Pakistan recently raised USD 1Billion through Islamic bonds at 7.95% to maintain its forex reserves.
As per Sharia (Islamic law) lending with interest payments is prohibited, which is considered exploitative in nature. Thus, bonds are forbidden in Islamic finance.
As per Sharia (Islamic law) lending with interest payments is prohibited, which is considered exploitative in nature. Thus, bonds are forbidden in Islamic finance.
So how can institutions raise Sharia compliant money? They issue Sukuk.
Sukuk is an Islamic financial certificate that represents a portion of ownership in a portfolio of eligible existing or future assets.
Sukuk is an Islamic financial certificate that represents a portion of ownership in a portfolio of eligible existing or future assets.
When investors buy Sukuk, they become entitled to receive periodic profit payments from underlying assets. Upon maturity Sukuk holders get back the principal amount. The periodic payment may be in the form of rent from the asset or the profit made by the asset in the market.
Thus Sukuk securities are structured in accordance with Sharia by paying profit, not interest. 
For the recent issue a portion of the Lahore-Islamabad Motorway has been pledged as part of the issuance.
The Sukuk is issued at a rate of 7.95% which is the highest rate ever paid by the country on a Sukuk issue.
The Sukuk is issued at a rate of 7.95% which is the highest rate ever paid by the country on a Sukuk issue.
Pak Ministry of Finance has claimed that interest costs have risen around the world which has led to higher rates on this issue.
However,in 2017,the Sukuk was raised at a spread of 5% to the benchmark US yields while this one is nearly 6.3% higher than the comparable US yields.
However,in 2017,the Sukuk was raised at a spread of 5% to the benchmark US yields while this one is nearly 6.3% higher than the comparable US yields.
The spread is significantly larger compared to earlier deal which indicates that rates are higher due to weakening credit profile of Pakistan and not due to global rate movement.
7.95% rates are extremely high for a government. For context Reliance very recently issued USD 4Billion dollars worth of bonds at ~3% rates.
Raising at such high rates also depicts the country's desperation to replenish its depleting forex reserves.
Raising at such high rates also depicts the country's desperation to replenish its depleting forex reserves.
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