Govt mulls buying Ijara Sukuk on deferred payment

KARACHI: The government is mulling to purchase near maturing Ijara Sukuk worth Rs233.81 billion from the Islamic banks on one year deferred payment term to squeeze surplus liquidity, sources said on Wednesday.
The government is expected to buy Rs233.81 billion Shariah-compliant paper, maturing on 21 November, as no investment option is available for Islamic banks to park their surplus funds of around Rs80-90 billion.
The government will buy Ijara Sukuk having issues of GIS9, GIS10, GIS11, GIS12, and GIS13 using Islamic financial concept of Bai-muajjal via open market operation for one year
“This potential payment obligation would be considered as SLR-eligible investment by the banks, providing a short-term relief to the Islamic banking industry in terms of excessive liquidity management unless the government issues fresh Sukuk,” said a head of treasury at Islamic bank.
“The Shariah Board of the State Bank of Pakistan (SBP) has approved this transaction structure (and) the stakeholders are waiting for a go-ahead from the Ministry of Finance.”
The Islamic banking institutions, especially the full-fledged Islamic banks are flush with excess cash in the absence of no fresh Sukuk in the market June 20, 2014. Total outstanding Ijara Sukuk stood at Rs300 billion at the end of May, which is about 26.54 percent of the total Islamic banking deposits.
Sources said the Finance Ministry has planned to issue fresh Sukuk, using the same underlying asset, on the maturity of GIS on November 21. Though the size of the planned issuance is not revealed by the government, bankers presume, it could be Rs300 billion.
Bankers believe the likely purchase of Sukuk is an appropriate response by the government to tackle the high liquidity issue of the Islamic banks because of their low net financing to deposit ratio (currently 35-40 percent). This could also facilitate the Islamic banks and the Islamic windows of conventional banks to park surplus funds with the State Bank of Pakistan, they added.
Last time, the government issued three-year Ijara Sukuk through an auction held on June 20, 2014. It raised Rs49.537 billion for the construction of Pindi-Bhattian project. The maximum value of the asset under that issue was Rs49.572 billion.
Total outstanding Ijara Sukuk stood at Rs300 billion at the end of May, which is about 26.54 percent of the total Islamic banking deposits, while total outstanding SLR eligible securities available with conventional banks amounted to Rs4.8 trillion as of May 31, which is 59 percent of the total conventional banking deposits.
After introducing Sukuk-backed open market operations to facilitate Islamic banking through outright purchase and sale of Islamic bonds in October last year, the policy makers are also considering to establish modarba-based discount window under the SBP’s five-year strategic plan for Islamic banking.
“The formulation of modarba-based discount window to park banks’ funds with the SBP is pending, but hoped to be initiated soon,” said a banker.