By S.M. Inam
Pakistan’s sovereign Sukuk issuance crossing Rs10 trillion marks an important milestone in the country’s efforts to expand Islamic finance and diversify its sources of public borrowing. The achievement reflects growing activity in the domestic Islamic capital market and offers an opportunity to attract a wider pool of investors. However, the real significance of this development will depend not simply on how much the government borrows through Sukuk, but on whether Pakistan can turn this expanding market into a sustainable source of investment, economic confidence and financial stability.
Finance Minister Muhammad Aurangzeb, speaking at a ceremony in Islamabad to mark the milestone, said sovereign Sukuk issuance had increased by 113 per cent this year compared with approximately Rs2 trillion in 2025. Figures shared by Meezan Bank showed that the government issued Sukuk worth Rs4.179 trillion between January and October 31, exceeding twice the previous full-year record of Rs2.052 trillion set in 2025. The expansion demonstrates the growing importance of Shariah-compliant financial instruments in the government’s domestic financing strategy.
The progress is considerable when viewed over a longer period. Sovereign Sukuk issuance, which stood at approximately Rs761 billion in 2020, has grown at a compound annual rate of around 22 per cent over five years. This growth suggests that Islamic finance is gradually becoming a more established component of Pakistan’s financial system. It also reflects the availability of domestic institutional investors and increasing public familiarity with investment products structured in accordance with Islamic principles.
Yet the expansion of the market exposes another challenge. Pakistan has succeeded in increasing domestic Sukuk issuance, but it has not attracted foreign investment on a comparable scale. Aurangzeb acknowledged this weakness, pointing out that foreign inflows through special convertible rupee accounts into Treasury bills and Pakistan Investment Bonds had remained positive in recent months, while international participation in Sukuk remained disappointing.
This imbalance deserves serious attention. A financial instrument that has demonstrated considerable domestic demand should also be capable of attracting international investors, particularly at a time when global Islamic finance continues to offer opportunities for countries seeking alternative investment channels. Pakistan has a large Muslim population, an established banking sector and a strategic position connecting South Asia, Central Asia and the Middle East. These advantages could support a much stronger presence in the international Sukuk market.
However, international investors do not make decisions on religious compatibility or attractive financial products alone. They also examine economic stability, currency risks, regulatory consistency, transparency, sovereign creditworthiness and the government’s ability to meet its financial obligations. Pakistan must therefore recognise that marketing Sukuk overseas is only one part of the challenge. Building confidence in the country’s wider economic environment is equally important.
The government’s decision to make Sukuk accessible to individuals investing from as little as Rs5,000 is another positive development. It creates an opportunity for ordinary citizens to participate in government-backed investment rather than leaving the market largely to commercial banks and large institutional investors. At a time when inflation and declining purchasing power have weakened household savings, accessible investment instruments can encourage financial inclusion and provide people with an alternative to keeping their money idle.
The evolution of Pakistan’s Sukuk structure also deserves recognition. Since 2008, the government has largely relied on the Ijarah model, under which each issuance is linked to state-owned assets. While this arrangement established an important foundation for sovereign Islamic financing, the availability of suitable assets can limit the government’s ability to expand issuance. The introduction of a hybrid structure combining Ijarah with Commodity Murabaha by the Finance Ministry and the State Bank of Pakistan represents an effort to widen financing opportunities against the same underlying assets.
The introduction of tradable three-month and six-month Sukuk is another significant step. These instruments address a longstanding gap in the shorter-term Islamic financial market and provide investors with greater flexibility. Their development could also help establish a Shariah-compliant yield curve across different maturities, making it easier for investors to assess returns, manage liquidity and compare investment opportunities. A deeper market with different maturity options would strengthen the overall Islamic financial system and encourage more sophisticated participation.
However, Pakistan must avoid treating the expansion of Sukuk issuance as an achievement in isolation. Borrowing through Islamic instruments does not automatically reduce the country’s debt burden. Sukuk may offer a Shariah-compliant alternative to conventional government securities, but they remain a form of public financing that must be serviced responsibly. Their value lies in diversifying the financial system, broadening the investor base and potentially improving the terms on which the government raises money.
The scale of Pakistan’s debt obligations makes this distinction particularly important. The country paid $14.4 billion towards its foreign debt last year, including $3.2 billion in interest payments. Such substantial external payments place pressure on foreign exchange reserves, limit fiscal flexibility and reduce the resources available for development. Pakistan cannot build lasting economic stability by repeatedly borrowing to meet existing obligations without improving its capacity to generate exports, attract productive investment and increase government revenues.
The government must therefore connect the growth of the Sukuk market with a broader economic reform agenda. Greater fiscal discipline, a predictable regulatory environment, stronger institutions and transparent public financial management are essential. The proceeds raised through government securities should also support responsible financing rather than perpetuate an endless cycle of borrowing for routine expenditure.
The participation of State Bank Governor Jameel Ahmad and the keynote address by Justice (retd) Mufti Muhammad Taqi Usmani at the Islamabad ceremony highlighted the institutional and Shariah foundations of this initiative. Their involvement also underlined the importance of maintaining public confidence in the credibility and structure of Islamic financial instruments. Pakistan has demonstrated that its domestic Sukuk market can expand rapidly. The next task is to make it internationally competitive. That will require more than promotional campaigns by banks and brokerage firms. It will demand economic consistency, credible financial management, investor protection and a clear long-term strategy for developing Islamic capital markets.
(The writer is a former government officer and a senior analyst on national and international affairs, can be reached at metromorning78@gmail.com)
