FINANCIAL MANAGEMENT
ASSIGNMENT 2
SUBMITTED BY: MUSKAN FATIMA (BBA 171038)
FINANCIAL MANAGEMENT
QUESTION 1)
What are Sukuk Bonds, how do they work in Pakistan?
SUKUK BONDS
Sukuk is an Islamic bond and which is based on the securitization concept. These bonds are an
Islamic substitute for asset monetization, syndicate project financing, financing through asset
backed securitization and public financing. These bonds obey the rules and regulations of Sharia
(Islamic Law), as Riba is forbidden in Islam, the person who is the issuer of sukuk bonds vends
these bonds to an investor and then uses the capital raised to purchase an asset which belongs
to issuer, partial ownership is given to the investor as well. GOP Ijara Sukuk is the most well-
known case of sukuk bonds in Pakistan that are in consistence with Sharia. Ijara sukuk are given
by the Government of Pakistan (GOP) to overall population which are disseminated by various
banks (going about as the sub-overseer) while State Bank of Pakistan is the principle caretaker
of these bonds. Sukuk bonds are a medium-term speculation on which SBP reports ensured
benefits at regular intervals. Annual expense is deducted from these bonds according to the
common law. Other examples of Sukuk bonds issued in Pakistan include Mudharabah,
Musharakah, Murabahah, Al-Wakalah.
A Sukuk represents proportionate beneficial ownership in the underlying asset. Sukuk bonds
interface the profits and incomes of obligation financing to a specific resource purchased, viably
circulating the advantages of that benefit. This empowers the speculator to maintain the Sharia
and still get the advantages of obligation financing. Be that as it may, in a sukuk bond financing
must be raised for recognizable resources on account of the manner in which they are
organized. Sukuk securities can be exchanged again before development in the optional
market.
HOW DO THEY WORK IN PAKISTAN
Primary sellers of Government, assigned by SBP offer IPS records to every one of the individuals
and substances that hold a PKR ruled record with the essential vendor. The financial specialist
basically needs to make an Investor Portfolio Securities (IPS) represent putting resources into
sukuk bonds. IPS account opening branch gives action proclamations of IPS record to every
financial specialist on a quarterly premise. Charges demanded by banks on IPS accounts are
unequivocally referenced in their individual calendar of charges.
Then the next step is Buying of Sukuk Bonds. After opening an IPS account, Sukuk securities can
be obtained either from the essential market (when the administration drifts) or from the
auxiliary market. Bonds are held by banks in IPS accounts for the benefit of the financial
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specialist. The financial specialist at that point turns into the lawful proprietor of these bonds
held in the IPS account.
Government reports benefit on Sukuk securities like clockwork based on rental rate declared by
SBP before beginning of every semi-yearly period. The measure of benefit is credited to the
record of speculator through its essential seller (bank).
The last step is the maturity of Sukuk bonds. When Sukuk bonds develop financial specialist's
record is attributed by the PKR sum proportional to the assumed worth of Sukuk bond. Sukuk
securities are just redeemable at development anyway they can be sold in optional market
through essential seller.
Q2. How is the bond market in Pakistan and how can it and overall debt market
improve? What role can govt play?
BOND MARKET
The bond market also known as debt or credit market is a financial market where members can
issue new debt, which is known as the primary market, or purchase and vend debt securities,
known as the secondary market. This is mostly in the form of bonds, but it may include notes,
bills, etc
DEVELOPMENT OF BOND MARKET
Pakistan’s bond market came into being in late 1990s after the reforms of liberalization. Then
“Pakistan Investment Bond” (PIB) with maturities of 3, 5, 10 years were introduced in 2000 by
SBP when they replaced FIB’s with same maturities. Later to provide interbank call money curve
KIBOR rates were introduced in 2001. To create liquidity in the Government Bonds market, two
Jumbo issues were floated in 2003 and 2004.
HOW DOES IT OPERATE
The market of bonds is divided as follow:
PRIMARY MARKET
Bonds are issued through IPO. The company in need to raise capital goes to the investment
bank which creates the legal framework, set prices and coordinate with the investor to get the
money in exchange with the promise to pay back the principal amount with interest.
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FINANCIAL MANAGEMENT
SECONDARY MARKET
Secondary market operates when an investor already possesses a bond and wishes to raise
capital. The investor in need of capital exchanges its bond for cash by reselling it to another
investor. The bond trader goes to a new investor, agree on a price and make a deal.
Fluctuations in Economic growth and inflation are 2 key factors affecting the bond market.
Investors decide on how much to pay for a given bond based on how much they expect
inflation to erode the value of those fixed payments. The higher their expectations of inflation,
the less they will pay for bonds and vice versa. In bond market, lower prices correspond to
higher yields, and higher prices correspond to lower yields. When prices fall, yields rise, and
vice versa.
SBP oversees Government Securities advertise in the interest of the Government of Pakistan,
while SECP operates the Corporate Bond Market. The security advertise work as in the
monetary market of Pakistan, securities are either given by the Government or Corporate
elements.
GOVERNMENT BOND
Government bond is an obligation security lent by a legislature to help government spending,
frequently gave in the nation's nearby intrigue. Government bond market has the following
characteristics:
In govt markets the issuance of bonds is done in 3, 5, 10, 15, 20, and 30 years tenors, and bonds
are issued at Par Value through auction system. These kind of Bonds are sellable in secondary
market. Semi-Annually coupon payments are made. In govt market, Bonds are issued in the
form of un-certificated bonds and are maintained in SGLA maintained by the SBP.
CORPORATE BOND
Corporate bond is an obligation security which is given by organization and offered to
speculators to meet its money related necessities. In Pakistan this is generally known as Term
Finance Certificate (TFC). Corporate Bonds are typically given for a predefined timespan with an
affirmation to restore the chief measure of the security cash including enthusiasm to the
bondholder. At the point when somebody purchases a security, he/she is loaning cash to the
organization that gave it. The organization guarantees to restore the cash, on a predefined
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development date. Till that time, it additionally pays an expressed pace of return, which
typically happens semiannually. The intrigue installments gathered from corporate securities
are assessable. In contrast to shares, bonds don't give a proprietorship enthusiasm for the
giving organization. This structure the premise of optional market. Corporate bond market in
Pakistan has some characteristics like Both NBFIs and public/private firms are a part of TFC
issuers and the coupon rates on the term finance certificate display a wide variety with
different fixed coupons as well as floating coupons linked to various interest rates including the
discount rates, PIB rates and the KIBOR.
HOW CAN BOND & DEBT MARKET IMPROVE
It is very necessary for the bond market to be stable, as the stability of debt market is very
important for its growth in the economy. Steps should be taken in order to reduce the period of
term finance certificate approval at the SECP. The SECP ought to likewise act proactively to
acquaint new guidelines all together with oblige new instruments. To boost market making and
development in corporate bond market, primary dealers should be appointed. Investor base
should be diversified concerning time horizons and risks to have a developed bond market. This
could be done by incorporating long term recognized investors.
ROLE OF GOVERNMENT
Government is very keen to develop Bond Market. The government should provide both
individual and institutional investors with the right motivation to boost them to invest, and
exchange in, debt instruments. The issuance of debt should be done on regular basis to support
the development of debt market. Market information should be provided to the investors and
all the issuers, apart from this Mortgage, Islamic Fund Industry and Infrastructure Finance
initiatives should also be enhanced by putting efforts.
To improve the cost of issuing the term finance certificate the role of govt is to review the
stamp duty on TFC’s. Cutting down the tax rate alongside a cap on total duty paid could provide
an inducement to the TFC market.
The government could ensure growth and development in investment sector by highlighting
and funding the expansion of the life insurance sector, guaranteeing the efficiency of collective
investment schemes and strengthening the asset management agenda and policy for the public
pension fund.
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REFERENCES
https://www.quora.com/How-does-the-bond-market-work
https://www.thestreet.com/investing/frequently-asked-questions-about-the-bond-market-
1087488
https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/sukuk/
http://www.sbp.org.pk/fscd/2007/Presentations/CorporateSukuk.pdf
http://www.sbp.org.pk/dmmd/Guidelines/Sukuk.pdf
https://tradingeconomics.com/pakistan/interest-rate
http://www.sbp.org.pk/fscd/2007/Presentations/Bond-Market.pdf
http://www.sbp.org.pk/ecodata/Auction-Investment.pdf
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