Islamic Commercial Paper – an innovation on the landscape of Pakistan's Islamic Corporate Finance

Muhammad Haris Munawar

Muhammad Haris Munawar

(The writer is an Associate member of ICMA Pakistan and MBA from IBA, Karachi, currently working as Head of Investment Banking at BankIslami Pakistan Limited) January 10, 2019

Pakistan's Islamic finance industry is constantly evolving and fast growing for last more than decade. There has been constant evolution, transformation and product innovation in the Islamic finance industry of Pakistan. However, the year 2018 was quite promising as Islamic corporate finance market of Pakistan witnessed a quantum leap of evolution and innovation through the launch of Country's first ever Shariah Compliant Islamic Commercial Paper (ICP). The aim of this innovative product was to broaden the avenues for Pakistan's Islamic mutual funds industry that is always looking for lucrative short-term/fixed income rated instruments for investment in a Shariah-compliant manner. The growth of Islamic banking and Islamic mutual funds is on the rise in Pakistan visa-e-vie the demand for Islamic products and instruments have also increased.

Commercial Paper is an unsecured short-term debt instrument, maturities between minimum of 30 days and maximum of one year, issued by corporates at discount to its face value normally for meeting working capital requirements. As per the SECP regulations the issuer has to meet certain minimum conditions such as; issuer's equity must be greater than Rs.25 million and that it has no overdue loan or defaults in the report obtained from the Credit Information Bureau of the State Bank of Pakistan. Under the regulations, every issuer has to appoint an Issuing and Paying Agent (IP Agent), a Scheduled Bank / IFC / DFI, having a minimum credit rating of "A-/A-2". Issuer's entity credit rating is no more required under the revised regulations however keeping in view the mutual funds requirement to invest only in the rated instrument it is mandatory to have instrument rating based on the credit rating of the issuer.

Two notable Shariah Compliant Islamic Commercial Paper transactions concluded during 2018 were PKR 2.5 Billion ICP issue by Hascol Petroleum Limited and PKR 7.0 billion ICP issue by K-Electric Limited; both the transactions were advised, structured and arranged by BankIslami Pakistan Ltd. The foremost challenge in advising & structuring such innovative transactions is to strike the fine balance between Shariah rulings/standards and the country's local laws & regulations. This challenge could be overcome through series of detailed deliberations and meaningful discussions between the stakeholders i.e. Issuer, Shariah Advisor, IP Agent, Legal Advisor and the Investors.

Hascol Petroleum's ICP was actually Pakistan's foray into Shariah compliant unsecured short term papers. Initial issue size was Rs. 1.5 billion (ICP-1; December 2017) which was increased to Rs. 2.5 billion in the second tranche (ICP-2; June 2018) envisaging the market appetite to invest in rated instrument issued by one of the fastest growing Oil Marketing Companies (OMC) of the country. Hascol ICP was structured along the principles of 'Bai Salam and Wakalah' due to the nature of the issuer's business operations being an OMC. The Bai Salam structure is used when the advance is fully paid for a product that is available for delivery on a future date. The ICP program tenor was of one year, covering two tranches of six months each. JCR-VIS assigned short-term rating of 'A-1' based on entity rating of 'AA-'. Transaction was widely distributed to 100% non-bank market which includes almost all the Asset Management Companies (AMCs) and Islamic Insurance/ Takaful companies. ICP Issue received an overwhelming response from the investors which can be well judged by over-subscription of ICP-1 by more than 80% of the issue size (excluding green shoe option). The transaction was well received by the market and was also covered by local and international magazines and newspapers i.e. Islamic Financial News, Malaysia and the Bloomberg.

K- Electric's ICP Programme of Rs 7.0 billion happened to be Pakistan's first ever largest, privately placed, unsecured short term paper. ICP was rated 'A-1" by JCR-VIS based on KE's outstanding entity rating of 'AA'. ICP was innovatively structured on the Shariah principles of 'Wakalah-tul-Istismar' whereby K-Electric was appointed Business Investment Agent for generation, transmission and distribution of electricity to its Clients (including Industrial, Commercial, Agricultural and Residential areas), during the Wakala tenure, for its specified Integrated Business Centers (IBCs). Transaction was widely distributed to mainly non-bank market and ICP Issue size was successfully subscribed by 36 investors comprising of Income Funds, Cash Funds, Pension Funds, Balanced Funds, Money Market Funds and privately managed funds of AMC etc. K-Electric ICP program tenor is of 18 months, covering three (3) tranches of six months each.

With these two pioneering and innovative ICP transactions, the floodgates for more ICPs in Pakistan have been opened. Islamic finance experts are positive that there will be healthy demand from the corporate sector for ICPs to meet its short term liquidity requirements without creating any encumbrance or charge on its assets as security. Hence, an increase in ICP issues by the corporate sector is a trend waiting to happen.