Desperate times call for desperate measures! Who would know this better than the treasurers of Islamic banks and other Islamic financial institutions? Even the latest Government of Pakistan (GoP) Ijara Sukuk auction mirrors that belief.
It is this hopelessness among market participants that the 3-year GoP Ijara Sukuk auction received bids worth Rs113.7 billion-–a little over two times the targeted amount of Rs49.5 billion. This offered amount, which represents nearly 62 percent of available liquidity from maturities of Ijara Sukuks (since March 2013), gives inkling that Islamic institutions are still sitting cash-rich.
Moreover, the liquidity situation is such that these cash-rich Islamic institutions are even willing to invest their funds at lower rates. This is evident in the discount over benchmark in the range of 30 bps to 350 bps, which was welcomed by the market participants in this auction, whereas a cut-off discount of 200 bps over the benchmark rate was settled on by the government.
With the benchmark (weighted average yield on 6-month treasury bills) hovering around 9.97 percent, the yield on the 3-year Ijara Sukuk produces a yield of 7.97 percent-–not far away from the yields on Sukuks in the secondary market.
“For Islamic mutual funds, a return of 7.97 percent on Sukuks is still better compared to the rate of 4-6 percent earned on Islamic bank deposits,” a fixed income fund manager at a leading asset management company told BR Research. But, the returns on Islamic products are not going to get any better until new Shariah-compliant avenues are built up, he warned.
And the chronicle doesn’t end here! Sources claim that investors are even willing to pay a premium of Rs2 on this Ijara Sukuk in the secondary market, where a premium of Rs2 implies an even lower yield of 6.8-6.9 percent.
No matter how dull the situation has become for Islamic financial institutions, the auction result must have pleased the government that raised its borrowing at a cheaper rate than the ones prevailing in the market. This also comes as good news for corporations that are planning to raise funds through debt instruments at a low cost.
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