Banks to face Rs8 billion Sukuk default

KARACHI: Banks in Pakistan were stunned at the information that a major cement company has expressed inability to payback Rs8 billion Sukuk bonds and has asked the creditors to restructure the payment schedule.

Banking sources said in a meeting held on Friday last with the bankers and income fund managers, Maple Leaf which issued the Sukuk, asked the bankers to restructure the financing.

The re-payment of Sukuk is due from June 2010 in eight semi-annual installments, said the sources.

This could be the first possible default of the Islamic Term Finance (Sukuk) involving such a large amount.

The largest creditor of the Sukuk was the Allied Bank which has an exposure of Rs3.19 billion.

It might put an additional burden on the balance sheet of the bank as all most all banks have been facing tough time for the last couple of years.

When contacted, the ABL did not comment on the situation. Sources said the bank was negotiating for better deal with the company.

Analysts said that Habib Bank has increased its exposure to Rs1.6 billion in the Sukuk. Bankers said there was no option than restructuring as the company has shown its inability to pay back.

Bankers said the company has offered non-voting shares against the credit given by the banks but the banks were not ready to accept the non-voting shares.

Bankers expressed doubt that voting shares might make the owners of the company a minority shareholder.

A senior banker said the possible default of the Sukuk could hurt the credibility of newly born Islamic banking product but the most important aspect of the failure of Sukuk is that a company having best track record is unable to pay back its loans. The weak economic growth forced a large number of companies of various sectors to close down their businesses; they defaulted and piled up massive non-performing loans in the balance sheets of the banks.

Only last year banks witnessed over Rs100 billion NPLs.

‘ABL has the largest exposure among banks, Rs3.2bn which amounts to 12 per cent of Bank’s total capital,’ said a KASB Securities report issued recently.

It said HBL Income Fund initially had an exposure of Rs35 million which was raised to Rs1.6 billion.

Faysal Bank has an exposure of Rs900 million, MCB Bank Rs625 million, Askari Bank Rs175 million, Arif Habib Bank Rs175 million, Soneri Bank Rs150 million; BOP Rs100 million, Bank of Khyber Rs100 million and HSBC Pakistan Rs150 million.

Analysts said almost all sectors of the economy are under sever stress due to weak economic growth which is also an outcome of mounting terrorism inside the country expelling foreign investors from the country while causing massive losses to manufacturing and trading sectors.

Very high interest rates increased the cost of doing business while causing failure of businesses, leading to a build-up of NPLs.

Analysts said the situation was also reflected through insignificant borrowing by the private sector through banks.

Banks are main supplier of credit to entire economic system.