Karachi, December 30, 2021 (PPI-OT): SBP announces Shariah compliant OMO injection and Standing Ceiling Facility

In a move to improve management of market liquidity, the State Bank of Pakistan (SBP) announced introduction of Shariah compliant OMO Injection and Standing Ceiling Facility yesterday.

In addition to facility for Islamic banks, we also take this as a positive for a borrowing avenue opened up for the government. At present, the total deposit/asset size of the Islamic banking industry is Rs3.8trn/R4.8trn, respectively.

With inclusion of Islamic Banks in the IRC, the next development that may follow for Islamic Banks could be the implementation of Minimum Deposits Rate, which is currently exempted for the said segment.

OMO Injection and Lending facility now also for Shariah banks

In a move to improve management of market liquidity, the State Bank of Pakistan (SBP) announced introduction of Shariah compliant OMO Injection and Standing Ceiling Facility yesterday. This would be a Mudarabah-based borrowing/lending facility available from SBP to Islamic Banks and banking windows, similar to a structure present and practiced by conventional banks. As this development is a step towards bringing Islamic banking operations to a level-playing field with conventional banks, the borrowing/lending rates in these market operations would be close to the ceiling/floor of the existing Interest Rate Corridor (IRC), respectively.

Available of liquidity addressing the timing difference

We take this as a positive development for the Islamic banking industry as now, in addition to deposits and money market, Islamic banks will now have an avenue to turn to for liquidity that would be available on lesser volatile rates. This facility has been needed by the industry in times when SBP has announced Sukuk auctions on a short notice, where the recent development will address the timing difference of available liquidity in order to avail the Sukuk opportunities on competitive rates. We highlight, Islamic banks do not have consistent government securities auctions but instead have irregular Sukuk auctions based on assets available by the government.

In addition to facility for Islamic banks, we also take this as a positive for a borrowing avenue opened up for the government. At present, the total deposit/asset size of the Islamic banking industry is Rs3.8trn/R4.8trn, respectively. As Islamic banks still face the issue of lack of investment avenues, utilization of Islamic banks by the government would address the respective issues of the government and the Islamic banks, both. To note, there is another shorter tenor lending avenue, Bai Muajjal, available at the moment for the industry.

Regulations on minimum deposit rate cannot be ruled out

With inclusion of Islamic Banks in the IRC, the next development that may follow for Islamic Banks could be the implementation of Minimum Deposits Rates (MDR), which is currently exempted for the said segment. Though industry sources suggest the central bank does have this subject under discussion, we believe the Islamic Banking industry is still not on a level-playing field with the conventional banks until the introduction of shorter tenor Shariah government securities and consistency in Shariah government securities auctions. The Islamic banks are currently offering savings rates at ~300-400bps lower than conventional banks’ savings rates and any regulation of a similar MDR on the Islamic Banking industry on a standalone basis would have a significant negative impact on their prospective ROE.