Bankrolling dev projects through Islamic bonds

The Bangladesh Bank (BB) is about to issue yet another Islamic Shariah-based bond, popularly known as Sukuk, on behalf of the government to help the latter bankroll the construction of rural infrastructures. Earlier, the BB had raised Tk.190 billion by issuing four types of Sukuk for the government to implement development projects in different parts of the country.  The maiden BB-issued Sukuk was an instant success, as it was over-subscribed nearly four times, showing investors' notable interest in Islamic financial products floated in the capital market. However, Islamic banks with huge excess liquidity were the main clients of the Sukuks.  Those days are now gone. Most Islamic banks are struggling because of the outright loot of their funds by the cronies of the fascist regime of Sheikh Hasina. 

The long-term financing of development projects or industries both public and private sectors has been a problem in Bangladesh. The government on its part, as a matter of tradition, relies on tax revenues and external assistance to bankroll development projects taken up for implementation from time to time. Resource constraints often force it to trim its annual development budgets. The situation is far more troubling for the private sector entrepreneurs needing resources for investment in new projects despite the fact they have options. One potential option is the capital market. Fear of losing family control over their enterprises and the pitiable state of the country's stock market discourage them from taking recourse to mobilizing funds from the stock market by floating initial public offerings (IPOs).

Issuance of bonds, including Sukuk, could be a viable option for the private sector in such a situation. Until now, tradable private bonds are almost non-existent in the capital market. Sukuk could be an effective vehicle for private investors, but Beximco's Sukuk scam has largely marred such a prospect. The retail buyers and the banks that were allegedly forced by the central bank to buy the unsubscribed portion of Beximco's Sukuk are unlikely to be successful in retrieving their money. Moreover, the depositors' money kept with a section of private and public banks was so easy to plunder that not many took the trouble of going to the capital market or floating bonds for investment. Then again, the decision of the government to sell more than 80 per cent of the new Sukuk bond, which will be put on auction on the 12th of this month, to Shariah-based banks, insurance companies and non-bank institutions, is not in line with government's avowed policy of making a moribund bond market vibrant through the  greater participation of general investors. Some people prefer Islamic banking and Shariah-based products. Since the sovereign guarantee is attached to the proposed Sukuk, general investors would love to put their money in it. Thus, instead of borrowing from banks, the government should raise funds in increased volume from the market by issuing Sukuks. This would also help avoid the crowding-out effect as far as private investment is concerned. Such an opportunity must not remain confined to the public sector. The securities regulator and the BB should jointly try to erase the negative impression created by Bexmico's Sukuk scam and encourage private sector investors with a clean track record to float Islamic bonds for long-term financing of their projects.