An Eco-System of Shariah Compliant Investment

An Eco-System of Shariah Compliant Investment

The Knowledge of Halaal and Haraam with respect to one’s income is a matter of grave importance, highly emphasized in our Deen. The Prophet ﷺ stated that eating from haraam earnings is one of the things that prevent du‘aa’s and righteous deeds from being accepted.

Allah says in the Quran,

‘O you who have believed, eat from the good things which We have provided for you’

[Source: al-Baqarah 2:172].

In the explanation of the above verse, Prophet ﷺ mentioned a man who has travelled on a long journey and is disheveled and covered with dust; he stretches forth his hands to the heaven, (saying) “O Lord, O Lord”, but his food is haraam (from haraam earnings), his drink is haraam, his clothing is haraam, he grew up nourished from haraam earning, so how can his du’aa’ be accepted?”
[Source: Sahih Muslim].

Hence, we can safely conclude that an indifferent attitude towards this discipline can be detrimental for ones Duniya and Akhira.

Unfortunately, many Muslims around the world lack the opportunity to invest in corporations or equities in a Shariah Compliant way. Some countries do offer such opportunities via Islamic Banks, however, they do not adequately satisfy the Muslims in general due to their low returns and limited access to a few cities of those countries. By the grace of Allah, Pakistan has opened different opportunities for Non-Resident Pakistanis worldwide to invest their excess liquidity, cash, or savings to these types of investments which are completely Halaal, Alhamdulilah.

Overseas Pakistanis can enter Pakistan’s capital markets by opening a Roshan Digital Account(RDA) in any of the 8 eight designated banks. Under an RDA scheme 60,000 RD accounts have opened till now and over USD $200 million have inflowed in the country. Apart from many functional Islamic banks and mutual funds, Shariah conscious RDA customer can also freely trade shares by opening of Shariah Trading Account with Central Depository Company(CDC) and Meezan Bank partner brokers.

Pakistan Stock Exchange(PSX) also offers three indices: All Pakistan Islamic Index, KMI- 100, and KMI-30. PSX-KMI All Share Index, developed by PSX and Meezan Bank, comprises of all shariah-compliant companies listed on the PSX Ltd. The index enlists 226 companies with 24 additions and 24 expulsions made in 2019. Any Pakistani can invest in these companies and be confident in the fact that they are completely Shariah Compliant.

A recent Shariah compliant investment opportunity for Non-Resident Pakistanis is the Islamic Naya Pakistan Certificate (INPC). INPC is based on Mudarabah mode of finance. INPC company is a special purpose vehicle(SPV) owned by the Government of Pakistan that acts as Mudarib to invest and manage funds of NRP customers who invest as Rab-ul Maal. INPC company will invest these funds into Shariah compliant financing transactions with Ministry of Finance and Government of Pakistan. Islamic Naya Pakistan Certificate (INPC) till now has attracted USD $ 50 million of home remittance.

Instead of fixed profit rate INPC announces Profit Sharing Ratio (PSR) and Weightages before each month. Actual Profit earned from such investment activities during the month will be distributed among depositors as per profit sharing ratio (PSR) and weightages. Islamic Naya Pakistan certificate is approved by Meezan Bank and Shariah Advisory Committee of State Bank of Pakistan.

The rates of return on dollar denominated INPC are far higher than the non-resident Pakistani’s can earn in their host countries. These profit rates range between 5.5% to 11% depending on the maturity period of 3 months to 5 years. Table below highlights the profit rate in the month of November 2020.

Islamic NPC Company Limited
Islamic NPC Company Limited

A worth mentioning milestone is the establishment of the very first Digitalized Shariah Compliant Platform. Meezan Bank in collaboration with CDC and Brokers now allows investors through Meezan Roshan Digital Account-MRDA to trade through this platform. At this point of time 6 brokers are on Meezan Digitalized Platform to provide investment only in shariah compliant shares.

Many investors hesitate to invest in PSX directly as they do not understand Shari’ah processes. This platform reassures Shari’ah conscious investors, as Digitalized Trading System is inclusive of all Shariah principles.

An eco-system for the establishment of “Riba Free Pakistan” has already been provided for 8.5 million Non-Resident Pakistanis by the Government of Pakistan. From acquiring a digital account within 48 hours from anywhere in the world, a shariah compliant investor will have access to Capital Market, Real Estate, and investments in Islamic Naya Pakistan Certificate.

Quran Quran

“Those who eat Riba (usury) will not stand (on the Day of Resurrection) except like the standing of a person beaten by Shaitan (Satan) leading him to insanity. That is because they say: “Trading is only like Riba (usury),” whereas Allah has permitted trading and forbidden Riba (usury). So whosoever receives an admonition from his Lord and stops eating Riba (usury) shall not be punished for the past; his case is for Allah (to judge); but whoever returns [to Riba (usury)], such are the dwellers of the Fire – they will abide therein.” [ Al – Baqarah 275 ]

We at Usmani and Co. would urge all NRPs to explore these avenues further to help build a Riba free, progressive Pakistan.

By: Sadaf Sawant (Panel Member UCO)



Usmani & Co in collaboration with Meezan Bank and IBA-CEIF, is hosting a Webinar LIVE on Zoom and Facebook on Thursday, December 24, 2020, at 4:00 P.M. (PST) on the Importance of Shariah-compliant investment through Meezan Roshan Digital Account and Islamic Naya Pakistan Certificates.

Usmani & Co. is a globally well-reputed Advisory Firm, committed to offering comprehensive advisory services by leveraging on its global presence, integrated structure, and internationally recognized award-winning Scholars. Meezan Bank is the only full-fledged Islamic bank in Pakistan that is offering these Mudarabah based Shariah-compliant investment instruments offering lucrative Islamic investment options to Overseas Pakistanis.

All Non-Resident Pakistanis who wish to make Halal investments in their home country with the largest Islamic bank in Pakistan can join the Webinar and get their questions answered directly by experts in Shariah-compliant investments.Register for this webinar at WEBINAR OPEN

Sukuk Structuring – Understanding K-Electrics’ sukuk

Sukuk Structuring – Understanding K-Electrics’ Sukuk

The successful issuance of K-Electric Sukuk back in 2015 led to another effective Sukuk issuance by K-electric in 2020. The Diminishing Musharakah Sukuk in 2015 was jointly arranged by Meezan Bank Limited and Habib Bank Limited and was awarded a rating of AA+ by JCR-VIS and A+ by Islamic International Rating Agency (Bahrain). It was the largest listed corporate Sukuk in Pakistan, the shariah structuring of which was approved by Dr. Imran Usmani and other prominent scholars who were part of the shariah advisory board. (Source:

Another milestone that we all are a witness to is the recent effective issuance of Sukuk or Islamic bonds by K- Electric, the subscription of which closed on 3rd August 2020; two weeks in advance. Its early closure is not just another testament to the investor’s trust in Islamic bonds but also the increased use of Islamic financial instruments in Pakistan’s Capital Market. Sukuk, all over the world, has become increasingly popular as a feasible and viable shariah-compliant long-term financing instrument.

Moody’s investor’s service sector report 2019 showed an increase of 36% international Sukuk issuance, which was the highest recorded in the previous four years. However, the first half of the year 2020 showed a decline of 5% of Sukuk issuance compares to 2019 to $170 billion. The reason for the decline being the obvious; coronavirus.  It is hoped that in the second half of 2020 the issuances will increase worldwide.    

K-Electric Sukuk issuance taking on the lead with the second half of 2020 with an oversubscription of 2.5 times; it is hoped that the issuance of this Sukuk by the private sector for the infrastructural purpose will bring Karachi’s power supply into a surplus position. It is also paramount to understand that the oversubscription of PKR 25 billion K-Electric Sukuk that had to be closed two weeks in advance was more acceptable to the public as it did not interfere with the moral conflict of taking on an interest bearing conventional bond.

The origin of Sukuk can be traced back to the first century of the Islamic Calendar during the Ummayad Caliphate. In the Arabic language, the word Sukuk is a plural of the word ‘sakk’, which means a legal instrument, deed, or cheque. Imam Malik is his famous treatise, Al-Muwatta has described the use of sakk by the Ummayad Government. The ‘sack’ was also known as ‘grain permit’ and it entitled the holders to a certain amount of commodities from the state government treasury upon maturity. Since it was backed by state obligation, it was traded among Sukuk holders and was marked as a tradable instrument by Muslims’ in the past (Islamic Capital Markets, Obiyathullah Bacha).

In Islamic Finance, a more accurate translation would be Islamic investment certificate or participation certificates. The holder of this certificate is the beneficial owner (in proportion) of the underlying assets of the Sukuk or ownership in a business venture along with the profit or loss associated with the Sukuk or business venture (Sukuk Principles and Practices, ISRA). Bahrain-based Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) defines Sukuk as “certificates of equal value representing undivided shares in ownership of tangible assets, usufruct, and services or (in the ownership of) the assets of particular projects or special investment activity”.

In modern times, Sukuk has been used as a financial instrument to raise large amounts of cash or capital from investors and it can be done by developing various structures of Sukuk with underlying assets.

The various structures of Sukuk could be sale based (Murabahah), lease based (Ijarah), and equity-based (mudarabah, musharakah, and wakala) . However, even a combination of all these is possible.

Lets’ first delve into a basic musharakah Sukuk structure in order to further proceed into Karachi Electrics’  diminishing musharakah Sukuk.

Basic Musharakah Sukuk Structure

The company (originator) and investors enter a musharakah contract and become joint owners of a pool of assets through a Sukuk issuance process. As such, Musharakah Sukuk is securities where holders are owners of a specific asset. They will either benefit or lose from an increase or a decrease in the price of the underlying asset. It is additionally characterized by predefined maturity date and is typically tradable in the secondary market.

The Accounting and Auditing Organization for Islamic Financial Institutions in its Shariah Standard No. 17 (3/6) defines Musharakah Sukuk as ‘certificates of equal value issued with the aim of using the mobilized funds for establishing a new project, developing an existing project or financing a business activity on the basis of any partnership contract so that the certificate holders become the owner of the project or assets of the activity as per their respective shares, with the Musharakah certificates being managed on the basis of participation or mudharabah or an investment agency’.

The concept of diminishing musharakah structure has been established in the recent past. It is a contract in which a financier and a client enter joint ownership of a property, equipment, or a joint commercial enterprise. The share of the financier is further divided into a number of units and each unit is periodically bought by the client until the client becomes the sole owner of the property, equipment, or joint ownership. (Islamic Finance, Dr. Muhammad Imran Usmani)

According to the Accounting and Auditing Organization for Islamic Financial Institutions in its Shariah Standard No. 12 (5/1) ‘Diminishing Musharakah is a form of partnership in which one of the partners promises to buy the equity share of the other partner gradually until the title to the equity is completely transferred to him.’ The diagram below is an illustration of Karachi Electric diminishing musharakah Sukuk for further elaboration of this concept.


In this structure, 75% of the pool of assets is sold to investors or Sukuk holders through Pre-IPO and IPO, whereas 25% is still owned by KE. Thereby in this musharakah arrangement, KE and Sukuk holders enter joint ownership of 25:75 respectively. The 75% that is owned by Sukuk holders is then given on lease to KE for which KE provides rent to Sukuk holders for the usufruct of these assets. This arrangement is further followed up by the gradual purchasing of these assets by KE during the seven-year tenure of the Sukuk.

There are some Sukuk that are structured in the sale and leaseback model in which a particular usable property is purchased from the Sukuk issuer and then it is leased back to the seller with the intention that once the lease is matured the asset would be sold back to the original seller(originator). Firstly, the originator will establish a special purpose vehicle (SPV). The SPV is legally separate from the originator and Sukuk holders. The Originator then pledges or transfers the asset which will become the underlying asset of the Sukuk to this newly established SPV. These underlying properties represented by Sukuk will be held at trust by the special purpose vehicle (SPV) or trust and the lease rentals that are received from the originator for the use of the asset(usufruct) are distributed among the Sukuk holders on a pro-rata basis of the investment.

However, one may wish to understand that what makes such structuring of a Sukuk different from conventional bonds even though to an onlooker the result, being the periodic rentals, might appear like conventional bonds. 

So what exactly differentiates Sukuk from conventional bonds?

  • The Sukuk process involves issuers and investors via Islamic contracts, whereas a conventional bond involves lenders and borrowers.
  • Conventional bond is a debt-based instrument whereas Sukuk are not debt-based but rely on ownership of specific assets and its cash flows.
  • Sukuk issuance always has an underlying asset and Sukuk holders have a right to the ownership of the underlying asset and its cash flows; a bond does not have an underlying asset unless it is collateralized.
  • In Sukuk issuance, where the funds are raised to be used to finance needed tangible assets, the specificity of assets is important, in the issuance of bonds it can be used by the issuer for any general financial need which does not need to specify.
  • Income received by Sukuk holders (investors) must be derived from the cash flows generated by the underlying asset, not from other sources external to the asset.
  • Sukuk issuers will securitize assets to issue Sukuk. Investors who plan to purchase or buy the Sukuk will get a certificate that represents ownership of the asset, risk, and cash flows. Upon maturity, those investors are qualified to get the money equivalent to the value of the Sukuk. The value of Sukuk could be varied according to the value of the asset that is backing them. These criteria also differentiate Sukuk from bonds.
  • If these Sukuk are traded in the secondary market, they must have tangible assets more than 50% as per the guidelines given by shariah scholars, which is not the case with bonds as it does not represent any underlying asset.

It is hoped that with more of such Sukuk issuance, more infrastructural projects can be undertaken at the government and corporate levels which will not only benefit the economy at large but also remove economies from overreliance on debt.

To further understand the concept of Sukuk, do read the securitization chapter in Islamic Finance, Dr. Muhammad Imran Ashraf Usmani (

Written by: Sadaf Sawant
Executive Projects’ Coordinator and Panel Member at Usmani & Co.