The government is set to raise Tk 80 billion through sukuk or Islamic bonds this December and they will mature in five years, said officials at the financial institutions division.
For the first time in the country's history, the government is going to borrow from non-traditional instruments by issuing shariah-compliant fixed-income debt notes to meet its widening budget deficit.
But people working with treasury departments of commercial banks have told the FE that this move is meant to explore funds from Islamic banks having huge uninvested resources.
Islamic banks had the biggest amount of uninvested funds totalling Tk 117.71 billion as of August 2020, according to central bank statistics.
Foreign banks had the second-biggest amount of uninvested funds at Tk 38.39 billion during the same period.
Sukuk or Islamic bond is different from that of traditional bonds. It needs a project to raise funds.
The government project is worth Tk 80 billion, said an official at the financial institutions division demurring to share details.
However, the bond will comprise two tranches, and Islamic banks will be allowed to invest. The yield is yet to be fixed.
The division in early October 2020 issued a guideline on the matter under the caption 'Bangladesh Government Investment Sukuk Guidelines-2020'.
As per the guideline, both resident and non-resident people and entries will be allowed to invest in the bond. But the individuals are missing this time.
"Actually, all types of investors will be allowed later. We feel that the main appetite for the bond is coming from Islamic banks," said a central bank official on Thursday.
Echoing the views of treasury executives, some economists said this government move is to avail the unutilised funds belonging to Islamic banks.
"To my mind, it is to borrow from shariah-compliant banks as they have huge idle funds," said Dr Mirza Azizul Islam, former finance adviser to a caretaker government.
The government has planned to borrow nearly Tk 850 billion (net) from the banking system to feed its current budget.
He said this borrowing is also the right step in a sense that the banking sector has huge funds remaining idle for lack of investment opportunities.
Islamic banks have lesser requirements to maintain with the central bank in terms of SLR (statutory liquidity ratio) and CRR (cash-reserve ratio).
Mr Islam, however, said there is a need for productive uses of the funds. Otherwise, it will be a great burden on the government.
In the meantime, central bankers said they already formed an 11-member shariah board headed by one of its executive directors.
Chiefs of shariah of five leading Islamic banks sit on the board.
Apart from this, it has also formed a technical committee on the matter.
Bangladesh Bank will act as a special purpose vehicle or SPV for the bond.
An SPV or special purpose entity (SPE) is a subsidiary created by a parent company or government to isolate financial risk.
Its legal status as a separate company makes its obligations secure even if the parent company or government fails to pay the investors.
Islamic banks have deposits amounting to more than 20.32 per cent of the total banking sector deposits.
Their lending volume to shariah-compliant projects is around 24 per cent of the total banking lending.
Bangladesh has eight Islamic banks in operation with Islami Bank Bangladesh Ltd being the pioneer since the early 1980s.
jasimharoon@yahoo.com