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First auction of government’s Ijara Sukuk on September 15

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Points of Essence:

  • SBP has fixed September 15 to hold the first auction of a domestic bound Ijarah Sukuk with its target sale set at Rs10 billion . It is offered primarily to alleviate the Pakistani Government’s debt with the central bank.
  • The market however appears to be skeptical  about the bond as the current Islamic banks’ deposits which stood at Rs 147.361 billion at end of 2007 is too small to offer the Government any relief. Furthermore, there would not be any interest from corporations as justified by the small target set for the bond. There was also no disclosure on how frequently would the auctions of Sukuk bonds be held.
  • If there is any consolation, the issuance of bond would greatly help the Islamic banks in their liquidity management issues as they are currently awashed with unutilised funds.

By Mushfiq Ahmad

KARACHI: The State Bank of Pakistan has finally announced that the first auction of Ijara Sukuk in the domestic market would be held on September 15. It has set a target of Rs 10 billion.

The government aims to reduce its borrowing from the central bank through sale of sukuk bonds in domestic market. However, it looks unlikely that sukuk issue would be able to offer the government much help. The government last year borrowed more than Rs 688 billion from the central bank to finance its fiscal deficit. According to the “latest” Islamic Banking Bulletin of State Bank of Pakistan, Islamic banks’ deposits stood at Rs 147.361 billion at end of 2007. With such a small deposit base, it is unlikely that the government would be able to get much out of Islamic banks.

A banker said the Islamic banks were now receiving demand for funds from the corporate sector and because of this they might not show great interest in government’s sukuk bonds. His view is supported by the fact that the government has set a very small target of Rs 10 billion for the auction. When the government first talked about launch of Islamic bonds in the domestic market, it had said it would be raising Rs 18-20 billion through these papers. It seems the government has realized that it wouldn’t be able to raise a larger amount in one go. The government or the State Bank has not disclosed how frequently would the auctions of Sukuk bonds be held.

However, the issue of sukuk bonds would help those Islamic banks that have large unutilized funds and do not find many borrowers. Liquidity management has been a major problem for such Islamic banks in the absence of interest-free instruments in which they could invest their surplus funds. Conventional banks had an edge over the Islamic banks because they had the option to invest their surplus funds in government’s treasury bills.

Islamic banks have been using Wapda Sukuk (I and II) and Karachi Shipyard and Engineering Works Limited (KSEW) Sukuk certificates for meeting Statutory Liquidity Requirement.

“We keep losing money because of shortage of SLR eligible securities,” said an official of a large Islamic bank. “We get no return when we keep cash with the central bank to meet our SLR in absence of SLR eligible securities.”

He said there are only the sukuk issues of WAPDA and KSEW and those were very small. “They can’t meet Islamic banks’ requirement. There is need for more securities,” he said.

The SBP has already reduced the SCRR for Islamic banks which would help them buy the Sukuk bonds.

The SCRR of Islamic banks (IBs) and Islamic bank branches (IBBs) were reduced to 2 per cent from 6 per cent of their FE-25 deposits in April this year. Now the IBs and IBBs maintain 7 per cent (including 5 per cent CRR and 2 per cent SCRR) of their FE-25 deposits with the central bank in the current account.

Earlier, these banks used to maintain 5 per cent of their total FE-25 deposits as cash reserve requirement (CRR) and 6 per cent as special cash reserve requirement (SCRR) with the SBP.

There are six Islamic banks and 14 Islamic banking windows of conventional banks in the country.

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Written by Suapi Shaffaii

September 11, 2008 at 7:17 pm

One Response

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  1. Nice! How I can register on this auction?

    AuctionBeginner

    September 21, 2008 at 12:17 pm


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