SBP introduces new liquidity mechanism for Islamic Banking institutions

KARACHI: The State Bank of Pakistan (SBP) has introduced a new mechanism that allows Islamic Banking Institutions (IBIs) to access Shariah-Compliant Standing Ceiling Facility and Open Market Operations (OMO) injections, using Government of Pakistan Ijara Sukuk (GIS) held in the Central Depository Company (CDC) as collateral.

This initiative underscores SBP’s commitment to enhancing liquidity management tools for Shariah-compliant financial institutions.

Since its introduction in 2021, the Modaraba-based Shariah-compliant Standing Ceiling Facility and OMO injections have aimed to provide flexible financing options for IBIs.

With the availability of benchmark and revaluation rates for GIS via the Pakistan Stock Exchange (PSX), along with custody services from CDC, SBP has established a streamlined procedure for eligible IBIs to utilise Modaraba-Based Financing Facilities (MFFs) against GIS (CDC) as collateral.

To avail of the Shariah-compliant Modaraba-Based Standing Ceiling Facility and OMO injections with GIS (CDC) as collateral, IBIs will need to pledge their assets in favour of SBP through the Central Depository System (CDS) at the CDC. This will be facilitated through Group IDs created specifically by SBP for the pledging of GIS (CDC).

Analysts divided on SBP rate cut ahead of policy review

According to the established mechanism, the market value of the collateral provided by IBIs must be at least equivalent to the sum of the financing amount from SBP, the expected profit on the MFF, and any applicable haircut on the security’s market value, as per SBP’s collateral requirements, which are subject to periodic updates.

The determination of the market value of GIS (CDC) used as collateral will rely on revaluation rates published by the Financial Market and Asset Pricing (FMAP) on the last working day preceding the request for financing.

SBP clarifies that any collateral pledged for these facilities will be considered encumbered and will not count towards the Statutory Liquidity Ratio (SLR) of the IBIs during the financing period. Following the confirmation of the deal and the pledge in the CDS, funds will be transferred to the IBI’s current account at SBP.

On the settlement or maturity date of each MFF transaction, SBP will debit the IBI’s current account for the financing and profit, in accordance with the expected profit rate, and release the pledged securities in the CDS.

Furthermore, the existing provisions for availing MFFs from SBP against GIS (CDC) as collateral remain applicable.

To streamline processes, SBP has instructed all IBIs utilizing Modaraba-based Financing Facilities to submit a deal confirmation letter in a revised format via the Data Acquisition Portal (DAP), appropriately signed by authorized representatives, to the Chief Manager at SBP’s Banking Services Corporation (BSC) Karachi Office.