KARACHI: The State Bank on Thursday took an important decision regarding facilitating Islamic Banking through outright purchase and sale of Islamic bonds.

“The SBP may outright purchase or sale Government of Pakistan Ijara Sukuk (GIS) either on deferred payment basis (Bai-Muajjal) or on ready payment basis through Open Market Operations (OMOs) based on multiple price competitive bidding auction process,” said a State Bank statement.

The central bank said the decision was taken in order to facilitate Islamic banking industry in their liquidity management and more effective transmission of monetary policy.

Transaction modalities has been adopted for OMOs against GoP Ijara Sukuk. All Islamic banks and conventional banks having Islamic branches will be eligible to participate in these OMOs, according to the SBP circular.

All eligible participants in the OMOs will send their bids as per required format detailing face value of security and deferred price (in case of Bai-Muajjal or price (in case of ready payment basis). Price should include accrued profit and can be quoted up to four decimal places.

Each eligible participant will be allowed to submit maximum three bids in an OMO. Minimum bid size will be Rs25 million and its multiple thereof.

The SBP reserves the right to reject all or any of the bids without assigning any reason. If the deferred payment date falls on public/bank scheduled or unscheduled holidays, then the contracts will be extended to the next business day and there will be no change in deferred payment price.

The State Bank will have the discretion to accept the bids on a ‘pro-rata volume’ basis.

The OMO result will be announced on the same date. Successful bidders will send a contract to SBP for confirmation and settlement. In case of purchase or sale of GIS on deferred payment basis, the GIS will be transferred to the buyer on deal date, while payment will be made on deferred payment date.

The deal cannot be terminated before the deferred payment date. In case of Sale of GIS on deferred payment basis to SBP, banks cannot include the GIS in their SLR calculations from the deal date.

Published in Dawn, October 17th, 2014