The Securities and Exchange Commission of Pakistan (SECP) is making significant strides towards enhancing the nation’s financial landscape by focusing on the development of Shariah-compliant financial instruments.
In a move that signals the regulator’s commitment to diversifying the country’s Islamic finance offerings, the SECP has disclosed plans to explore an alternate Shariah-compliant structure for the issuance of short-term tradeable sovereign Sukuks. This initiative aims to fill a critical gap in the market, providing investors with new avenues to engage in Shariah-compliant investments.
On Friday, the SECP released two concept papers that lay the groundwork for the development of Pakistan’s short-term listed Sukuk market. These papers are designed to spark public consultation on several key issues, including the challenges and opportunities within this segment. The SECP’s objective is to identify customized regulatory interventions that will promote the listing of short-term sovereign and corporate Sukuk instruments. This development is a testament to the SECP’s proactive approach to fostering a more vibrant and accessible capital market in Pakistan.
Since December 2023, the Government of Pakistan (GOP) has been actively raising funds from the capital market through the issuance of sovereign Ijara Sukuk instruments. These instruments have proven to be an effective means for the government to secure financing while adhering to Islamic principles. To date, the GOP has successfully raised approximately Rs 713 billion through eleven auctions, issuing various types of sovereign Ijara Sukuk instruments with maturities ranging from one to five years. These auctions have been conducted through the Pakistan Stock Exchange (PSX), highlighting the critical role of the capital market in supporting the government’s financial needs.
Despite the success of the Ijara Sukuk, there is a notable absence of short-term tradeable sovereign Sukuks with maturities of three, six, or nine months. The current Ijara structure does not support the issuance of these short-term instruments, creating a gap in the market that the SECP is keen to address. The regulator is now exploring alternate Shariah-compliant structures that would enable the issuance of tradeable sovereign Sukuks with these shorter maturities. This move is expected to attract a broader range of investors, particularly those interested in short-term investment opportunities.
The SECP’s concept paper on the listing of short-term corporate Sukuks further highlights the growing popularity of these instruments among capital market investors. Despite their appeal, many corporations currently prefer to structure short-term Sukuks as privately placed and unlisted. This approach, however, limits their ability to raise funds from a larger pool of investors, potentially curbing the growth of the market. The SECP’s paper advocates for measures that would make the listing of short-term corporate Sukuks more appealing. These measures include enhancing efficiency, streamlining procedural requirements, and reducing associated costs, all of which would contribute to a more dynamic and accessible market.
Pakistan’s capital market already plays a pivotal role in providing Shariah-compliant borrowing solutions to both the government and the corporate sector. By developing a vibrant listed short-term Sukuk segment, the SECP aims to expand the range of Shariah-compliant financial solutions available to issuers and investors alike. This expansion would not only cater to the growing demand for Islamic financial products but also strengthen the overall financial infrastructure of the country.
To facilitate issuers in the process of issuing short-term listed Sukuks, the SECP’s concept paper outlines several potential solutions. These include the provision of a condensed version of the Shelf Prospectus or Supplement to the Prospectus, the electronic publication of an Abridged Prospectus, and the streamlining of regulatory approval timelines. Additionally, the paper suggests reducing regulatory costs and providing greater flexibility in the appointment of intermediaries such as Centralized Trade and Underwriting Institutions (CTI) and underwriters. These measures are designed to simplify the issuance process, making it more accessible and cost-effective for potential issuers.
The growth and development of the Sukuk market also underscore the SECP’s dedication to aligning with the Federal Shariat Court’s ruling for creating a RIBA-free economy. Short-term Sukuks, in particular, hold immense potential and are rapidly emerging as the preferred financing alternative for both local and international investors. The SECP’s efforts to promote this market segment are expected to have a far-reaching impact on Pakistan’s financial sector, driving greater adoption of Shariah-compliant financial products and enhancing the country’s position in the global Islamic finance market.
As the SECP continues to work on refining the regulatory framework for short-term Sukuks, the broader financial community is likely to benefit from the increased availability of these instruments. Investors, issuers, and the government alike stand to gain from a more diversified and dynamic Sukuk market, one that offers a wide range of Shariah-compliant investment opportunities tailored to meet the evolving needs of the market.
