- Pakistan seeks to raise funds via Islamic Sukuk to protect foreign reserves amid repayment pressure
- Islamic Sukuk are Sharia-compliant investments based on asset ownership, not interest payments
- Pakistan aims to attract Islamic finance investors and diversify its funding sources
When Pakistan's foreign minister Muhammad Aurangzeb spoke on the sidelines of the International Monetary Fund and World Bank spring meetings, he listed several ways Pakistan could raise money to protect its foreign reserves.
Eurobonds were one option. Commercial loans were another. And then he mentioned something less familiar to many in the financial markets -- 'Islamic Sukuk'.
To understand Islamic sukuk, we must understand what Pakistan's economy is going through at the moment. Pakistan is being made to repay a $3.5 billion loan to the United Arab Emirates (UAE) this month. The repayment puts pressure on the Pakistan's foreign exchange reserves. And hence, the country needs fresh money to keep its reserves comfortable and stay within IMF programme targets.
To do that, it is exploring every possible route to raise funds from global markets. Islamic Sukuk is one of those routes.
What is Islamic Sukuk
Sukuk are often called Islamic bonds. But they are not bonds in the usual sense. A normal bond works like this: you lend money to a government. The government pays you interest.
Sukuk do not pay interest. This is because Islamic law does not allow earning money from interest. Instead, Sukuk works like this:
- Investors buy a share in a real asset or project
- That asset earns income (like rent or business profit)
- Investors get a share of that income
So, instead of "lending money and earning interest", you are "owning a small part of something that earns money". This structure makes it Sharia-compliant.
Why This Matters For Pakistan
By talking about Sukuk, Pakistan is signalling that it wants to tap into a different pool of investors, especially from countries and institutions that prefer Islamic finance products.
These investors may not buy regular bonds, but they do invest in Sukuk. For Pakistan, this means:
- Access to new sources of foreign money
- Less dependence on traditional borrowing
- Ability to raise funds in a way attractive to Middle Eastern and Islamic finance markets
In times of reserve pressure, widening the funding base becomes important.
Which Countries Already Use Sukuk?
Sukuk are not new. Many countries, including non-Muslim majority nations, have issued them. Some key users include:
- Malaysia: one of the world's biggest Sukuk markets
- Saudi Arabia: frequent issuer for government funding
- United Arab Emirates: active sukuk market
- Bahrain and Kuwait: active sukuk markets
- Indonesia: regularly issues sovereign Sukuk
- United Kingdom: issued sovereign Sukuk despite being a non-Islamic country
- Hong Kong: has tapped the Sukuk market
- Nigeria: uses Sukuk to fund infrastructure
This shows Sukuk has become a global financial tool, not limited to Islamic countries. However, when Pakistan mentions Islamic Sukuk along with Eurobonds and loans, it is making a religious-financial statement -- pleading Islamic nations for help.
