KARACHI: The central bank on Tuesday cut the statutory liquidity requirement (SLR) for Islamic banks by five percent to 14 percent with an aim to fix liquidity problems of the Shariah-complaint lenders.

“Effective from November 17, 2016, all Islamic banks/Islamic banking branches will maintain SLR of 14 percent (excluding cash reserve requirement) of total demand liabilities, including time deposits with tenor of less than one year,” the State Bank of Pakistan (SBP) said.

“Time liabilities, including time deposits with tenor of one year and above will not require any SLR.” Presently, the SLR for the Islamic banks is 19 percent.

Earlier, Islamic banks feared that they would slip the 19 percent liquidity requirement on November 17— a date when Bai Muajjal transaction worth Rs225 billion was scheduled to be matured.

The SBP helps Islamic banks to maintain SLR ratio through purchase and sale of government of Pakistan’s Ijara Sukuk (GIS) either on deferred payment basis (Bai-Muajjal) or on ready payment basis through open market operations based on competitive bidding.

Islamic banking industry was flustered by the reduction in Shariah-complaint SLR eligible assets due to lack of issuance of new sukuk. Bankers hailed the central bank’s decision to manage the liquidity issue of the Islamic banking institutions.

“This move would give a breathing space to Islamic banking industry as the reaming SLR eligible instruments would be sufficient to meet the liquidity requirement,” said a senior banker. “However, it’s a temporary relief; the government needs to issue a fresh sukuk where the banks could invest their surplus funds.”

The central bank is striving hard to expand issuance of local currency sukuk and auctioned around 16 Ijara sukuk worth Rs865 billion since 2008. But bankers said the central bank fell short of increasing issuance of the much-needed tool for the fast-growing Islamic banking sector. The last sukuk issued in March 24 against the asset of M-1 Peshawar to Islamabad Motorway.

Islamic banks have expanded rapidly along with growth of sharia-compliant banking across the Middle East and Southeast Asia, but the sector still lacks some of the money market instruments available to conventional lenders.

In the 12-month period ending in September 2015, Pakistan’s 22 Islamic finance institutions have added Rs409 billion in assets, a 36.2 percent growth rate, central bank data shows. The sector now holds a 11.2 percent share of total banking assets, up from 9.9 percent a year earlier.

Profitability, however, remains below the banking industry average, partly due to higher expenses as Islamic banks expand their branch networks and a lack of compliant investment options.

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