IBOR set to emerge in Pakistan

Rapidly expanding Islamic banks are working to develop their own KIBOR-like benchmark for the inter-bank Sharia-compliant financing rate in the country. The decision to establish the Islamic Inter-Bank Offer Rate (IBOR) came after the Islamic banks saw trading activities and volumes increasing in the industry. This has been attributed to the cash-strapped government’s appetite for budgetary bank borrowing through the auction of Ijara Sukuk. So far, the bankers say, Sukuk of Rs 224 billion have come to the industry. According to bankers, Islamic banks view the Sukuk as a blessing in disguise for the industry which was still banking essentials particularly permanent investment windows and a proper credit line.
Some of the leading Islamic banks like Meezan Bank (MB) and Dawood Islamic Bank (DIB) are said to have agreed in principle to establish a credit line using Sukuk as a guarantee. “IBOR is a work in progress and we have received a green signal from the State Bank as well as the industry,” said Ahmed Ali Siddiqui, the executive vice president product development at Meezan Bank. He said Sharia advisory boards of the Islamic banks had also approved the proposal. The banker stressed that the Islamic banking industry was optimistic that the Rs 180 Ijara Sukuk would create enough trading activity in the Sharia inter-bank market. “We hope that a benchmark would evolve as soon as the trade begins,” Ahmed said.
But, the MB executive noted, sufficient increase in volumes on the inter-bank market was a prerequisite for the evaluation of a Sharia-compliant offer rate benchmark. “The banks are also upbeat that Ijara Sukuk will ensure encouraging volumes prospects on the inter-bank market,” Ahmed told Pakistan Today. It was also pointed out that leading Islamic banks like his own and DIB had finalised talks for the establishment of a credit line for which the Sukuk would be used as a security. “The inter-bank Musharkah, Wakalah and Mudarba are our clean products but using Sukuk as a guarantee we would be creating a secure credit line,” he said.
According to the banker, Islamic banks were also working on a standardisation plan to upgrade their inter-bank financing mode. “Musharkah and Wakalah are the two products to be standardised,” the MB official said. He underlined that there was significant demand from the Small and Medium Enterprises (SME) sector for an interest-free financing. “At the first stage, we plan to offer IBOR to SMEs as a financing rate, then to the corporate sector as a whole and finally we will move on to individual customers,” he said. Given the government’s ongoing borrowing-heavy approach to bridge the widening fiscal deficit, one can predict a bright future for the Islamic and commercial banks in terms of a risk-free and heavily weighted investment window.
Having auctioned Islamic bonds worth Rs 180 billion against the assets of Civil Aviation Authority (CAA), the cash strapped federal government has set a budgetary borrowing target of Rs 1.19 trillion to be raised from the banks through auctioning Rs 1.15 trillion MTBs and Rs 45 billion Ijara Sukuk during the ongoing last quarter of FY11. The federal government, through State Bank on May 9, auctioned three-year Sukuk worth Rs 45.803 billion at 13.4528 percent rate of return, what Ahmed said, as a last tranche of the Rs 180 billion CAA Sukuk. Islamic banks also want the Ministry of Finance and the State Bank to launch short-term, of six-month maturity period, Islamic bonds. If launched, Pakistan would be the first Islamic country to have a Sharia-complaint benchmark called IBOR and short-term Ijara Sukuk in the global Islamic banking industry.