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Bangladesh Joins Sovereign Issuers with Maiden BDT8,000 Crore (US$944m) Infrastructure-linked Sukuk Ijara Issuance

Bangladesh became the latest country to issue a debut sovereign Sukuk when the Debt Management Department (DMD) of Bangladesh Bank, the central bank, issued a BDT8,000 crore Sukuk Ijara through a “fixed profit (yield) based auction.”

DMD, as a locally incorporated special purpose vehicle, also acted as lessor and issued the Sukuk certificates on behalf of the Finance Division of the Bangladesh Ministry of Finance, the Obligor.

The certificates were issued in conjunction with Bangladesh Government Investment Sukuk Guidelines published in October 2020. The issuance is linked to infrastructure development in the water supply sector of the country. As such the proceeds from the issuance will be used to finance the government’s Safe Water Supply to the Whole Country Project, and at the same help promote the Islamic Capital Market (ICM) in Bangladesh.

According to the offer document, this transaction is the first of two tranches of Sukuk Ijara – each with a volume of BDT4,000 crore, with an aggregate BDT8,000 crore. The first was launched at end December 2020 and closed in early January 2021, while the second tranche will be issued on 28 June 2021. This debut tranche has a tenor of 5 years and matures on 28 December 2025.

The DMD fixed the rental rate based on the Bangladesh Government Islamic Investment Bond (BGIIB), as declared by the Bangladesh Bank for the calendar year 2019 dated 12/05/2020 + 1%. The last declared profit-sharing rate of the six-month BGIIB is 3.69%. As such the final rental rate is 3.69%+1% = 4.69% (Fixed) per annum. Periodic payments to certificate holders will be made on a semi-annual basis.

The asset pool for the transaction includes ownership of existing and future assets including the usufruct under the Safe Water Supply to the Whole Country Project.

The auction attracted robust support from institutional investors especially Islamic and other banks in the country. Some 37 banks, including the eight Islamic financial institutions licenced in the country, and two private investors participated in the auction. The state-owned State-run Sonali Bank was the top bidder with BDT2,000 crore.

The reasons are implicit. The current yield on both DMD T-bills and conventional bonds has decreased as the government is issuing securities to manage its budget deficit.

Local banks are awash with liquidity in a market with limited Central Bank liquidity management instruments. According to the DMD, excess liquidity in the banking sector totalled BDT169,650 crore at end Q3 2020 because of lower credit demand due to the business slowdown as a result of the COVID-19 pandemic and its knock-on effects. The fixed rental rate gives a higher profit than the yield of T-bills and bonds and carries a lower investment risk. Five-year Bangladesh Treasury bonds, for instance, are currently are priced at an interest rate of 4.64%.

Similarly, according to a recent Bangladesh Bank study, 28% of the country’s investors are reluctant to invest in interest-bearing T-bills, bonds and other government securities on faith grounds. This suggests that Sukuk, starting with sovereign and later corporate offerings may become a norm in the market especially as a yield curve for Sukuk Ijara starts to build.

The Sukuk certificates held by banks and financial institutions on their own account also qualify as approved securities for the central bank’s Statutory Liquidity Ratio (SLR) fulfilment.

The Sukuk certificates were distributed to “any resident and non-resident investors – both individuals and institutions” through banks and financial institutions acting as primary dealers.

The issuance reinforces the view expressed inter alia by the G20, World Bank and others of the ideal connectivity of Sukuk as a funding instrument to infrastructure development especially in emerging economies. Bangladesh has a high morbidity and mortality related to water-borne diseases.

At present, says the DMD, Bangladesh has achieved officially 88% safe water supply coverage. However, the situation on the ground requires much greater improvement. The project infrastructure development ask is huge and complex. It includes building construction, machinery, equipment and part purchase, an arsenic iron removal plant, rainwater harvesting unit, hydrological characterization, the establishment of submersible pump, deep tube well, hand pump, multiple hand pump, solar panel, etc.

As such the government has launched the 5-Year “Safe Water Supply for the Whole

Country” Project, which will be implemented by the Department of Public Health Engineering (DPHE).

The project commenced on 1 January 2020 and will be completed on 30 June 2025. The overall cost for completion of the project is estimated as BDT 8,851 crore, of which BDT8,000 is thus far being financed through Sukuk.

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