TL;DR. No.
There was a brouhaha when the news leaked that the Government of Pakistan is considering issuing a Sukuk Al-ijara, hereinafter called Sukuk, by mortgaging/selling F-9 park. The outrage reached a level that the Ministry of Finance had to issue a clarification that this structure is ordinary and GoP has been Sukuks by pledging/selling other assets for years.
The government of Pakistan (GoP) borrows in domestic markets by issuing bonds. The bonds can be purchased by the State Bank of Pakistan (SBP) or Authorized Dealers, which are usually commercial banks. Under the IMF program, SBP is restricted from buying GoP bonds in the auction. Thus, GoP can now only borrow by auctioning bonds to commercial banks.
GoP can either issue conventional bonds e.g. PIBs/T-bills, or sharia-compliant bonds i.e. Sukuks. There are two main differences between borrowing on a conventional basis versus a sharia-compliant basis.
One, an underlying asset is required for sharia-compliant transactions as sharia (or realistically speaking, sharia boards) do not approve of borrowing/lending money on interest or markup. The Sukuk transaction is structured as sales and leaseback, plus a buyback. At its issuance, GoP sells an asset to the Sukuk investors. During the term of the Sukuk, GoP pays the rent on the asset to asset owners i.e. Sukuk investors. At maturity of Sukuk, GoP buybacks the asset and repays the Sukuk investors. In economic terms, the cashflows of Sukuk are equal to a conventional bond issue as shown in the figure below.
Two, sharia-compliant banks and institutions can not invest in conventional instruments, whereas there are no restrictions on conventional banks to invest in Sukuks. Thus the demand for Sukuk is higher than the demand for conventional bonds. As a result of this, GoP gets lower pricing on Sukuk issues than PIB issues.
If GoP can get cheap pricing against Sukuk, why doesn't the government issue Sukuks all the time? The government needs to find unencumbered assets that it can sell to the Sukuk investors. Unlike a PIB where GoP is issuing bonds against standard terms and conditions, each Sukuk transaction needs extra steps such as verifying the assets are encumbered, a satisfactory review by investors' counsel, borrowers' counsel, and sharia boards of legal documents of sales, leaseback, and final purchase transactions. In addition insurance, sorry Takaful is required to be arranged for these assets favoring the Sukuk investors. It is simply convenient for GoP to issue PIBs.
Last year, GoP issued Pakistan Energy Sukuk II with much fanfare. The Sukuk was issued against assets of government-owned power plants.
Such high-quality (risk-free) sharia-compliant instruments are rarely issued. In contrast, PIBs are auctioned regularly. The demand for the Sukuk was high resulting in GoP borrowing at a cheaper rate than it would have had it borrowed by auctioning a PIB. This is the reason Irfan Siddiqui, CEO of Meezan Bank, after receiving accolades from GoP, SBP, and PSX, was complaining that sharia-compliant institutions are getting the long end of the stick for lending to GoP. But that's just supply and demand.
Two of the three issues have taken place so far, but Islamic banks are not happy. In fact, they are furious.
“What we want are government-guaranteed sukuk whose yield is equivalent to that of PIBs. But every time there is a sukuk issue, the government ends up raising money at a cheaper rate,” said Irfan Siddiqui, CEO of Meezan Bank, Pakistan’s largest and most profitable Islamic bank.
It was the first time the government managed to raise liquidity at a rate below Kibor. This means the government will save Rs1.8bn on its debt repayment every year until the instrument’s maturity a decade later.
“Two days ago, the finance adviser said at a ceremony the government would save Rs18bn in 10 years. I always tell the government: don’t save money by pushing us up against the wall. Give us an instrument that is comparable to conventional instruments,” he told Dawn in a recent interview.
So why did his bank invest eagerly in the sukuk if the yield was lower than expected? After all, Meezan Bank has invested Rs120bn in the first two tranches of PES.
“The only benefit to us was that we got to invest money that was otherwise lying idle,” he said, adding that the bank sometimes has up to Rs30bn parked with the central bank for months because it does not have Shariah-compliant investment avenues.
The difference in the yields of PES-II and the conventional bond issued at the same time was 70 basis points, according to Mr Siddiqui.
In other words, the government short-changed Islamic banks by 0.7pc as it issued a far more liquid conventional debt paper of the same tenor at a higher rate around the same time.
Coming back to the topic. Why is there so outrage in public over the proposed F-9 park Sukuk when there is nothing extraordinary this time around? Partly it’s the government getting comeuppance for when it used to complain about previous governments issuing Sukuk by selling assets. Partly because people are confusing it with securitization where cashflows of the property are used to service the debt. And partly due to the fact that earlier Sukuks have usually been issued against earning assets such as airports, motorways and power plants, etc. This is the first time a Sukuk is being considered/issued against barren land, ok, a public park.