Pakistan's hybrid sukuk plan to strengthen Islamic banks' liquidity

Pakistan's adoption of a hybrid sovereign sukuk structure is expected to expand Shariah-compliant liquidity management for Islamic banks by increasing sovereign sukuk issuance and strengthening funding options for the country's fast-growing Islamic banking sector, according to Fitch Ratings.

The global ratings agency said Pakistan is among the core Islamic finance markets where central banks provide Shariah-compliant liquidity facilities, enabling Islamic banks to manage short-term funding needs and invest surplus liquidity. It said the hybrid sovereign sukuk structure, introduced in 2026, could significantly expand the supply of sovereign sukuk, providing Islamic banks with more high-quality liquid assets.

Fitch said liquidity management instruments available to Islamic banks have expanded considerably across major Islamic finance markets over the past decade, although gaps remain compared with conventional banks, particularly in countries where Islamic banking sectors remain relatively small.

The agency said the recent Iran war highlighted the importance of effective Islamic liquidity management, as robust Shariah-compliant liquidity facilities help financial systems withstand periods of market stress.

Pakistan was listed alongside Gulf Cooperation Council countries, Malaysia, Turkiye, Indonesia, Bangladesh and Tunisia as jurisdictions where central banks already provide Islamic liquidity facilities. Fitch contrasted these markets with countries such as Morocco, Egypt and Kazakhstan, where such facilities remain unavailable, increasing the risk of liquidity shortages during periods of financial stress.

According to Fitch, broader sovereign sukuk issuance is essential because it provides Islamic banks with additional investment opportunities for excess liquidity through high-quality liquid assets. The agency said Pakistan's adoption of the hybrid sukuk structure is expected to support greater sovereign sukuk issuance, further deepening the domestic Islamic capital market.

Globally, sukuk account for 42% of outstanding debt capital markets in Gulf Cooperation Council countries, 59% in Malaysia, 18% in Indonesia and 8% in Turkiye as of the end of the first half of 2026. Emerging Islamic finance markets, including Egypt, Bangladesh and Algeria, have also recently begun issuing sukuk, Fitch said.

Despite the progress, Fitch said liquidity management challenges persist across Islamic finance markets. Short-term sukuk remain scarce in most Gulf Cooperation Council countries, Jordan and Nigeria, limiting Islamic banks' ability to manage day-to-day liquidity efficiently. Only about 3% of Fitch-rated sukuk have maturities of one year or less.

The agency also highlighted structural challenges in Islamic interbank markets, which remain significantly shallower than conventional money markets. Differences in Shariah interpretations and regulatory frameworks continue to limit cross-border transactions. For example, Indonesia's prohibition on tawarruq-based contracts restricts transactions with Gulf Cooperation Council Islamic banks that rely on the structure, while regulations in Oman prevent Islamic banks from placing funds with conventional banks.

Fitch said international efforts are underway to improve market efficiency. The International Islamic Financial Market and the International Capital Market Association are developing standardized documentation for Islamic repo transactions to reduce operational costs and Shariah-related complexities. The agency also noted that Saudi Awwal Bank recently completed the first blockchain-based Islamic repo transaction.

The report said managing liquidity and funding constraints remains the biggest challenge facing Islamic financial institutions, according to Fitch's Islamic Finance Survey 2026, retaining the top position for several consecutive years.

Weak access to liquidity, caused by underdeveloped markets or restrictive regulations, could weigh on an Islamic bank's funding profile and credit ratings, Fitch said. Conversely, access to deep repo markets and central bank liquidity facilities can strengthen banks' credit profiles.

Fitch added that approximately 62% of the Islamic banks it rates globally are investment grade, while about 85% carry Stable Outlooks, excluding national ratings. It said Gulf Cooperation Council Islamic banks entered the Iran conflict with strong capital, liquidity and asset-quality buffers, leaving them well positioned if geopolitical tensions remain contained.