Islamic bonds open up Sharia-compliant investment opportunities

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The Pakistani government’s decision to raise 49.5 billion rupees by issuing new three year sovereign Islamic bonds has expanded the Islamic bond market by 15%, it has been reported.

Currently, these three year bonds, called Ijara Sukuks, account for less than 6% of Pakistan’s long term debt market. Strict rules prohibiting the charging of interest mean that investment opportunities for Islamic banking entities can be limited. Ijara Sukuks must be asset backed; those released last week are to be used for the construction of the new M3 motorway, whilst the next product in development will be backed by petroleum imports into the country.

This petroleum-backed bonds are expected to improve liquidity management for Islamic banks, whilst creating a liquid secondary market for short term Islamic instruments. Ahmed Ali Siddiqui, Executive Vice President of Meezan Bank, told The Express Tribune: “The unavailability of a short term investment instrument has been a big challenge for the industry so far. We hope the situation will soon change with the introduction of the new short-term instrument.” Siddiqui believes that the product has a yearly potential of 300 billion-500 billion rupees.

In a research note issued to clients on Monday, Ujala Adnan, Research Analyst at Elixir Securities, wrote: “Islamic banks and banks with Islamic deposits have faced difficulty with respect to the deployment of available funds. Owing to a shortage of structured Islamic products, most of the Islamic banks face the problem of redundant Islamic funds.”

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