Ijara Sukuk on the horizon

T-bill auctions can never fall short of target in an economy where banks are saddled with high liquidity.
With banks shying away from long-term treasury instruments, and fewer investment options amid growing public disquiet that monetary tightening will continue at least this fiscal year, primary dealers tendered a total of around Rs234 billion, against a combined pre-auction target of Rs150 billion. The government, however, racked up bids close to the target amount.
"At present, the rates on shorter tenure treasury bills, 3-month and 6-month, are more lucrative compared to the repo/floor rate (10.5 percent) as they offer around a return higher by 200 to 250 basis points", according to one money market dealer. Given this scenario, the market is expected to remain long on bills and short on bonds in the current quarter.
When the market is all gloom for treasury bonds, a new 3-year sovereign instrument, Ijara Sukuk, is stated to make a foray next week, after a gap of more than a year, aiming at Rs40 billion each from the two Sukuk auctions scheduled before the end of December 2010. Ijara Sukuk made its first debut in September 2008 with a total of four auctions held till September 2009.
In sharp contrast to the PIB market, market appetite for Islamic bonds is not half bad since there is a dearth of investment avenues for Islamic banks. Not only does it satisfy their SLR requirement, but one additional feature that makes investment in Ijara Sukuk more attractive is the embedded floating rate feature that resets the coupon rate semi-annually and reduces the interest rate risk.
For Islamic banks, a profit rate above or below the 6-month T-bill weighted average yield, currently hovering around 13.1 percent, sounds palatable. At present, Islamic banks average investment earning is around 7 to 9 percent from the Islamic inter-bank market, mainly stemming from Mudaraba, Musharaka and Wakala.
"Since, at present, Islamic banks have Rs100 billion in liquidity, market participation in both the auctions is expected to remain upbeat," according to one Islamic banker. Therefore, it is quite unlikely that the profit rate will go above the 6-month T-bill weighted average, as such an immense liquidity may force Islamic banks to sacrifice the liquidity risk premium.