With Basel III global banking standards being phased in around the globe, several Islamic banks have issued subordinated instruments to raise capital, including those in Turkey, Malaysia, Saudi Arabia and the United Arab Emirates.
The seven-year private placement is the first of its kind to be issued by an Islamic bank in Pakistan, said Abdullah Ghaffar, head of investment banking at Al Baraka Bank Pakistan.
“The Tier 2 sukuk by its nature is unsecured and subordinated, is rated and privately placed to institutional investors in local currency.”
Al Baraka is one of five full-fledged Islamic banks in the country, a sector which is expanding as regulators promote the industry through an array of product incentives and instructions to market participants.
The sukuk is rated A by the Pakistan Credit Rating Agency and includes loss absorbency features, using a mudaraba structure, a sharia-compliant investment management partnership.
Subordinated sukuk have been used by Islamic banks as an alternative to short-term, syndicated murabaha loans. Murabaha is a common cost-plus-profit arrangement in Islamic finance.
In Pakistan, Islamic banks must maintain a minimum paid-up capital of 6 billion rupees, a requirement that will be raised to 10 billion rupees by the end of 2016.
Al Baraka Bank started operations in Pakistan in 1991 and operates a network of 110 branches, it held 91.8 billion rupees in assets as of June.
In May, the chief executive of Al Baraka Banking group said the lender was considering subordinated sukuk for both its South African and Pakistani units.