KARACHI: The State Bank has provided greater opportunity to Islamic banks for investing in government papers by increasing the limit to invest in Ijara Sukuk.The State Bank issued a circular on Friday stating that the central Bank has increased maximum holding limit of Ijrara Sukuk (Islamic bonds) for Islamic banks and conventional banks, having Islamic branches to 35 per cent of issue amount.

Earlier, the holding limit of Islamic bond was 25 per cent which was frustrating for Islamic banks as deposits were sharply rising.

“We have been negotiating with the State Bank and this was our demand to increase the holding limit of Ijara Sukuk,” Irfan Siddiqui, President, Meezan Bank, told Dawn.

He said the State Bank would issue another Sukuk bond of Rs40 billion in a week's time giving the Meezan Bank an opportunity to hold additional Islamic bonds worth Rs19 billion. The State Bank has, so far, issued four Ijara Sukuk worth Rs150 billion and with the addition of Rs40 billon Sukuk bonds next week, the total amount would reach Rs190 billion.

The SBP said that in order to ensure that there is no over concentration, maximum holding limit of Ijara Sukuk for Islamic Banks will be 35 per cent of the issue amount.

For conventional banks, with Islamic Banking branches, holding limit will be 35 per cent of the issue amount, and for conventional banks, with no Islamic banking branches, holding limit would be 25 per cent of issue amount.

The holding restriction will be applied on a combined or amalgamated basis for commercial banks with Islamic banking branches.

Mr Irfan Siddiqui said the conventional banks have many options to invest in government papers, but Islamic banks have limited access to invest in government papers.

So far deposits of entire Islamic banks have reached around Rs400 billion and banks are desperately looking for options to invest with minimum risk.

Risk is high in loaning to private sector since high lending rate has increased risk of default or failure of business. The State Bank has so far issued just four Islamic bonds.

This is typical banking trend in the prevailing banking system of Pakistan where banks are willing to invest in government papers instead of advancing to private sector.

The government has become most attractive investing choice for both conventional and non-conventional banks in the country.

However, limited options for Islamic banks to invest in government papers had been frustrating them as they were finding no option to utilise the fast growing deposits.

The conventional banks have been making profit mostly by investing in government papers which eroded the risk factor involved in banking.

For the last four years, the government is the biggest borrower from the banking system, leaving little room for the private sector.

This trend made borrowing costly for private sector, resulting in minimum investment in private sector.