Pakistan's central bank is launching a second phase of a mass media campaign designed to raise awareness and acceptance of Islamic finance among consumers in the world's second most populous Muslim country.
The campaign is part of the central bank's five-year plan for the industry. The new phase, announced at the end of December, will shift from building the overall visibility of the industry to educating consumers on the value proposition of Islamic finance.
This year's rush by top-rated non-Muslim countries to tap the burgeoning Islamic finance market may not be repeated next year but a new crop of sovereign entrants, mostly from emerging markets, is waiting around the corner.
The United Kingdom, Hong Kong and Luxembourg - all ranked at least AA by rating agencies - issued sharia-compliant financial instruments, or sukuk, for the first time in 2014. They gave a huge boost to a market which was once just seen as a funding tool for borrowers from the Gulf and Muslim countries in southeast Asia.
Pakistan plans to issue a US dollar-denominated Islamic bond worth at least $500 million this month and also hopes to obtain $1.1 billion from the International Monetary Fund soon, Finance Minister Ishaq Dar said on Saturday.
After a successful Eurobond issue in April, Pakistan said it planned an international sovereign sukuk issue, and in early September it revealed it had selected four banks — Citigroup, Deutsche Bank, Dubai Islamic Bank and Standard Chartered — as bookrunners.
Islamic banks can now manage their short-term liquidity more efficiently as the central bank has decided to start conducting open market operations in Ijara Sukuk, or Islamic bonds.
The SBP had started conducting auctions of Ijara Sukuk in September 2008, providing Islamic banks (IBs) an opportunity to place their surplus funds in zero-risk, Shariah-compliant government bonds. So far, 15 auctions have been held, with the latest on last Monday. The decision to conduct Sukuk OMOs is the second important step taken since then.
Pakistan’s central bank has released a study of Islamic banking, the first of its kind in the country, which shows latent demand for sharia-compliant finance but many obstacles such as small branch networks and a lack of product awareness among consumers.
Consumer outreach, rural banking and the need for stand-alone Islamic banks are among issues that must be addressed if the industry is to reach a regulatory target of 15 percen
sold $1 billion of sovereign Islamic bonds in its first-ever issue of the securities, attracting orders for 4.7 times the amount on offer.
The dollar-denominated five-year notes were priced at a 2.005 percent profit rate, according to a on the government’s website today. The U.K., which along with Hong Kong is rated the highest investment grade, sold sukuk for the first time in June at a coupon of 2.036 percent. Those notes yielded 1.75 percent today, data compiled by Bloomberg show.
Pakistan's insurance sector is set for a boost in competition which could help spread the uptake of insurance after the industry regulator allowed conventional firms to offer sharia-compliant products (takaful) earlier this year.
The regulator, the Securities and Exchange Commission of Pakistan (SECP), has now granted two takaful licenses and has up to 10 applications currently being finalized, said Faraz Uddin Amjad, Joint Director of the SECP's insurance division.
Hong Kong, Indonesia and Pakistan are banking on pent-up investor demand as they look to raise up to a combined US$3.5bn in the fast-growing Islamic bond market.
The three sovereign sukuk issues, including a planned US$1bn debut from Triple A rated Hong Kong, are set to launch before the end of September.
Few Asian issuers have targeted the global sukuk market in the past, and the glut of deals comes as governments across Asia are looking to attract Islamic investors from outside the region.
Asia presents huge developmental potential for Islamic finance and is likely to be the main driver of Islamic banking growth in the near future given the untapped potential in India, Bangladesh and Indonesia, according to a report. Islamic finance can be utilised for greater integration of financial markets with the real economy and for improvement of the economic balance between emerging and frontier markets, according to Kuwait Finance House Group report. Islamic banking is banking that is consistent with the principles of Sharia which prohibits acceptance of specific interest or fees for loans of money.
Pakistan looks set to end a year-long drought in sovereign sukuk issuance to support its goal of doubling Sharia-compliant banks' market share by 2020.
The government may offer as much as Rs542 billion ($5.6 billion) of local-currency sukuk in 2014, including notes backed by a highway and an airport, Ahmed Ali Siddiqui, head of product development and Sharia compliance at Meezan Bank, which advises authorities on Islamic issuance, said in an April 9 interview in Karachi. That compares to one sale of Rs43 billion in 2013.