KARACHI: Meezan Bank is going to raise up to Rs10 billion via sukuk or Islamic bonds, a regulatory filing said on Friday.

The country’s largest Islamic bank will count the proceeds of the sukuk towards its tier-II capital, which is the secondary layer of capital that every bank keeps as part of its required reserves. Unlike tier-I capital that’s contributed mainly by shareholders, tier-II capital is often raised through debt instruments like the upcoming sukuk.

The Rs10bn issue includes the Rs3bn green-shoe option, which grants Meezan Bank the right to raise more funds than originally planned.

At the same time, the bank is going to exercise the “call option” with respect to an earlier tier-II capital sukuk of Rs7bn that it issued in September 2016. The call option gives Meezan Bank the right, but not the obligation, to buy back the 2016 sukuk before its maturity in 10 years.

Speaking to Dawn, Meezan Bank Head of Product Development and Sharia Compliance Ahmed Ali Siddiqui said the two transactions are expected to result in cost savings for the bank. “Our credit rating (at the time of 2016 sukuk) was AA. Now it’s AAA. This means we have a better risk profile than before,” he said, noting that the issue will support the bank in its ongoing “growth phase”.

Meezan Bank Head of Investment Banking Urooj Hassan said the upcoming issue will be the lender’s third tier-II capital sukuk. The bank raised Rs7bn in 2016 at six-month Karachi interbank offered rate (Kibor) plus 50 basis points. In 2019, it issued another sukuk of Rs4bn at Kibor plus 90bps.

“We’re maturing the 2016 sukuk. We expect to get a rate lower than Kibor plus 50bps,” he said.

But the more important reason for replacing the old sukuk with a new one is a regulatory provision under which a discount factor of 20 per cent is applied to tier-II capital sukuk in each of the last five years to its maturity, said Mr Hassan.

In other words, Meezan Bank would be able to count only Rs5.6bn instead of Rs7bn towards equity should it decide against exercising the call option before December 2021.

Meezan Bank recently became the most valuable Pakistani lender in terms of the market value of shares. Its net profit amounted to Rs6.7bn in the April-June quarter, up 2pc from a year ago. Its share price inched up 0.3pc to Rs140.66 on Friday.

Published in Dawn, August 14th, 2021