Rural infrastructure project: Sukuk auction on April 19 to raise Tk 50b

| Updated: April 17, 2022 16:15:50

Rural infrastructure project: Sukuk auction on April 19 to raise Tk 50b

The government is set to raise Tk 50 billion more by issuing Islamic bonds on April 19 to bankroll a rural infrastructure development project, officials say.

The central bank will hold an auction to issue Istisna Sukuk bonds to eligible banks, non-banking financial institutions (NBFIs), insurance companies and individuals.

The Bangladesh Bank, as a special-purpose vehicle for the issuance of government securities, has completed all necessary preparations to issue the third set of the Shariah-based bonds.

"We'll issue Istisna Sukuk, instead of Ijarah Sukuk, to raise another Tk 50 billion to implement a rural infrastructure-development project," a senior official familiar with the development said on Saturday.

Investors will receive a 4.75-per cent profit on their investment in these bonds, he tells the FE, saying that it will be paid on a half-yearly basis (annualised).

The duration of the project is five years. The tenure of the bond is also five years, the official cites.

The regulator has already set a fresh Sukuk-allotment quota with priority to Shariah-based Islamic banks, NBFIs and insurers for the auction of the bonds.

Under the quota, Islamic banks and financial institutions will be eligible to receive more bonds unlike conventional banks, other financial institutions and individual investors.

As per the BB criteria, Shariah-based Islamic banks, NBFIs and insurance companies will be eligible for 80 per cent instead of 70 per cent earlier Sukuk certificates.

But conventional banks and other financial institutions will be entitled to receive 8.0 per cent of the bonds instead of 15 per cent.

Besides, 10 per cent of the Bangladesh Government Investment Sukuk (BGIS), generally known as Istisna Sukuk, will be sanctioned to Islamic branches and windows of conventional banks.

Individual investors will be eligible to get the remaining 2.0 per cent instead of 5.0 per cent earlier.

"We've placed more emphasis on Islamic banks and financial institutions than the conventional ones in the new allotment quota of Sukuk bonds to create fresh investment opportunities for Shariah-based financial institutions," says a senior central banker while explaining the main objective of the quota.

Islamic banks and NBFIs cannot invest in any interest-bearing government securities that involve receipt of interest, he adds.

Actually, Shariah rules cannot permit payment or receipt of interest by any individual or institution.

However, a client will have to invest a minimum of Tk 10,000 in the securities with no upper limit. Banks, corporate institutions and individuals will be permitted to invest.

"Interested individuals may invest in the Islamic bonds through using their bank accounts," another BB official explained.

Islamic financial institutions, particularly banks, will be eligible to meet their statutory liquidity ratio (SLR) rules of the central bank with the BGIS, according to the central banker.

Currently, the required SLR is 13 per cent daily for conventional banks and 5.5 per cent for Shariah-based Islamic banks.

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

'Istisna' means asking someone to construct, build or manufacture an asset.

In Islamic finance, istisna is a long-term contract whereby a party undertakes to manufacture, build or construct assets, with an obligation from the manufacturer or producer to deliver them to the customer upon completion.

In practice, the key advantage of an istisna contract is that it can provide flexibility to the customer, where payments can be made in installments linked to project completion, at delivery or after project completion.

On the other hand, Ijarah Sukuk are certificates of equal value which are issued by the owner of an existing property or asset either on his own or through a financial intermediary, for the purpose of leasing it against a rental from the subscription proceeds.

After subscription, the underlying becomes owned by the Sukuk holders.

On 29 December 2021, the government raised Tk 50 billion through issuing Ijarah Sukuk bonds for the implementation of a need-based government primary school-development project by 2023.

In fiscal year 2020-21, the government raised Tk 80 billion through issuing the first Sukuk for implementation of a safe water-supply project styled 'Safe Water Supply for the Whole Country'.

The Department of Public Health Engineering is working to implement of the project by 30 June 2025.

In the private sector, BEXIMCO, a leading local business conglomerate, has already issued asset-backed Green-Sukuk bonds worth Tk 30 billion for the first time in Bangladesh for expanding its businesses.

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