Client Name

Pakistan State Oil (PSO)

Faculty Advisor

Dr. Mohsin Zahid Khawaja

SBS Thought Leadership Areas

Investment Decision Making

SBS Thought Leadership Area Justification

This ELP falls under the Investment Decision Making thought leadership area of IBA SBS. The field of investment decision making examines how firms evaluate financing alternatives, manage financial risk, and optimise their capital structure in response to both internal constraints and external market conditions.

This project aligns directly with that framework. At its core, the ELP asks a capital allocation question: should PSO continue to finance its working capital requirements through bank borrowing, or does secondary market financing represent a superior alternative? Answering that question required evaluating multiple financing instruments across a range of criteria including cost, tenor, market depth, regulatory constraints, and execution risk, which is precisely the analytical process that investment decision making as a discipline is built around.

The project also engages with the structural side of financing decisions. PSO's situation is not simply a question of which instrument is cheaper. It involves regulatory advantages that cannot be replicated in the capital market, a scale of financing need that has no precedent in the domestic corporate debt market, and a cost differential that makes the bank borrowing alternative economically dominant under current conditions. Identifying and quantifying these factors required applying the same cost-benefit and risk-adjusted reasoning that underpins investment decision making in practice.

Aligned SDGs

GOAL 8: Decent Work and Economic Growth

Aligned SDGs Justification

This project primarily supports SDG 8: Decent Work and Economic Growth, specifically Target 8.10, which calls for strengthening the capacity of domestic financial institutions to expand access to banking, insurance, and financial services for the private sector.

The alignment operates on two levels. At the firm level, the project directly evaluates whether PSO, one of Pakistan's most systemically important companies, can access deeper and more diversified financing through the secondary debt market. Expanding a company of PSO's scale beyond sole reliance on bank borrowing would represent exactly the kind of private sector financial deepening that Target 8.10 envisions.

At the market level, the findings speak to the current limitations of Pakistan's secondary debt market in absorbing large corporate financing requirements. By identifying the constraints around market depth, investor capacity, and regulatory structure, the project contributes to understanding what institutional and market development would be necessary before instruments like Sukuks, TFCs, and Commercial Papers can meaningfully serve companies at PSO's scale. That diagnostic is itself relevant to the broader policy conversation around financial sector development in Pakistan.

NDA

No

Abstract

This study evaluates whether secondary market financing instruments, specifically Term Finance Certificates, Commercial Papers, and Sukuks, represent a viable and cost-effective alternative to conventional bank borrowing for Pakistan State Oil, the country's largest oil marketing company. Conducted in collaboration with PSO's Treasury Department, the research draws on five years of corporate debt issuance data from the Pakistan Stock Exchange, Assets Under Management data from the Mutual Funds Association of Pakistan, and primary insights from PSO's senior treasury management.

The analysis finds that while Pakistan's secondary debt market has grown steadily, it remains structurally unsuited to meet PSO's financing requirements under current conditions. PSO currently borrows from commercial banks at sub-KIBOR rates, while the secondary market offers a minimum pricing of KIBOR plus 70 basis points, creating an annual cost penalty of PKR 3 to 5 billion on PSO's PKR 300 billion financing requirement. The market also lacks the depth to absorb an issuance of this scale, with total realistic corporate debt absorption capacity estimated at PKR 300 to 420 billion across all borrowers simultaneously. No comparable domestic corporate issuer exists at PSO's scale, making pricing discovery and investor confidence structurally difficult. PSO also benefits from an SBP per-party exposure limit waiver that reserves approximately PKR 300 billion in banking system capacity exclusively for PSO, an advantage with no equivalent in the secondary market.

The principal recommendation is that PSO should continue to rely on bank-based financing for its core working capital needs, while selectively exploring Sukuk issuances for long-tenor, asset-backed, or strategically defined financing purposes as market conditions develop.

Document Type

Restricted Access

Document Name for Citation

Experiential Learning Project

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