KARACHI:The State bank of Pakistan is all set to launch the first three-year Islamic bond “Government of Pakistan Ijara Sukuk” to further diversify the government borrowing base. The GoP Ijara Sukuk will be sold through competitive auctions by central bank during next week.

The issuance of Ijara Sukuk will not only help the government to diversify its debt by reducing borrowing from the central bank but also arrange the liquidity available with Islamic banks.

As per the rules, the maturity period of the first Sukuk issue will be for three years from the date of issue and the profit on the Sukuk will be paid semi-annually on the basis of rental rate announced by the State Bank prior to start of each half year. The GoP Ijara Sukuk semi-annual profit will be the benchmark against latest weighted average yield of the six-month Market Treasury Bills (MTBs).

On Saturday, while issuing detailed guidelines regarding issuance and other operational details of GoP Ijara Sukuk, the SBP said that Sukuk will be issued on face value for three years and all commercial banks including Islamic banks (and non-banks subjected to SLR and entitled to open current account with SBP) will be eligible to open Subsidiary General Ledger Accounts (SGLA) with the SBP for Ijara Sukuk.

While, commercial banks having Islamic branches will have to maintain separate SGLAs to clearly distinguish between the holdings of the Islamic branch and its conventional counterpart.

The SBP said that all Islamic banks and commercial banks with Islamic branches will be designated as primary dealers for the purpose of participating in the auction of GoP Ijara Sukuk, however Islamic branches will not be allowed to separately place bids in the auction. The GoP Ijara Sukuk will be sold through competitive auctions in which participation will be restricted to the mentioned primary dealers, the SBP said.

The semi-annual profit will be benchmarked against the latest weighted average yield of the 6 month Market Treasury Bills determined one day prior to the start of each 6 month rental period (commencing from the issue date of Sukuk) and determined in the same manner at the start of each half year.

However, in case the last Market Treasury Bill auction the 6 month tenor is either rejected by the State Bank or there is no participation from the market, State Bank will use the 6 month tenor as given on the Reuters PKRV page (121-180 days) as the above benchmark determined one day prior to the start of each 6 month rental period.

Primary Dealers will be required to place bids as margin over under the benchmark 6 month Treasury Bill weighted average yield and minimum bid size will be PKR 100,000 and in multiples thereof and primary dealers will be free to place multiple bids.

The highest margin over the six-month Treasury Bill weighted average yield (at and below which the SBP decides to accept all bids) will apply uniformly to all accepted bids. This margin will remain fixed over the entire tenor of the Sukuk.

“In order to ensure that there is no over concentration, holding of any commercial bank including Islamic banks cannot exceed 25 percent of the issue amount as of close of any business day. In case of commercial banks with Islamic branches this restriction will be applied on a combined or amalgamated basis,” the SBP said. A tender notice inviting sealed bids from the primary dealers would be broadcast on SBP’s REUTERS page SBPK16 and newspapers and will give details of the auction programme.

While, successful bidders would be required to duly execute, within one day of announcement of auction result, a Certificate Subscription Undertaking through their authorised signatories at the premises of the SBP Banking Services Corporation (”SBP BSC”), to subscribe to the Sukuk and deposit the requisite amount for settlement of the accepted bids on the settlement date of the auction.

In addition, the settlement date will be the date of issue of the Sukuk and Ijara Sukuk will be scripless and held in the SGLA accounts of commercial banks. Sukuk can be traded in the secondary markets and are transferable through SGLA and primary dealers are free to sell Ijara Sukuk to eligible investors as described in the rules.

However, the SBP said that in such cases all banks will be required to open IPS accounts of their customers reflecting the customer holdings of Ijara Sukuk. In this regard, the current procedures applicable for IPS accounts will also apply to that of Ijara Sukuk.