BAIMUAJJAL OF SUKUK MARCH, 2014 ISLAMIC BANKING DIVISION SINDH BANK LIMITED HEAD OFFICE Page 1 of 11
TABLE OF CONTENTS Key Terms..4 1.0 Product Structure and Process 5 1.1 Sale of Sukuk from Ready Market..5 1.2 Sale of Sukuk on Credit Basis to another Bank 5 1.3 Sale of Sukuk by Purchasing Bank 6 2.0 Form of the Agreement.6 3.0 Pre-Requisites for the Transaction.8 4.0 Checklist / Transaction Approval Format Sheet for Bai Muajjal of Sukuk..9 5.0 Accounting Treatment..11 6.0 Scope and Responsibilities.12 Page 2 of 11
Key Terms Bai Muajjal Sindh Bank Limited (SNDBL) Islamic Banking Division (IBD) Shariah Advisor (SA) Member Shariah Supervisory Committee (MSSC) Real Time Gross Settlement (RGST) Delivery vs. Free (DVF) Sukuk Page 3 of 11
1.0 Product Structure and Process Flow 1.1 Purchase of Sukuk from Ready Market SNDBL (Treasury) will purchase a specific quantity of a particular type of Sukuk from the ready market from Bank A at an agreed market price using the Real Time Gross Settlement (RTGS) system using Delivery vs. Payment (DVP) mechanism. This transaction shall be done a recorded line by the Treasury Front Office. The Sukuk will be delivered to SNDBL s Statutory General Ledger (SGL) / CDC account and SGL statement will be generated to record the delivery. 1.2 Sale of Sukuk on Credit Basis to another bank. After the delivery in the 1 st Leg has been received by SNDBL in its SGL Account; SNDBL Treasury will execute a Bai Muajjal (Credit Sale) of the same type of Sukuk to Bank B (that is in need of funds) from its inventoryat an agreed Price for a specific quantity of Sukuk for a defined credit tenor. This Bai Muajjal will be telephonically recorded at Treasury Front Office end and a Bai Muajjal Contract will be signed same day between SNDBL and the purchasing bank to record the Offer & Acceptanceof the transaction. Treasury Back Office must make sure that this format is signed on the same day by both the parties. The delivery of Sukuk is transferred to Bank B via Delivery vs. Free (DVF) mechanism in Real Time Gross Settlement (RTGS) system. This sale must be an independent sale and Bank B should be clearly in advised in the sale document that it is free to hold the Sukuk or sell it to any party it wishes to in the market. Note:In case of GoP Ijarah Sukuk, settlement (inflow/outflow) will be in Statutory General Ledger (SGL) account. In case of SLR-eligible Public Entity Sukuk, settlement will be through Central Depository Company (CDC). Actual Payment and Delivery of the Sukuk must take place from one account to another and there should not be any netting of the amounts. Page 4 of 11
1.3 Sale of Sukuk by Purchasing Bank B In order to generate liquidity, Bank B who has purchased the Sukuk on Credit basis from SNDBL may sell these Sukuk in the market on its sole discretion to generate the required liquidity. 2.0 Form of the Agreement The following shall be the format of the Agreement to be executed by SNDBL with the corresponding Financial Institution; when selling the Sukuk on credit basis. SINDH BANK ISLAMIC BANKING Bai Muajjal Contract Dated: To: 01-Jan-2014 NIB BANK LIMITED Dear Sir, We hereby Offer to Sell the Sukuks to you as per the following details Type of Asset GOP Ijarah Sukuk Issue 15 11 2010 Quantity of Sukuk (Unit) 50,000 Sukuk Delivery Date 01/Jan/2014 Face Value 500,000,000 Contract Price (PKR) PKR 539,735,020 Contract Price (in words) Five Hundred Thirty Nine Million Seven Hundred Thirty Five Thousand Twenty and Paisa Nine Only Payment Due Date 20/Jun/2014 You shall be authorized to Hold or Sell the above Sukuk to any entity in the market. For and on behalf of SINDH BANK LIMITED (Authorized Signatory) Page 5 of 11
Acceptance: Dated: 01-Jan-2014 We accept your offer and we hereby purchase the Assets mentioned above for a Contract Price of PKR 539,735,020.09 We undertake to pay the Contract Price on the Payment Due Date i.e. 20-June-2014. For and behalf of NIB BANK LIMITED (Authorized Signatory) Page 6 of 11
3.0 Pre-requisites for the Transaction SNDBL Treasury will ensure that a certain inventory of the type of Sukuk (like GOP Ijarah etc.) is already available with SNDBL. SNDBL Treasury Front Office will obtain approval for each transaction from IBD and Shariah Advisor (as per the approved Transaction Approval Format) on case to case basis. The copy of the approval should be delivered to the Treasury Back Office. Treasury Back Office should not initiate the transaction until it receives the approval. The Credit Sale in the second leg should only be initiated / executed by the Treasury Front Office once it has been confirmed from the Treasury Back Office that SNDBL has received the delivery of Sukuk in its SGL Account / CDC Account. The responsibility of confirming the delivery rests with Treasury Front Office. Treasury Front Office and Treasury Back Office must comply with all other guidelines issued by Shariah Advisor and / or Islamic Banking Division. Page 7 of 11
4.0 Checklist / Transaction Approval Format Sheet for Bai Muajjal of Sukuk Following is the approved Checklist / Transaction Approval Format Sheet for Placement of Transactions under Bai Muajjal of Sukuk. This completely filled in Checklist / Transaction Approval Format Sheet must be submitted for approval before each transaction. The Treasury Front Office and Treasury Back Office must make sure that no Bai Muajjal Sukuk Transaction is executed before IBD & Shariah Advisor s approval for the same on the below mentioned format. Date: 1 st January 2014 SINDH BANK LIMITED INTER OFFICE MEMO To: From: Islamic Banking Division / Shariah Advisor Treasury Front Office Subject: Approval for Placement Transaction under Bai Muajjal of Sukuk This is to request approval for executing a Placement Transaction of Credit Sale of Sukuk by the Treasury Department. Following are the details of the transaction: Sukuk Type Government of Pakistan Sukuk 6 Total Face Value of the Sukuk PKR 2,000 Million Name(s) of Entity/Entities from which SNDBL may buy the Sukuk from in the 1 st Leg HBL AlBarakah Islamic Price at which each Sukuk Certificate may be purchased PKR 100,090 -Price as per Market Practice in %age SNDBL s Internal Average Holding Cost of the Sukuk after the purchase at above proposed price Quantity of the Sukuk Certificates to be used in the Transaction with each Certificate having a Face Value of PKR 100,000 Financing Amount as per SNDBL s Internal Average Holding Cost of the Sukuk terms 100.0900 PKR 100,110 -As per Market Practice in %age terms 100.1100 20,000 PKR 2,002,200,000 Name of the Buyer of the Sukuk NIB Bank Price at which each Sukuk Certificate is being sold 103,343.7 Price as per Market Practice in %age terms 103.3437 Page 8 of 11
Total Selling Price PKR 2,066,874,000 Tenor of Financing (Credit Period of Sale) 3 Months Total Current Outstanding Position of Placements PKR 506 Million under Bai Muajjal of Sukuk Total Current Inventory of the same Sukuk with PKR 8,750 Million SNDBL Total Outstanding Value of Due from FI PKR 8 Billion Reasons for executing this Placement under Credit Sale of Sukuk Transaction: Excess Liquidity due to increase in deposits Advances to Deposits Ratio: Credit Sale of Sukuk to Deposits Ratio: Increase in liquidity due to maturity of Corporate/Commercial/SME Financing Increase in liquidity due to current/upcoming maturities of earlier Placement Transactions. Any other situation of excess liquidity; please specify We hereby confirm compliance to the guidelines of the Shariah Advisor / IBD, as per the Transaction Manual-Placement Transactions under Bai Muajjal of Sukuk Kindly accord your Approval for the above transaction Approval & Comments Islamic Banking Division Shariah Advisor Page 9 of 11
5.0 Accounting Treatment First Leg: Purchase of Sukuk from Ready Market The initial purchase by SNDBL under the structure shall be a completely independent purchase with no bearing on the profits or financing amount of the subsequent Bai Muajjal Sale. This purchase shall be recorded as an independent outright purchase of Sukuk and shall have no bearing on the financial entries or any other effect on the sale in the second leg. Second Leg: Sale of Sukuk on Credit Basis to another bank From an accounting perspective, it is pertinent to note that these transactions will not be shown in the bank s books under Investment as simple outright purchase/sale but these transactions will be reported under the head of Placement with Banks or Due from Banks as the product has been designed as a vehicle for placement of excess liquidity. The profit or return from these transactions will be reported as gain or expense on Placement under Bai Muajjal of Sukuk and not as a normal capital gain or loss. The financing amount under the transaction shall be booked based on the underlying moving average cost of the particular Sukuk for SNDBL. In simple terms this will be the average of the different prices at which that particular type of Sukuk has been bought by SNDBL. Even though the initial acquiring by SNDBL of the Sukuk (involved in the Bai Muajjal Transaction) is categorized as an outright purchase; the profit from sale of the Sukuk under Bai Muajjal by SNDBL from its inventory will not be recorded as a Capital Gain. This is due to the fact that the Bai Muajjal Sale is a sale on deferred payment basis and not based on spot settlement with exchange of counter values at spot; and secondly the product has been designed as a vehicle for placement of excess liquidity and financing. Hence the profit under Bai Muajjal of Sukuk will be recorded on accrual basis. Following are the sample accounting entries involved in a Placement Transaction through Bai Muajjal of Sukuk: 01/01/14: Investment GOP Ijarah 6 PKR 2,000,000,000 Other Assets Accrued Rental PKR 100,000 Premium PKR 1,800,000 SBP Account / Cash PKR 2,001,900,000 01/01/14 Due from Bank/FI (Bai Muajjal) PKR 2,002,200,000 Profit Receivable-Bai Muajjal Sukuk Placement PKR 64,674,000 Investment GOP Ijarah Sukuk 6 PKR 2,002,200,000 Deferred Income PKR 64, 674, 000 At Month End (Accrual of Profit) 31/01/14 Deferred Income PKR 21,558,000 Profit Receivable on Bai Muajjal Sukuk Placement PKR 21, 558,000 Page 10 of 11
6.0 Scope and Responsibilities 1. Treasury Back Office (TBO) must make sure that Bank B is clearly advised in the Bai Muajjal Contract (Deal Ticket) that it is free to hold the Sukuk or sell it to any party it wishes to in the market. 2. TBO must make sure that the financial entries are booked as advised in this manual. Specially ensuring that the financing under Bai Muajjal contract is booked based on the average holding cost of the Sukuk which is sold on credit basis in the subsequent credit sale and not on the basis of amount at which the similar type of Sukuk is purchased from the market in the initial purchase transaction. 3. TBO must not deliver the Sukuk in the subsequent credit sale until and unless the delivery of the Sukuk in the first leg has been received by SNDBL in its SGL Account / CDC Account. 4. Upon receiving the completely filled in Bai Muajjal Transaction Approval Sheet; the IBD shall review the transaction information provided in the sheet and upon satisfaction shall approve the sheet. 5. The Shariah Advisor shall approve the transaction along with the Head, IBD. Page 11 of 11