Islamic Finance

Bangladesh's Islamic banks to get separate quota on government sukuk auctions

Published 22 Mar,2021 via The Financial Express - Amid growing demand for the instrument, the central bank has decided to introduce a separate quota on Sukuk or Islamic bonds for the country's Shariah-compliant or Islamic banks, officials said.

The Bangladesh Bank (BB) did not offer any quota while holding its first auction, they said, but would introduce it from the next auction scheduled to be held in June next.

The decision came at a recent meeting of the central bank, but without setting any quota limit.

"We've decided to introduce a separate quota for the Islamic banks, but the volume or percentage is yet to be set," said an official at the debt management department of BB.

The department is expected to hold talks in this regard with the divisions concerned soon, he said, dropping a broader hint that it could be between 40-50 per cent for the Islamic banks or Islamic banking windows of other banks.

The rest of the bonds will be distributed among the individuals and other financial institutions.

The first auction for the Bangladesh Government Islamic Investment Sukuk was held in December 2020, introducing a new chapter in the country's financial market.

On debut, Tk 40 billion worth of Sukuk were issued. Banks and financial institutions were allowed to participate in the bidding.

The denomination of each Sukuk was Tk 10,000. Any individual and institution can purchase it.

Individuals can purchase through a banking channel. They need to open a separate account with the banks.

Like the bonds, there is 5.0 per cent tax on profit at source (annualised). The central bank had applied to the national board of revenue for reviewing it.

The government is mobilising fund through issuing the bond to finance a safe water supply project across the country.

An Islamic bond is different from that of the traditional one. There is a need for a project to raise funds from the Islamic people.

There are usually three parties involved in an Islamic Sukuk -- originator, special purpose vehicle (SPV) and investors. The government is the originator of the Sukuk.

Bangladesh Bank acts as a SPV to administer it. It also acts as the trustee to resolve any crisis between the investors and the government.

Investors will receive a profit at a rate of 4.69 per cent on their aggregate investment in the bond. The profits will be paid to investors on a semi-annual basis.

The tenure of the bond is 5 years and the project duration is also 5 years.

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