The Ministry of Finance recently issued Pakistan’s first Green Sukuk, valued at Rs30 billion, under the Sustainable Investment Sukuk Framework, marking a turning point in Pakistan’s sustainable finance journey.

Announced on May 8, 2025, these Islamic bonds aim to finance environmentally sustainable projects (hence the term “green”) specifically three hydropower initiatives—the Garuk Dam in Balochistan, the Nai Gaj Dam in Sindh, and the Shagarthang in Gilgit-Baltistan.

This provides great reason to be zealous, until we’re posed with a fundamental question that continues to ideologically divide Islamic bankers and scholars alike: Is this Sukuk genuinely asset-backed and truly Islamic, or a conventional bond repackaged as Islamic?

The Green Sukuk’s issuance was followed by tremendous investor enthusiasm; bids totaled Rs161 billion against an initial target of Rs30 billion, leading the government to increase the final issuance to Rs31.98 billion. This clearly emphasizes investors’ growing appetite for ethical and sustainable debt instruments — though it also places greater responsibility on ensuring genuine Shariah-compliance. The instrument is fully tradable on the Pakistan Stock Exchange (PSX), enhancing liquidity, though this feature does not resolve questions around how variable rent is sourced pre-project completion.

Islamic finance expert Harris Irfan, in his book “Heaven’s Bankers”, points out an important distinction: Sukuk should ideally be asset-backed, directly linking the debt instrument’s returns to the performance and revenue of the leased assets. In reality, most Sukuk—likely this Green Sukuk—end up being “asset-based,” where returns are pre-agreed and guaranteed via buy-back clauses at maturity, effectively mirroring conventional bonds. This eventually makes the originator of the Sukuk — in other words — the country that is issuing the bond as the guarantor of the bond and not directly the performance of the project.

This minor distinction has major implications. Asset-backed Sukuk incorporate genuine risk-sharing, a fundamental Islamic finance principle, while asset-based Sukuk........

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