Sukuk era begins

Banks yesterday flocked to sukuk to invest their idle funds and manage a better yield than in conventional treasury bills and bonds as Bangladesh held its first-ever auction for the Islamic bond.

Banks and individuals placed 39 bids worth Tk 15,153 crore against the targeted amount of Tk 4,000 crore.

The auction committee of the central bank allocated the fund proportionately among the bidders. As a result, every bidder received sukuks equal to 26.4 per cent of their investment.

A sukuk is an Islamic financial certificate, similar to a treasury bond and structured to generate returns in compliance with Islamic finance principles.

The government will raise Tk 8,000 crore through the issuance of the sukuk to implement a safe water supply project.

The central bank will raise the rest Tk 4,000 crore in May.

The Shariah-based bond is expected to help the government manage its deficit financing at a time when it is struggling to collect revenues due to the economic hardship caused by the coronavirus pandemic.

Although Shariah rules don't permit to use the Islamic bond to manage budget deficit directly, the fund will help the government implement infrastructure projects.

Investors will receive a profit of 4.69 per cent on their investment in the Islamic bond.

The central bank has fixed the rate based on the Bangladesh Government Islamic Investment Bond (BGIIB). The last declared profit-sharing ratio of the six-month BGIIB is 3.69 per cent, and the central bank has added one percentage point to decide the rate for the sukuk. 

Profits will be paid on a half-yearly basis.

The yield on both T-bills and bonds has decreased as the government is issuing securities to manage the budget deficit.

So, banks prefer the sukuk, which offers a higher fixed profit rate, as a safe haven for their investment, a central banker said.

Thirty-seven banks, including eight Islamic lenders, and two individual investors took part in the auction.

State-run Sonali Bank was the top bidder as it placed a bid of Tk 2,000 crore.

In addition, banks are now sitting on excess liquidity because of lower credit demand due to the business slowdown. The excess liquidity in the banking sector stood at Tk 169,650 crore in September.

According to a central bank study, 28 per cent of the country's investors are reluctant to invest in the interest-bearing T-bills, bonds and other government securities.

Against the backdrop, both conventional and Shariah-based banks heavily invested their fund in the tool, another central banker said.

The profit rate of the sukuk is higher than the five-year Treasury bond, which now offers an interest rate of 4.64 per cent.

The sukuk will mature in five years, and the government looks to implement the safe water supply project by June 30, 2025.