First short-term Sukuk draws Tk56,607cr bids

Bangladesh’s inaugural short-term Islamic bond (sukuk) has received an overwhelming response from investors, with bids exceeding the government’s target by more than tenfold, highlighting strong demand for Shariah-compliant investment instruments in the banking sector.

The government sought to raise Tk5,500 crore through the 273-day sukuk, but received offers worth Tk56,607 crore at the auction held on Saturday. The sukuk offers an annual return of 9.36 per cent.

The issue was heavily oversubscribed, forcing the government to limit allocations. Al-Arafah Islami Bank, for example, applied to invest Tk4,400 crore but was allotted only Tk440 crore.

Bankers said the strong demand reflected the shortage of Shariah-compliant short-term investment opportunities for Islamic banks. Unlike conventional banks, which can invest surplus funds in treasury bills and government bonds, Islamic banks are unable to use interest-based instruments.

The situation has been compounded by weak private
sector credit demand. Private sector credit growth has fallen to 4.7 per cent, one of the lowest levels in recent years, leaving Islamic banks with substantial excess liquidity and limited investment options.

“When the government offered a safe, Shariah-compliant investment, banks naturally showed strong interest,” a treasury banker said.

Towfiqul Islam Khan, Senior Research Fellow at the Centre for Policy Dialogue (CPD), said banks’ appetite for the sukuk was driven by the opportunity to earn stable returns with minimal investment risk while also meeting their Statutory Liquidity Ratio (SLR) requirements.

He said the slowdown in private sector lending should be viewed from both demand and supply perspectives.

“We have not seen major business groups seeking loans but being denied financing. It is important to determine whether the slowdown reflects weak demand for credit or supply-side constraints,” he said.

According to Towfiqul, banks have become more cautious in extending loans, while businesses are also reluctant to invest because of prolonged global uncertainties and an unfavourable business environment.

He added that investments in government securities also require lower provisioning than commercial lending, making them more attractive for banks with ample liquidity.

Towfiqul said the government should prioritise three areas to stimulate private sector investment: improving infrastructure, particularly in the energy and logistics sectors; ensuring macroeconomic stability while advancing economic reforms; and implementing visible reforms to restore investor confidence.

A treasury official at Shahjalal Islami Bank said the shortage of Shariah-based short-term investment instruments had encouraged Islamic banks to invest heavily in sukuk.

He added that many Islamic banking windows also use sukuk to invest deposits while generating stable returns, and that the instrument has become an effective means of meeting SLR requirements.

Individual investors have also shown growing interest because of the associated tax rebate benefits.

Bangladesh introduced government sukuk in 2020 to finance development projects. Since then, the government has raised Tk53,500 crore through 11 sukuk issuances, according to Bangladesh Bank.

Globally, sukuk has become an established Shariah-compliant financing instrument. Malaysia remains the largest sukuk market, while countries including Saudi Arabia, Indonesia, Pakistan, Bahrain, Qatar and Singapore also issue sukuk regularly.

The global sukuk market now exceeds US$1 trillion in outstanding value, with around US$200 billion in new issuances each year.