By Imtiaz Hussain Abro.
KARACHI: The potential of attracting Shariah-compliant investors to the Pakistan Stock Exchange (PSX) was witnessed once again with massive participation in Pakistan’s first listed government Ijarah Sukuk issuance.
The Ministry of Finance had set an auction target of Rs30 billion, but the bids received from retail and institutional investors surpassed expectations, reaching over Rs396.2 billion. As a result, the maiden auction was oversubscribed by 13 times.
What is noteworthy is that the government managed to attract one-year investors at rates that were 2.5% lower than the policy rate of 22% and even 1% below the minimum deposit rate prescribed by the State Bank of Pakistan for conventional banks on saving accounts.
The significant participation, even at lower rates, reflects the market’s preference for Shariah-compliant instruments that offer halal returns. Additionally, this will enable the government to benefit from Sukuk issuance at lower rates compared to conventional options.
The strong interest in listed Sukuk indicates the opportunities available for the development of Shariah-compliant instruments. If this demand is effectively tapped with appropriate solutions, the liquidity held by investors seeking interest-free and halal returns can be utilized to benefit the economy and reduce the government’s financial burden.
The successful Sukuk transaction, along with increased coordination among capital market infrastructure institutions such as the PSX, National Clearing Company of Pakistan Limited, and Central Depository Company, supported by the SECP, is a positive sign for the further development of Islamic capital markets in the country.
Given the recent decisions by the federal government and central bank to transition to an Islamic financial system by December 2027 and gradually phase out conventional banking, many corporate entities are now considering conversion to Islamic financing and exploring capital markets for their financial requirements.
Against this backdrop of market developments, there is a golden opportunity to develop Islamic capital markets and target Shariah-compliant retail investors to participate in the PSX. This step will not only expand the investor base but also be beneficial for companies seeking capital.
According to data from the SECP Capital Market Development Plan Report, there are currently only 210,000 retail investors with trading accounts at the PSX, and the number of active investors is estimated to be around 100,000. One of the reasons for the low investor enthusiasm is the general public’s apprehension about the Shariah permissibility of stock market investment.
Due to prevailing market practices, the perception that stock market investments are speculative, the presence of features like short selling and interest-based borrowing, the Shariah non-compliance status of trading processes like day trade and futures trade, as well as the lack of clarity regarding the Shariah compliance level of listed securities, many Shariah scholars advise the public to avoid the stock market.
It is now crucial to make focused efforts to develop and launch a dedicated Islamic trading counter at the PSX, attracting genuine investors who seek to trade and invest in a Shariah-compliant manner and avoid practices conflicting with religious guidelines, rather than engaging in speculation.
The PSX currently features two Shariah-compliant indices, namely the KMI-30 Index and the All Share KMI Index, which are recomposed every six months and include companies that meet the Shariah-compliant screening criteria. As per the latest available data, 251 listed companies are declared compliant, and investors interested in Shariah-compliant shares can invest in these securities. The Islamic trading counter at the stock exchange would allow trading and investment in shares under Shariah guidelines, with all mechanisms, rules, and settlement methods designed in accordance with Islamic commercial law.
Such a counter would have several distinctive features that are currently lacking in the existing trading counter. The Shariah-compliant counter would enable investors to deal exclusively with shares that are Shariah-compliant and listed in Islamic indices. Shares of companies engaged in non-compliant businesses, such as conventional banks, insurance firms, and alcohol manufacturers, would be excluded. Similarly, companies with high conventional leverage or significant non-compliant earnings would also be screened out.
Regarding settlement and delivery mechanisms, the Islamic counter is suggested to have real-time settlement and immediate transfer to investors’ CDC accounts. From a technological perspective, this is achievable, but it would require buyers to have pre-funded accounts before entering purchase deals. This step would also enable investors to execute same-day sales while following Shariah guidelines related to possession.
Another important feature of the Islamic trading counter would be the restriction on speculation, prohibiting activities like short selling, as selling anything not in the seller’s possession is prohibited in Islam. Additionally, future sales, sale of letters of rights, and pre-IPO trades would also face restrictions, which would help control speculation and unwarranted volatility when these stocks are traded under the Islamic trade counter.
For share financing, investors using the Islamic counter would be allowed to utilize Murabaha-based financing options, while interest-based margin financing or lending would not be permitted.
The proposed Islamic trading counter has the potential to bring significant benefits to the PSX and the broader economy by attracting more retail investors and increasing market liquidity. It could also provide investment opportunities for global investors seeking ethical and Shariah-compliant options.
 was witnessed once){kind=link}