SBP cuts SLR by five percent for Islamic banks

RIZWAN BHATTI

KARACHI: In order to facilitate the Islamic Banking Industry, the State Bank of Pakistan (SBP) has announced a reduction in Statutory Liquidity Requirement (SLR) for Islamic banks and Islamic banking branches by 5 percent to fix at 14 percent. From today (Wednesday) all Islamic banks and Islamic banking branches will be required to maintain a 14 percent SLR compared to 19 percent previously.

Sources in the banking industry told Business Recorder that SBP's move will help avoid a crisis for the Islamic banking industry. They said that an amount of Rs 225 billion of Bai-Muajjal is being matured on Wednesday and with this maturity, SLR of Islamic banks and Islamic banking branches was reaching lower than the 19 percent. Sukuk bonds and Bai-Muajjal are part of SLR and with the maturity of Rs 225 billion of Bai-Muajjal, Islamic Banks and Islamic Banking Branches were required to place the same amount in the shape of cash with the SBP to maintain 19 percent SLR. Therefore, the SBP has decided to cut the SLR for Islamic Banks and Islamic Banking Branches to facilitate the industry.

Presently, some Rs 570 billion of Islamic banking industry has been placed under the SLR with SBP. This amount includes some Rs 308 billion of Sukuk and Rs 225 billion of Bai-Muajjal. With the maturity of Rs 255 billion Bai-Muajjal, the amount will reach Rs 345 billion, therefore SBP has decided to cut the SLR and fix it at 14 percent.

According to a circular issued in exercise of powers conferred upon the State Bank of Pakistan under section 36 of the State Bank of Pakistan Act, 1956, and section 29 of the Banking Companies Ordinance, 1962, it is has been decided to revise the Statutory Liquidity Requirement (SLR) for Islamic banks and Islamic banking branches.

Effective November 17, 2016, all Islamic banks and Islamic banking branches will maintain SLR of 14 percent (excluding CRR) of Total Demand Liabilities (including Time Deposits with tenor of less than 1 year). Time Liabilities (including Time Deposits with a tenor of 1 year and above) will not require any SLR, the circular added. Sources said earlier this month a meeting of Islamic banking industry was held on this issue and they requested the SBP for some reduction in SLR, besides demanding the ministry of finance of issuance of fresh Sukuk bonds.

They said that with maturity of Rs 225 billion Bai-Muajjal, surplus liquidity of Islamic banking industry will surge to some Rs 400 billion, while there are no more investment opportunities for the Islamic banks. "Shariah complaint financing is cheaper for the government compared to conventional banking, despite that there are limited investment opportunities for the Islamic banking industry as new Sukuk bonds are not being issued for the domestic industry," they added.

Bai-Muajjal is a contract between a buyer and a seller under which the seller sells certain specific goods (permissible under Islamic Shariah and law of land) to the buyer at an agreed fixed price payable at a fixed future date in lump sum or within a fixed period by fixed instalments. The amount of Rs 208 billion (basis amount) was invested by Islamic banks under Bai-Muajjal for one year against Jinnah International Airport.