Types under appropriate law. The SPV which has

Types of FIS

Fixed Income Securities are mostly bonds in the current market of the modern
world. They can be classified into corporate and government bonds. Corporate
bonds are issued by companies and organizations to fund debts and expansions etc.,
they can further be classified as either investment grade or a non-investment
grade bonds (also known as high yield bonds). Investment grades are issued by
companies with a low default risk thus a lower interest rate whereas high yield
bonds have a very low credit rating due to a high probability of default.


Government Bonds



are types of fixed income securities which work in compliance with Shariah Law.
Sukuk in the global market have usually been structured as trust certificates
but there exist some jurisdictions that do not recognize the trust concept and
have opted for structuring Sukuks as participating notes under the legislation
which in many ways is similar to the asset-backed securities.


Types of Sukkuk



an ordinary or simple trust certificate transaction, the entity trying to raise
assets or funds establishes an offshore special-purpose vehicle (SPV) under
appropriate law. The SPV which has been established than issues trust
certificates to investors and then utilizes the proceeds to setup an arrangement
with the entity obligated for funding purposes. For the funding arrangement
mentioned above the most used types of structures in a Islamic market include: ijara, murabaha and musharaka.

Ijara: a sale and leaseback structure

Murabaha: a trade finance

Musharak: an equity investment in the form of a


Civil-Law Structures


the trust certificate structure, alternative structures have begun to emerge in
which the sukuk transactions are allowed to be carried out in compliance with
the local laws. This is usually achieved by the formation of asset-leasing
companies which are setup in such a way to be able to issue certificates in the
form of an ijara to investors which in turn allows the company to purchase the
assets and subsequently lease them back to the obligators. This form of model
can be compared with the loan participation notes which have been in the market
since the previous century.


Credit Exposure


today’s market most of the sukuk transactions have been structured in a way in
which the obligator shares his credit risk with the investor. Nevertheless, the
investors need to consider whether the sukuk only gives recourse to the obligor
or to another separate entity represented by the assets dependent on the underlying
sukuk’s funding arrangement.


vs Asset-backed


the asset-based structure of sukuk the reliance of the investors on the credit
strength of the obligor rather than the underlying asset which allows the
obligor to simplify its reporting and segregation in relation to the assets
since they are aware of the fact that investors actually are only reliant on
the obligor’s credit strength.


the other hand, in an asset-backed structure of sukuk the investor can be
expected to try and value the assets themselves as the return of capital and
the profit return in due course are based on the underlying assets themselves
rather than the obligor’s credit strength.

A certificate of deposit (CD)


is issued by a bank. In return for saving money with the bank, it pays interest
to the account holder. CDs offer lower rates than bonds, but higher rates than
traditional savings accounts.


Municipal bonds


are a type of government bonds, these are usually issued by states, cities, and
counties. These bonds also provide tax relief.



type of a government bond; they usually are long maturity bonds (i.e. 20
years). The interest payments and principal repayments of the bonds are guaranteed
by the government which issues these bonds to fund its debts.

types of fixed income securities include Treasury
bills, Treasury notes. The
Treasury bills (T-bills) and Treasury notes (T-notes) are similar to the T-bond in that they are sold by the
government. The T-bill is a
short-term fixed income security that matures within one year from issuance,
and typically sells at a discount to par. The Treasury notes have maturity dates of 10 years or less, and like
Treasury bonds, can be issued at a discount, at a premium, or at par.

T-bills: also known as Market treasury bills(MTBs) are Government Debt Securities with a maturity/tenure
of one year or less. T-Bills are typically issued through the State Bank of
Pakistan (SBP) with maturities of 3, 6 and 12 months. It is important to note that
T-Bills are discount securities. That is to say, they are issued at Below Face
Value and reclaimed at Face Value with no intervening interest payment. In
simple terms no coupon payments and sold at less than Face value of the bond. ”T-Bills
are issued in the minimum denomination of PKR 5,000. T-Bill auctions are held
by the State Bank of Pakistan every fortnight. At present, outstanding T-Bills
are approximately PKR 5.8 trillion or 77% of total outstanding Government
Securities” (http://jsgcl.com/pdf/KSE_Guideline_Book.pdf).

These bonds are Purchased by individuals, institutions and corporate bodies
including banks irrespective of their residential status and primary dealer
maintains a Subsidiary General Ledger
Account (SGLA) with SBP for the
settlement purpose.

Pakistan Investment Bonds


of Pakistan issued long term paper (FIBs) in 1992, with this came into being
the long-term yield curve so the corporate enteritis to benchmark and issue
their own long-term securities. The auction of FIBs was stopped in 1998 due to
less response by the public on the declining earnings on these instruments. At
that time, there was no long term marketable government security that could
meet the investment needs of institutional investors. The, government, in order
to develop the longer end of its debt market for creating a benchmark yield
curve and to enhance the corporate debt market, decided to launch Pakistan
Investment Bonds in December 2000.

These Investment bonds are issued for tenures/maturities of 3,5, 7, 10, 15, 20
and 30 years. However, at present, the Government is issuing bonds with
maturity of 3, 5 and 10 years only. PIBs are coupon bearing debt securities. They
are issued at face value and pay interest semiannual. A Primary Dealer maintains a Subsidiary General Ledger Account (SGLA) with SBP for the settlement purpose. They are purchased by individuals,
institutions and corporate bodies including banks irrespective of their
residential status. SBP & Ministry of Finance announce the coupon rates and
the target amounts after consulting each other.
”Current stock of outstanding PIBs is roughly PKR 1.3 trillion”. (http://jsgcl.com/pdf/KSE_Guideline_Book.pdf)


are sold by the SBP to ten Primary Dealers through multiple price sealed bids
auction who get a commission on the sale proceeds of PIBs @ 0.5% on amount of
bid accepted or 3.5% of the target amount, whichever is less. Here the ten
primary dealers:

There is another selection
of government bonds, as various government owned and run companies issue their bonds.
In 1988, Water and Power Development Authority (WAPDA), a government owned
statuary company, issued a five-year bond. Over the period 1988 to 1994, WAPDA
issued Rs. 22.5 billion of bonds to the public (Leonardo (2000)).

market experience of WAPDA bonds was disappointing due to two factors. First,
WAPDA had to delay repayments of its maturing bonds due to insufficient funds.
Second, the secondary market for the WAPDA bonds did not meet market
expectations due to the under capitalization of the market maker resulting in
low liquidity of the bonds.


National saving scheme

Under the umbrella of National savings, A new bond has been launched this year
called the Premium prize bond, its major
characteristics are that the investment period in unlimited and not defined. It
pays out semiannual cash flows and no profit is payable if encashed before the
each of the six month periods. Zakat is exempted whereas the minimum investment
is 40,000 rupees, Individuals, private/public institutions and institutional
investors are also allowed to invest (funds such as pension, gratuity and
trusts etc.)

Another recent addition to the scheme was a Short term saving certificate, Major characteristics include a
maturity period of 3 months, 6 months and 12 months, basically anyone can
invest in them. It’s cash flows are received at the end of its maturity and no
profit is received if encashed before the maturity. Institutional investors are
also allowed and the certificate is also exempted from zakat.


Investment Procedure

Portfolio Securities Account


Portfolio of Securities account is necessary for investing in PIBs, MTBs and GOP
Ijara Sukkuk. Primary Dealers/Scheduled Banks hold these securities in IPS
accounts on behalf of their customers. Customer is the legal owner of the security
held in the IPS accounts with banks in accordance with instructions of SBP.


of the procedure are mentioned in a document attached.


Corporate Bonds

Term Finance Certificates


are corporate debt instrument issued by financial institutions for short and medium-term
loans. The financial institution involved basically acts as the trustee between
the other two parties involved, the issuer (borrower) and the investors. Some
of the TFCs have fixed rate of returns while others have a floating rate which
includes the risk-free benchmark + risk spread of the particular instrument.
All TFCs are rated before they are issued, by a rating agency based on the creditor
history and the structure of the TFC. The two operating rating agencies in
Pakistan are JCR-VIS and PARCA.

can be listed on any one of all of the stock markets in Pakistan for the
purpose of buying and selling. All the listed TFCs are traded through the
licensed members of the stock exchange on which they are listed on. Non-listed
TFCs can also be sold/bought by direct negotiations with the buyer/seller,
therefore they are less liquid so non-listed TFCs have a high liquidity risk
are compared to listed TFCs.

bonds, TFC’s income is divided in the forms of coupons paid semiannually
typically with the last coupon being paid at the time of the maturity. The
faster recovery of cash flows makes the TFCs less risky are compared to the
generic bonds where the lump sum amount is paid at the time of the maturity.
Corporations are exempted from paying the withholding tax on TFCs but are
required to pay the normal corporate tax on the income. The individual
investors are required to pay a 10% withholding tax the time of the purchase
which is then subsequently adjusted against the final tax liability during the

The recent successfully subscribed debt issues of Standard Chartered Bank of 2 billion and so did KESC Azam Certificates for 2 billion,
before the closing period, shows that demand for corporate debt is profound. At
the same time, the domestic market witnessed innovation when Treet Corporation
Limited announced to raise Rs1.255 billion through issuance of Participation
Term Certificate (PTC)

is a convertible and redeemable bond structure, which would not only deliver an
interest payment but also issue a predetermined number of shares till its


of the Listed TFCs, both public and private, are in a document attached.


Commercial Papers


paper is a type of unsecured short-term debt issued by corporations. Commercials
papers came into being in Pakistan in order to help expand the money market by
providing an additional financial instrument to the investors. In Pakistan its deemed
desirable to diversify the short-term financing by issuing commercial papers as
instruments of redeemable capital under section 120 of Companies Ordinance,

commercial paper is issued for maturities between 30 days and one year and its
minimum size of issue cannot be less than ten million rupees. It is required to
be in the form of a promissory note and issued at such discount to face value
which is determined by the issuer in accordance with the existing T-Bill rates,
KIBOR and its Credit Rating.


order to issue a commercial paper the issuer is required to appoint an advisor
in the assistance on the structure of commercial issue. An IPA needs to
appointed for the sale of the issue on behalf of the customer.


of the Listed Commercial Papers are in a document attached.