Sukuk market growing at 22% CAGR, but foreign investment remains underwhelming, says Aurangzeb

Finance Minister Senator Muhammad Aurangzeb reported that Pakistan's Sukuk market has expanded at an impressive 22% compound annual growth rate, however, foreign investment in these Sharia-compliant instruments is still relatively low and requires promotion. During a ceremony commemorating the achievement of Rs10 trillion in Sovereign Sukuk, Aurangzeb emphasized the importance of expanding the market and introducing more flexibility in sovereign financing instruments.

Sukuk, also known as Islamic bonds, are financial instruments that adhere to Islamic law (Shariah) and its investment principles. Unlike traditional bonds, which are debt instruments that pay interest, Sukuk represent ownership in tangible assets or asset pools. Investors receive a share of ownership or profits from these underlying assets, as opposed to solely receiving interest payments.

Aurangzeb highlighted the introduction of hybrid government Sukuk, developed by the Ministry of Finance Debt Management Office in collaboration with the State Bank of Pakistan, as a significant advancement. He explained that this instrument merges various Sharia-compliant structures and offers greater flexibility in utilizing government-owned assets.

Additionally, the finance minister pointed to the introduction of shorter-tenor Sukuk, including three- to six-month instruments, as a critical step. He emphasized that this development fills a significant market gap and contributes to creating a credible Sharia-compliant yield curve across various maturities.

However, Aurangzeb noted that foreign investment in Sukuk has been below expectations in recent months. He called for actively promoting Sukuk among international investors and diversifying foreign portfolio investment into Sharia-compliant instruments. Aurangzeb suggested that banks, primary dealers, and brokers should collaborate on this endeavor.

In terms of retail participation, Aurangzeb stressed the importance of digital platforms in scaling up the market. He mentioned the State Bank's platform and telecom platforms to facilitate retail investment in Sukuk. The finance minister suggested that leveraging digital platforms would be the key to further growth.

For the long-term corporate debt market, Aurangzeb announced that the Ministry of Power had granted the first mandate for National Grid Company to issue its first-ever listed Sukuk. If successful, this benchmark would encourage other corporations to follow suit. Aurangzeb stressed the need for continued collaboration among the State Bank of Pakistan (SBP), Securities and Exchange Commission of Pakistan (SECP), Pakistan Stock Exchange (PSX), and the Development Bank of Pakistan (CDC) to foster a more comprehensive Sukuk market ecosystem.