The Ministry of Finance has decided to generate Rs 15 billion through issuance of long-term Sukuk for Islamic banks to settle power sector circular debt.

Sources in the ministry told Business Recorder that in order to resolve the serious issue of power sector circular debt, the federal government has decided to generate new funds from Islamic banking industry. The Islamic banking industry has huge liquidity due to limited opportunities of investment.

The federal government is facing circular debt issue since 2007 due to rising oil subsidies and prices of petroleum products on international front, besides less than target revenue collection. Sources said after successful deal with conventional banks in January this year, the ministry of finance is now negotiating with Islamic banks for issuance of long-term Sukuk to minimize the circular debt, they added. “As part of these efforts to minimize circular debt, in January this year, the conventional banks have already subscribed worth some Rs 150 billion of long term bonds ie Term Finance Certificates (TFCs) to adjust circular debt,” they added.

According to sources over the last few weeks, the ministry has been engaged and in correspondence with Islamic banking industry to generate fund through issuance of Sukuk aimed at managing debt in power sector because the issues was creating several problems for banking as well power sector. Sources said initially, talks between the MoF and Islamic banking industry have almost finalized and after several rounds of discussions, Islamic banking industry has shown it willingness to subscribe for Rs15 billion worth Sukuk to help the government adjust circular debt related payments.

“As a matter of principle, all Islamic banks and Islamic banking branches of conventional banks are agree to participate in the Sukuk auction and subscribed Rs 15 billion of Sukuk,” they added.

Sources said after detailed meetings with debt policy and coordination office of the MoF, Islamic banks have sent the agreement term sheet to mature the deal and now they are waiting for government’s formal approval. According to terms and conditions, Sukuk for the circular debt will be for a period of five years, with expected mark-up rate of Kibor plus 1, demand by the Islamic banking industry. It is being expected that the MoF is likely to issue Sukuk by the end of this month.

Sources said among Islamic banks, keeping in view the past experience, Meezan Bank will be largest participant and expected to subscribe Rs 3 to 4 billion worth Sukuk.