KARACHI: The Economic Coordination Committee (ECC) has directed the power division to plan Rs200 billion funding through Islamic financing to partially repay the outstanding circular debt, while the government is also likely considering introducing Islamic financing model for the Naya Pakistan Housing Project.

“We believe participation in the aforementioned developments would be an asset-deployment opportunity for the Islamic financing sector, given the limited asset placement avenues that are currently available for the sector,” Amreen Soorani at JS Global Capital said.

Currently, Islamic assets contributes 13 percent (Rs2,482 billion) to Pakistan banking industry assets and 18 percent to total financing.

ECC has directed the Power Division to plan Rs200 billion funding through Islamic financing to partially repay the outstanding circular debt of Rs1.3 trillion, for which Meezan Bank Ltd (MEBL) will act as investment agent.

The financing would be for 10 years with a cost of KIBOR + 1.0 percent, with Rs100 billion in the first phase and another Rs100 billion under the Green Shoe option. Secondly, the incumbent government is likely considering introducing Islamic financing model for the Naya Pakistan Housing Project (total project estimated at Rs3.0 trillion per annum as per media sources.

“We believe participation in the aforementioned developments would be an asset deployment opportunity for the Islamic financing sector in Pakistan, given the limited asset placement avenues that are available for the sector,” Soorani said.

To recall, frequency of the issue of major risk free investment for Shariah institutions, Ijara Sukuk, has been decreasing over time, leading to challenges for Islamic banks and windows in deploying the maturing Sukuks and fresh deposits.

Nonetheless, Bai Muajjal, a short-term Islamic instrument, has opened an avenue for Islamic Banks and windows to park a part of its excess liquidity, where banks can lend to financial institutions and the State Bank of Pakistan (SBP) at a rate close to the T-Bill, holding a shorter tenor than Sukuk.

Moreover, introduction of Islamic financing products in other government infrastructure projects would further assist Islamic banks in deploying access liquidity.