SBP to buy Rs111 billion worth Ijara sukuk

KARACHI: The State Bank of Pakistan (SBP) will purchase Rs111 billion Ijara sukuk, an Islamic sovereign bond with a three-year maturity in an auction on Friday.

The purchase of the government of Pakistan Ijara sukuk would be made on Bai Muajjal basis—a Shariah-complaint equivalent of deferred payment from all Islamic banks, the SBP said in a statement.

The issue would help Islamic banks manage excessive liquidity and resources.

Ijara sukuk worth of Rs314.3 billion would mature in December, February and March, whereas Ijara sukuk of Rs118 billion was due to mature on December 18.

The government has re-issued the Ijara sukuk against the asset of Jinnah International Airport. This issue was first time auctioned on December 15, 2015.

Islamic banks are expected to breathe a sigh of relief, as they would have a money market instrument available to park their short-term liquidity at zero-risk, Shariah-compliant government securities.

“The deferred payment purchase by the government is SLR-eligible,” the SBP statement said.

Presently, Islamic banks are required to maintain the statutory liquidity requirement at 14 percent of their total demand liabilities and time deposits with tenor of less than one year in Pakistan.

The SBP had already identified effective liquidity management as a key challenge of Islamic banking industry.

There is a dearth of Shariah-compliant investment opportunities, limited availability of money market instruments, and absence of Islamic SBP standing facility.

The SBP’s governor in his recent speech stated that sovereign sukuk being issued since 2008 provide the key liquidity management avenue to the domestic industry; however, demand for such instruments far surpasses their supply.

Analysts said surplus liquidity with Islamic banks in Pakistan has pushed Islamic lenders’ returns lower than their conventional peers. Lack of sukuk and investment avenues for Islamic banks has limited balance sheet growth vis-à-vis conventional counterparts.

The government is requested to make strategy to replace at least 30 percent of its domestic, interest-based debt with Shariah-compliant borrowing.

This is according to the unanimously passed Senate Resolution No 393, a presentation made by the Islamic banks showed.

To meet this target, it has been requested to establish a dedicated desk at the Ministry of Finance for issuance of sukuk headed by additional secretary for targeting a sukuk issue of Rs800 billion in 6-12 month period.

To ensure regular supply of sukuk and to issue sukuk of varying maturities, identification of assets is the most critical step.

As a first step, some significant projects of Public Sector Development Programme have been identified and shared with Ministry of Finance that can be used for issuance of sukuk.