Debut short-term sukuk oversubscribed tenfold, exposing Islamic banks’ liquidity glut

The government wanted to raise Tk5,500 crore. It received offers worth Tk56,607 crore instead – more than ten times the amount it sought.

The overwhelming response came today (28 June), when the government sold its first-ever short-term Islamic bond, known as a sukuk. The bond will mature in 273 days and offer a return of 9.36% per year.

One bank's experience showed the scale of demand. Al-Arafah Islami Bank applied to invest Tk4,400 crore in the sukuk, but the government allocated only Tk440 crore – just one-tenth of what the bank had sought.

The allocation was restricted because demand from banks was so high that the government had to limit how much each institution could buy.

Why the massive demand? Bankers say it highlights a wider challenge facing Islamic banks: they have limited options to invest their surplus funds.

Conventional banks can invest excess liquidity in treasury bills and government bonds. Islamic banks, however, cannot use these instruments because they are not Shariah-compliant, meaning they do not follow Islamic finance principles.

At the same time, businesses are borrowing less than before. Private sector credit growth has fallen to 4.7%, one of the lowest levels in recent years. This means, Islamic banks are holding large amounts of cash with fewer investment opportunities.

"So, when the government offered this sukuk, a safe, Islamic-law-friendly investment, banks rushed to grab as much of it as they could," said a treasury banker.

Towfiqul Islam Khan, senior research fellow at the Centre for Policy Dialogue (CPD), told The Business Standard that banks' strong appetite for sukuk was driven by the opportunity to earn a fixed return without taking investment risk.

He said the oversubscription was also fuelled by banks' need to meet their Statutory Liquidity Ratio (SLR) requirements through such investments.

Asked whether banks were choosing government instruments over lending to the private sector, Towfiqul said the issue needed to be examined from both demand and supply perspectives.

"We have not seen large business groups seeking loans but being denied financing. So, we need to determine whether the slowdown is due to weak demand for credit or constraints on the supply side," he said.

"On the one hand, banks are now much more cautious about lending compared to the past. At the same time, businesses are also being cautious due to global factors. The prolonged war situation and the lack of a normal business environment have reduced loan demand."

He said banks also needed to make lower provisions when investing in various government instruments.

"Top-tier banks have a large amount of liquidity, which is why their demand for investment is high. On the other hand, second-tier banks facing capital and liquidity problems have less ability to invest here," he added.

Towfiqul said the government needed to focus on three areas to revive private sector investment.

"First, infrastructure development, especially in energy and logistics. Second, ensuring macroeconomic and global stability and showing the government's ability to carry out economic reforms," he said.

"Third, visible reforms are needed to restore investor confidence instead of only discussions, as many investors are currently following a 'wait and see' approach."

A treasury official at Shahjalal Islami Bank told TBS that individual investors were also showing interest in sukuk because of tax rebate benefits.

"For banks, there is a shortage of Shariah-based short-term investment instruments in the market, which is why they are investing heavily in sukuk," the official said.

"Many Islamic windows of banks invest collected deposits in sukuk without directly engaging in investment or lending activities, which ensures stable returns for them."

He said Bangladesh Bank had kept the sukuk market open to all investors as some major Islamic banks were facing difficulties, ensuring that the issue was not under-subscribed.

"Banks are also using sukuk as an effective tool to meet their SLR requirements. In many cases, ordinary investors are receiving almost full allocations against their applications, which is increasing public participation in the sector," he added.

Sukuk raises Tk53,500cr in 6 years

Bangladesh introduced government investment sukuk for the first time in 2020. At the time, the Finance Division listed 68 projects for financing through sukuk.

The first sukuk, worth Tk8,000 crore, was issued to finance a safe water supply project. Since then, the government has continued issuing sukuk to fund various development projects.

According to Bangladesh Bank data, the government has so far raised Tk53,500 crore through 11 sukuk issues.

Sukuk market expands globally

Malaysia is the world's leading country in issuing and using sukuk. The instrument is also used in Bahrain, Indonesia, Pakistan, Qatar, Saudi Arabia, Singapore and the United States.

Sukuk has become an established Shariah-compliant financing tool not only in Muslim-majority countries but also in non-Muslim markets.

The global sukuk market has expanded rapidly in recent years. The total outstanding sukuk worldwide has crossed $1 trillion, with around $200 billion worth of new sukuk issued every year.