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February 21, 2019

Govt Approves Sukuk Worth Rs. 200 Billion to Curtail Circular Debt

Economic Coordination Committee has approved the launch of Islamic Sukuk bonds worth Rs. 200 billion to reduce circular-debt.
The issuance of Sukuk, after a period of one and a half year, will not only ease off liabilities on the power sector but will provide Islamic banks with an opportunity to invest their deposits to make margins and profits.
Accordingly, these Sukuk will be based on the mode of Ijarah with underlying assets of power distributing companies and other power-related assets.
The government will sell these assets to Islamic banks and issue ownership shares (Sukuk) and the Islamic banks and Islamic banking windows, as investors, will give these assets back to the government on a rental basis. The funds generated under Sukuk will be used by the government to pay its liabilities of circular debt.
Furthermore, the central bank will chalk out modules of the Sukuk including its period and the profit rates.
The last Sukuk was issued in June 2017 by the previous government. Since then, deposits of the Islamic banks were mobilized at impressive pace but banks were lacking options of investments based on Sharia in the country.
Presently, it is expected that the profit rates of the Sukuk will be higher than what they were a couple of years ago. Not only banks, but their customers might also make a good profit through their investments.
Ahmed Ali Siddiqui, Director Central of Excellence in Islamic Finance at IBA, stated that the issuance of Sukuk is a good option for the government to raise Shariah complaint financing system to ease the issue of circular-debt, which is badly affecting the energy sector and the economy.
However, the government needs to improve the efficiency of the power sector by reducing theft, line losses and improving recovery after resolving the issue of circular debt, he added.
The circular-debt in the power sector surged to a whopping Rs. 1.4 trillion. The issuance of the Sukuk will give some respite to ease the debt burden but the government and power sector entities need to devise another plan to retire its loans.

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