Short-term Islamic bonds become a reality

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The Ministry of Finance, the State Bank of Pakistan (SBP) and Islamic banks are moving towards the introduction of short-term (six-month maturity period) Islamic bonds in the country, Pakistan Today has learnt. If introduced, the short-term Ijara Sukuk would be the first of its kind to be brought into the Islamic banking industry spread across the 57 countries in the Muslim world and would be issued against the tradable commodities like oil, wheat, sugar and others.
“The Ministry of Finance and the State Bank are deliberating upon a proposal for the issuance of short-term Sukuk,” a banker told Pakistan Today. “This has to be implemented on the pattern of ‘Salam Sukuk’ launched by Bahrain Monetary Agency for investing in the metal trade,” explained Ahmed Ali Siddiqui, Executive Vice President Product Development at Meezan Bank. The banker elaborated that with financing, the operations of agriculture producers like wheat, were to follow, the capital-intensive oil imports would be the primary focus of Islamic banks to invest in.
The compulsory oil imports cost the cash-strapped Pakistan billion of dollars every year with last year (FY2010) the country’s oil import bill crossing the $11 billion mark. According to latest projections, the country’s oil import bill is all set to exceed the $14 billion figure by the end of current fiscal year FY11, $38 billion in 2015 and $50 billion in FY 2026. According to Siddiqui, Islamic banks have the potential to invest about five to ten percent of their total deposits size which runs into Rs 400 billion.
The move, apparently, is to provide another investment window to Islamic banks whose ever-broadening deposits base has ballooned to Rs 400 billion with little or no room existing in the country for an investment that is Sharia-compliant and, more importantly, could reap short-term dividends for the Islamic banks like their conventional counterparts. The proposal, if executed, would also augur well for the present cash-strapped coalition government that, through the central bank, is presently borrowing huge budgetary support funds from both Islamic and conventional banks through the issuance of short, medium and long-term but heavily-weighted government guarantees, including Market Treasury Bills, Pakistan Investment Bonds and Government of Pakistan Ijara Sukuk.
The government has set a bank borrowing target of Rs 1.19 trillion for the ongoing quarter of this fiscal year at 13.8 percent interest rate, at minimum. Whereas conventional banks are pocketing handsome profits through investing in risk-free government papers for various terms of maturity period, Islamic banks have to wait for three years to access their investment in the Ijara Sukuk when it is fully matured. Islamic bankers, however, reject the impression claiming that Islamic banks were equally catering the financing needs of thrice, the individual consumer, the government and the private sector.
“The booking of quality assets is our responsibility. And we have to be selective given the present global recessionary climate. We want a healthy mix of investment between the private, consumer and government sectors,” the Meezan Bank official said. Dwelling on various reasons warranting the short-term Sukuk, the banker said the Islamic bonds worth Rs 180 billion issued by the government last year against the assets of the Civil Aviation Authority (Jinnah Terminal) were going to last with the payment of last tranche on May 16. ”After this demand would certainly arise” for another investment opportunity.
Underlining other advantages of Islamic financing, the banker said: “If we tie up financing with the real purpose (such as for oil import) we would not only put usage of the government funds in check but also reduce (money) leakages.” It is worth mentioning here that unlike conventional ones the Islamic banks do not provide cash to the borrower and link their financing to the purpose of usage. “All Islamic banks are on the same page on this matter which would be taken up with the Ministry and SBP after next board meeting of the Meezan Bank due this month,” the products deputy president said.