The deal would be one of largest infrastructure sukuk sold to date, helping expand a funding format that has largely been confined to handling mid-sized deals with shorter tenors.
The 10-year sukuk, to be privately placed by the Neelum Jhelum Hydropower Company (Private) Limited, was given a preliminary AAA rating by credit rating agency JCR-VIS with a stable outlook.
The rating will be finalized upon review of legal documents and the issuance of the government guarantee, which will cover the issuance amount and profit payments, JCR-VIS said in a statement.
Unlike conventional bonds, sukuk are investment certificates which follow religious principles that forbid interest payments, instead paying returns linked to an underlying asset.
The project’s total cost is estimated at Rs404 billion, with around three quarters of that being funded through debt.
The plant would generate 969 megawatts of power adding around five percent to the country’s total installed power generation capacity, with the first generating unit expected to start operation in mid 2017.
Infrastructure sukuk have been slow to appear, partly because they often require the transfer of assets into special purpose vehicles, which can be problematic for political or legislative reasons when it comes to large state projects.
The two auctions would exceed the total amount of sukuk the central bank has sold in the previous three year period.
Pakistan’s Islamic banks have expanded rapidly along with growth of sharia-compliant banking across the Middle East and Southeast Asia, but the sector still lacks some of the money market instruments available to conventional lenders.
Islamic banks follows religious principles such as bans on interest and pure monetary speculation, which rules out their use of short-term financial instruments such as treasury bills and repurchase agreements.
In the 12-month period ending in September, Pakistan’s 22 Islamic finance institutions have added 409 billion rupees in assets, a 36.2 percent growth rate, central bank data shows.
The sector now holds a 11.2 percent share of total banking assets, up from 9.9 percent a year earlier.
Profitability, however, remains below the banking industry average, partly due to higher expenses as Islamic banks expand their branch networks and a lack of compliant investment options.
Originally published on www.thenews.com.pk