Friday, Aug 29, 2008

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KARACHI (Dow Jones)--Pakistan government will sell its first Islamic, or sukuk, bond in the domestic financial market around mid-September to reduce borrowings from the central bank, a finance ministry official said Friday.

"The government will set an auction target of PKR15 billion ($197 million) to PKR20 billion in its first sale of Islamic bonds," the official, who didn't wish to be named, said.

The coupon rate on these bonds will be close to six-month treasury bill cutoff yields of 11.49%, the official said.

Standard Chartered Bank and Dubai Islamic Bank will assist in the sukuk sale, the official said.

"There is ample appetite within the Islamic banking industry and it will be a successful issue," said Muzamil Aslam, an economist at KASB Securities.

The issue will be beneficial to both issuer and investors, Aslam said: The government wants to diversify its source of funding while the Islamic finance industry is searching for more investment opportunities.

"The Islamic industry have little avenues to invest, and most of the time their funds remain idle," Aslam said.

Islamic banks account for around 4.1% of total banking activity in the country, according to State Bank of Pakistan data.

They hold about PKR206 billion of assets, and have 2.6% and 4.3% market share in deposits and financing, respectively, the data showed.

Pakistan is planning to launch several bond offers this fiscal year, which began July 1, to reduce its dependence on central bank borrowing.

In the last financial year, the government borrowed PKR688.4 billion from the State Bank Of Pakistan to finance its fiscal deficit, which rose to 6.5% of gross domestic product, compared with 4.5% in the preceding year.

-By Haris Zamir, contributing to Dow Jones Newswires; 91-11-43563300; chandrasekhar.jayachandran@dowjones.com

(END) Dow Jones Newswires

August 29, 2008 05:34 ET (09:34 GMT)