Pakistan is reportedly exploring multiple options to repay a $3.5 billion debt to the United Arab Emirates, and one of the key options under discussion is the use of Sukuk bonds—an Islamic financial instrument based on Sharia principles. With limited fiscal space and rising financial pressure, the government is considering alternative funding routes, including support from Saudi Arabia and China, along with domestic financial tools like Sukuk.
Sukuk bonds differ fundamentally from conventional bonds. Under Islam and its Sharia law principles, earning or paying interest (riba) is prohibited. Instead of offering interest, Sukuk represents partial ownership in a real asset, project, or infrastructure. Investors earn returns through profit-sharing, lease income, or asset performance rather than fixed interest payments. This makes Sukuk compliant with Islamic financial rules while still providing investors with returns.
In practice, when a government issues Sukuk, it typically links the bond to tangible assets such as highways, airports, or public infrastructure. Investors essentially buy a share in these assets and earn income generated from them, such as rent or usage fees. Pakistan has previously used this model and even issued billions of dollars worth of Sukuk in recent years to raise funds.
To repay the UAE, Pakistan could issue new Sukuk bonds in international or domestic markets and use the funds raised to clear the debt. On paper, this seems feasible, especially since past issuances have attracted investor interest. However, the strategy comes with risks. Since Sukuk must be backed by real assets, the government may need to pledge or monetize existing infrastructure if new projects are not available. This could put pressure on public assets and limit future financial flexibility.
In simple terms, Sukuk is not a “loan with interest” but a structured investment tied to real economic activity. While it offers Pakistan a Sharia-compliant way to raise funds, its effectiveness will depend on investor confidence, asset availability, and the country’s overall economic stability.
