In a significant move aimed at enhancing liquidity management for Shariah-compliant financial institutions, the State Bank of Pakistan (SBP) has introduced a new mechanism for Islamic Banking Institutions (IBIs) to avail themselves of the Shariah-compliant Modaraba-Based Standing Ceiling Facility (MFF) and Open Market Operations (OMO-Injections) using Government of Pakistan Ijara Sukuk (GIS), held in the Central Depository Company (CDC), as collateral.
This initiative is part of SBP’s ongoing efforts to strengthen the financial framework for Islamic banking institutions, allowing them greater flexibility and access to Shariah-compliant financing options. The step also aligns with SBP’s previous introduction of Modaraba-based Shariah-compliant facilities in 2021, designed to enhance the liquidity management tools available to IBIs.
Under the new mechanism, Islamic banking institutions wishing to utilize the MFF and OMO-Injections must pledge GIS (CDC) as collateral. This collateral must be pledged in favor of SBP within the Central Depository System (CDS) of CDC, with the SBP creating specific Group IDs on the CDS for the pledging of GIS (CDC). This ensures a streamlined and secure method for IBIs to access these liquidity management tools while remaining in compliance with Shariah principles.
A key requirement of the new process is that the market value of the collateral pledged by the IBI must be at least equivalent to the sum of the financing amount, the expected profit on the MFF, and the applicable haircut on the market value of the collateral security. This ensures that the collateral remains sufficient to cover the obligations related to the financing transaction and the expected returns.
The market value of GIS (CDC) used as collateral will be determined by the revaluation rates published by the Financial Markets and Advisory Division (FMAP) of SBP. These rates will be calculated on the last working day before the day on which the facilities are requested. Additionally, the SBP has clarified that collateral pledged in favor of the bank for these facilities will cease to be unencumbered and will not be counted towards the Statutory Liquidity Requirement (SLR) of the IBIs during the period of the facility.
Upon confirmation of the collateral pledge in the CDS in favor of SBP, the funds will be transferred to the IBI’s current account at SBP. On the settlement or maturity date of the financing transaction under MFF, SBP will debit the IBI’s current account with the financing amount and expected profit. Subsequently, the pledged securities in CDS will be released.
This new process for availing MFFs using GIS (CDC) as collateral is designed to ensure the secure and efficient movement of funds, providing a more seamless access point for IBIs to manage their liquidity requirements while maintaining Shariah compliance.
The SBP has also advised all Islamic banking institutions that are availing themselves of the Modaraba-based Financing Facilities against eligible collateral to submit the deal confirmation letter in the revised format. This letter must be signed by the authorized signatories and submitted via the Data Acquisition Portal (DAP) to the Chief Manager of SBP (BSC) Karachi Office for processing.
These measures are expected to enhance the overall functioning of Islamic banks by facilitating greater access to Shariah-compliant financing options, ultimately improving the liquidity management processes within Pakistan’s Islamic financial sector.