investors from the Persian Gulf by boosting sales of sukuk bills.

State Bank of Pakistan is seeking to sell sukuk maturing in a year or less in the domestic market in the quarter ending September, spokesman Syed Wasimuddin said in an e-mail yesterday. The plan is part of an effort to double Islamic banking services in the next three years to 12 percent of the total. The securities pay profit rates rather than interest.

“Islamic banks and Shariah-compliant mutual funds are dry in terms of investment opportunities,” Irfan Malik, head of fixed income at National Fullerton Asset Management Ltd., which has the equivalent of $160 million in assets, said yesterday in an interview in Karachi. “Securities of less than one-year maturity and Islamic interbank lending will attract local and foreign investors. We will participate in the auction.”

Pakistan, whose population of 170 million is second to Indonesia among Muslim nations, is aiming to attract the wealth of the oil-rich Persian Gulf to help finance its budget deficit and revive an economy hurt by nine years of fighting with the Taliban militants.

Deficit Widens

The government said last month the $150 billion economy has suffered a loss of about $35 billion since the fight against the Taliban that spread from neighboring Afghanistan in 2001 hurt investment. The cost to deploy 100,000 troops in the northwest tribal areas widened the country’s budget deficit to 5.6 percent of gross domestic product last fiscal year ended June 30, exceeding the target of 4.9 percent.

At least 41 people were killed and 175 were injured when two suicide bombers blew themselves up at the shrine of a Sufi saint in Pakistan’s eastern city of Lahore yesterday, Khusro Pervez, Lahore’s commissioner, told reporters. The attack came a month after 100 people were killed in twin attacks on mosques of the minority Ahmadi community in the city.

Pakistan is selling Islamic debt to finance a deficit projected to be 4 percent of GDP in the year started July 1.

Global sales of Islamic bonds fell 24 percent to $6.5 billion so far this year, from the same period in 2009, according to data compiled by Bloomberg. Issuance totaled $20.2 billion last year, up from $14.1 billion in 2008. Pakistan raised $600 million from its first sale of sukuk in the overseas market in January 2005. Acting central bank Governor Yaseen Anwar said in June more developed money markets would help create benchmarks for Islamic products.

“Geopolitical uncertainty is keeping Gulf investors wary of investing in Pakistan,” Abdul Kadir Hussain, chief executive officer at Mashreq Capital DIFC Ltd., which manages $2 billion of mainly Gulf assets, said in an interview in Dubai yesterday. “Investors need definitive clarity on the political front before committing funds in this market. The long-term implications of the war with the Taliban aren’t clear.”

Trailing Malaysia

The difference between the average yield for emerging- market sukuk and the London interbank offered rate narrowed two basis points yesterday to 441, and 26 basis points so far this year, according to HSBC/NASDAQ Dubai US Dollar Sukuk Index.

The yield on Malaysia’s 3.928 percent Islamic notes due June 2015 fell four basis points, or 0.04 percentage point, to 3.54 percent this week, according to prices from Royal Bank of Scotland Group. The government sold $1.25 billion of the notes in May, its first international offering in eight years.

Pakistan’s Islamic banking industry is a 30th of the size of Malaysia’s, which has the world’s biggest market for sukuk.

The 303.3 billion ringgit ($93.2 billion) of assets held by Islamic banks in Malaysia accounted for 19.6 percent of the total last year, the central bank said in March. Pakistan’s equivalent deposits, at 300 billion rupees ($3.5 billion), are about 6 percent of the total, according to State Bank of Pakistan’s website.

Islamic Banks

Bank Negara Malaysia, which began selling Islamic bills weekly in 2006, had 14 billion ringgit of outstanding short-term notes as of June 30, according to central bank data.

Pakistan has 42 billion rupees of local-currency denominated Islamic notes outstanding, the State Bank of Pakistan’s website shows. That compares with 260 billion ringgit in Malaysia, according to data compiled by Bloomberg.

Middle Eastern banks make up half of Pakistan’s Shariah- complaint lenders. These include Al Baraka Islamic Bank, owned by Bahrain’s Al Baraka Banking Group, the United Arab Emirates- based Dubai Islamic Bank Pakistan Ltd. and Emirates Global Islamic Bank. Al Baraka Banking offers Shariah-compliant corporate loans, housing and car financing in Pakistan through its Islamic unit.

Foreign Investment

Faysal Bank Ltd., based in Bahrain, and Bank Alfalah Ltd., owned by the Abu Dhabi Group, are conventional lenders offering Islamic services in Pakistan.

Issuance of short-term and long-term Islamic securities will address the problem of a lack of investment opportunities for the mutual fund industry, according to National Fullerton’s Malik. Without a developed money market, funds are holding sukuk until the debt matures, he said.

Companies based in the U.A.E. invested $209 million in the 11 months through May in Pakistan, or about 9 percent of total foreign investment, according to the central bank’s website. The Gulf nation was the fourth-biggest investor after the U.S., U.K. and the Netherlands.

In 2006, Pakistan sold a 26 percent stake in Pakistan Telecommunication Co., the biggest phone-service provider, to Emirates Telecommunications Corp., the U.A.E.s largest phone company, for $2.6 billion.

To contact the reporters on this story: Khalid Qayum in Singapore kqayum@bloomberg.net; Soraya Permatasari in Kuala Lumpur at soraya@bloomberg.net

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