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Market for sukuk goes ravenous

The rising popularity of Islamic banking in Pakistan is providing the necessary impetus for the development of Islamic sovereign instrument market.

In light of the growing deposit base with Islamic banks amid limited Shariah compliant investment avenues, the third Ijara Sukuk auction of the current fiscal year remained well-covered. The government raised a total of Rs47.5 billion, compared to the pre-auction target of Rs45 billion.

The auction drew a bid-to-cover ratio (the value of bids received divided by the value of bids accepted) of 1.2, slightly lower compared to average bid-to-cover ratio of around 1.4 for the previous two Ijara Sukuk auctions held in 1HFY11.

Still, it was well above market expectations. As the government has already sold around Rs89 billion worth of Ijara Sukuks in the first two auctions, the market was expecting poor participation in the third auction.

With profit rates above or below the 6-month T-bill weighted average yield (benchmark yield) – currently hovering around 13.67 percent – bids placed in the auction were ranging from a high of 75 bps above the benchmark rate to a low of 100 bps below the bench mark rate.

However, high demand pushed down the cost of financing, making it possible for the government to issue bonds at zero margin above the benchmark rate.

The market is expecting to see another Ijara Sukuk auction in 4QFY11. “From a total of around Rs192 billion worth of assets under the present Ijara Sukuk issuance programme, the government has so far raised a total of Rs136 billion from all three Ijara Sukuk auctions. This means the government might arrange one another Ijara Sukuk auction with a target of Rs50 billion in the 4QFY11”, according to one Islamic banker.

The deposit size of Islamic banks, grew to Rs338 billion as of September 2010 from around Rs244 billion in the same period a year earlier, and SBP’s decision to raise the Statutory Liquidity requirement (SLR) by 5 percentage point to 14 percent for Islamic banks from April, 01, 2010, suggests upbeat appetite for Sukuk bonds down the line.


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