Wednesday, 18 June 2014

Auction of Government of Pakistan Ijarah Sukuk


Tender for Sale of 3-Year Government of Pakistan Ijara Sukuk (GIS) are invited by the Director, Domestic Markets & Monetary Management Department (DMMD), State Bank of Pakistan, Karachi from the designated Primary Dealers for the Sukuk in accordance with the provisions of SBP, DMMD Circular No.10 dated 17th June, 2014.
Ijara
  1. Receipt of Tenders                 Up to the date of auction (11:15 hrs)
  2. Opening of tenders                 11:30 hours on the date of auction
  3. Communication of result        On the date of auction
  4. 1st Rental Coupon                   To be determined one day prior to the settlement date
  5. Maximum value of the asset under the present issuance program of the Ijara Sukuk is PKR.49.572 billion.
Note: Bids can be rejected without assigning any reason.

Tuesday, 17 June 2014

Government of Pakistan Issuing Ijara Sukuk

In accordance with provisions of the notification of the GoP Ijara Sukuk Rules, 2008, another GoP Ijara Sukuk will be issued. Detailed transaction structure can be found at http://www.sbp.org.pk/dmmd/2014/C10-Annex- C.pdf

As per transaction mechanism, profit on the GOP Ijara Sukuk will be based on the followings: Rental rate benchmarked against the latest weighted average yield of the 6 month Market Treasury Bills or 6 month PKRV (as per FSCD circular 13 dated September 06, 2008). The rental rate as mentioned may be adjusted based on the difference between estimated supplementary rental and actual maintenance expenses of the underlying asset as explained in transaction structure.

For this particular issue of GIS (M-3), the total auction participation of a single 9Primary Dealer (PD) will be capped at whichever is the lower of the following: a) PKR 25 billion or b) 20% of Total Demand & Time Liabilities-Islamic (excluding FE-25 deposits) of the respective PD Islamic bank / Islamic window of that particular PD.

For this purpose, Total Demand & Time Liabilities – Islamic as of 28th March, 2014 will be used as reported to the State Bank of Pakistan.

In case any PD breaches the aforesaid limit, SBP reserves the right to cancel all or some of the bids of the concerned bank.

All Islamic banks and commercial banks with Islamic Branches are designated as PD for participating in the auction of GOP Ijara Sukuk.

All designated PD for the GOP Ijara Sukuk are advised to ensure meticulous compliance with the above instructions.

All other instructions on the subject shall, however, remain unchanged.

 

Saturday, 14 June 2014

Pakistan: Opportunities for Global Insurers

The incumbent government in Pakistan wishes to put the economy on track as well as accelerate pace of productive activities, construct mega size infrastructure projects and improve the quality of life of people, insurance companies will have to shoulder greater responsibilities. They have to come up with new products to cater to emerging needs. Over the last two decades new threats have emerged and hedging the risk has become the collective responsibility of all the stakeholders. The government being the largest stakeholder is responsible for paying compensation to the victims of various types of eventualities, i.e. act of terrorism, political violence and natural calamities. Three deluges, carnage and destruction on the eve of assignation of Benazir Bhutto and 2005 earthquake have shown that while economic losses ran into billions of rupees insurance claims were minuscule, simply because immovable and movable properties, government assets and even the lives of people were not adequately insured. In the prevailing scenario insurance will have to come up with new products to cater to emerging needs. This also offers opportunities to the global insurers to form joint ventures with Pakistani insurance companies to exploit a market that still suffers from very low insurance penetration. To read the details visit shkazmipk.com

Wednesday, 11 June 2014

Pakistan: Government divesting its share in United Bank

Government of Pakistan is scheduled to offer its shareholding (19.8% of outstanding shares) in United Bank to international and domestic investors on 11th Jun'14. The base size is determined as 160 million shares, whereas upsize can accommodate additional 81.9 million shares. Floor price will be announced through notice to all three exchanges after market close on June 10, 2014.

Profit after tax of United Bank have gone up by 19% CAGR (CY10-CY-13). Though, the growth has been impressive, surge in Net Interest Income (7%) lagged the escalation of Net Interest Expense (12%) primarily as Policy Rate dropped from 14% to 9%, to close at 10%. Resultantly, Gross spread ratio deteriorated to 52.1% (CY13) from 57.8% (CY10).

Net Interest Income for Q1'14 increased by 12%YOY to settle at PKR9.8 billion with Gross Spread Ratio declining to 50.6% from 51.7% in Q1'13.
The Bank targeted an investment focused asset allocation with a lengthening maturity profile, consequently ADR & IDR moved inversely as they settled at 45% & 57% from 47% & 51% a quarter earlier. PIB holdings ballooned up by 90% QoQ.

Being the first commercial bank to launch Branchless Banking (BB) seems keen to hold on to its initiative as UBL Omni retained its 27% share in 4QCY13, whereas its main competitor Easy Paisa saw its share falling to 59%. Further Omni revenue in Q1'14 grew by 60%.

Bank management has not only focused on domestic geographical diversification but also extended outreach internationally by launching 18 international branches. Further it expanded its spectrum of services by establishing 5 subsidiaries, locally and internationally.

Monday, 9 June 2014

Pakistan: Warehouse Receipt Financing an alternative route

Efforts of State Bank of Pakistan (SBP) to implement Warehouse Receipt Financing (WRF) in Pakistan are applaud able and needs to be supported by all the stakeholders. This essential but timely initiative is part of financial inclusion program being pursued by the central bank.Once fully implemented, WRF system will be extremely beneficial to the farmers and support in realizing top of the agenda item, achieving food security. This program one hand will help in containing wastages significantly, and on the other hand, enabling Pakistan to export surplus produce to those countries that need it the most.
Experts are of the consensus that the development of commodity physical trade and an efficient market system is a must for improving the performance of the agricultural sector in particular and the economy in general, the added advantage is documentation.
However, while going through initial reports regarding plan being considered by the designated working group constituted by the central bank, one gets a feeling that a rather complicated system involving too many participants is being proposed.
A closer look at the existing trading system of commodities like wheat, rice and cotton shows that not only too many intermediaries are involved but the available warehousing system is not to the level required for WRF system.
The detailed discussions with various stakeholders suggest that for the pilot project a product should be chosen that has relatively longer shelf life, quality standards are easy to certify, quantity to be handled can be monitored, appropriate warehousing facilities are available and above all commercial banks has the experience of extending credit against the selected commodity.
Keeping all the above stated factors in mind sugar can be picked as the first commodity to start WRF in Pakistan. The available data suggests that an elaborate and fully documented system is being followed in sugar trade. All the mills have reasonably reliable warehouses and sales are fully documented because of payment of GST.
Stock position is closely monitored by the commercial banks as these extend billions of rupees credit to the mills against hypothecation of stock. Mills submit daily stock reports to banks and physical stocks are checked with regular intervals to avoid any movement of stock without proper documentation.
Therefore, it may be said that since banks have been lending money against hypothecation of stock, sugar industry is a perfect test case to follow WRF system. The beauty of the system is that mills have long experience and expertise of collateral management and there may not be any need to induct additional collateral management company at this stage.
The added advantage is that Pakistan Mercantile Exchange (PMEX) is already working closely with some of the sugar mills to introduce trading of ‘mill specific deliverable sugar contracts’.
All the stakeholders have shown keen interest in participating in trading of sugar at PMEX. This on one hand will free the government from buying sugar through TCP in case of glut, and on the other hand, commercial banks will not be lending any additional funds.
Therefore, deliverable contracts can be changed into warehouse receipts and PMEX’s state-of-the-art technology based platform can be used for trading.
A closer coordination among the representatives of PMEX, sugar mills, apex regulators and commercial banks can lead to the commencement of trading of warehouse receipts in the shortest possible time.
Let one point be very clear to all the stakeholders that during the recently concluded sugarcane crushing season mills have produced over 5 million tons refined. The estimated value of the available stock is around Rs300 billion or US$3 billion based on international price of the commodity.
Mills have already acquired money from banks through hypothecation of stock and the amount involved can be confirmed from banks. The next move will be to convert these loans into warehouse receipt financing.
Once SECP approve these, trading of warehouse receipts can commence immediately as PMEX already has the required trading system in place.
One may say that according to my proposal the beneficiaries will be sugar mills and not the farmers. The perception has to be corrected because the ultimate beneficiary will be sugarcane growers as mills will be able to pay them off at a much faster pace. The added advantage is, they will not have to borrow from the informal sources and pay very high interest rate.

 

Sunday, 1 June 2014

Oil and Gas Production in Pakistan



Some of the quarters are adamant proving that there are low prospects of finding oil and gas in Pakistan, which is nothing but a gross distortion of the fact. The country has huge reserves, but either the companies have not been allowed to undertake exploration in ‘right’ areas or liquidity crunch is the prime reason for drilling fewer wells.  It may not be wrong to say that since independence ‘Oil and Gas Exploration Policy’ of the (GoP) has remained subservient to super powers. Even after more than six and half decades subdued drilling activities are mainly due to inadequate allocation of funds and ‘political’ unrest in major oil producing areas, Baluchistan and Khyber-Pakthunkhwa provinces.
Major oil and gas exploration and production companies operating in Pakistan are Oil& Gas Development Company, Pakistan Petroleum, Pakistan Oilfield, Mari Petroleum and OMV Pakistan. All these companies have an enviable success record as these have hit oil or gas from every exploratory well drilled, the quantities may not be very high.
For details visit shkazmik.com
  

Sunday, 25 May 2014

Pakistan embarks upon Warehouse Receipt Financing plan




Pakistan is among the top producers of cotton, sugarcane and food grains, i.e. wheat, rice and maize. However, significantly large quantities of food grains and even larger percentage of fruits produced goes stale before reaching the market. This on one hand deprives growers of their rightful return and on the other hand does not allow the country to earn foreign exchange, needed most desperately for the economic growth.
In an attempt to help the farmers boost production and yield, State Bank of Pakistan (SBP) has embarked upon an ambitious lending program for farmers. Now the annual disbursement to farmers is inching close to Rs400 billion (US$ four billion). The endeavor is fully supported by insurance companies operating in the country.

This initiative has helped Pakistan in joining the club of wheat exporting countries. At the close of the current sugarcane crushing season, refined sugar output is likely to exceed 4.7 million tons with an exportable surplus of over half a million tons. The country is also likely to get nearly 13.5 million bales of cotton. Pakistan is already exporting huge quantity of rice, especially ‘Basmati’.

To further facilitate the growers, SBP has embarked upon Warehouse Receipt Financing (WRF). In this regard a framework has been prepared and various meetings of the stakeholders have been held. The central bank considers that development of WRF is inevitable for achieving food security, improving return to farmers, and above all saving the output that goes stale before reaching the market. This requires millions of dollars investment for the construction of well organized warehousing infrastructure, imposition of stringent grading standards and ensuring proper collateral management.

In this venture, apart from the central bank and commercial banks (both conventional and Islamic), the other key stakeholders include Securities and Exchange Commission of Pakistan (SECP), federal and provincial governments, Pakistan Mercantile Exchange (PMEX), insurance companies, warehouse operators, collateral managers and farmers’ association. However, it remains a fact that unless modern warehouses are constructed in the country, this dream is not likely to become a reality.

While some of the ambitious planners believe that the entire infrastructure can be created within short span of time, others still have serious reservations, from availability of funds to construction of warehouses. It also requires  building confidence of all the stakeholders, particularly farmers, banks and insurance companies. The most encouraging point is that multilateral lenders have expressed their fullest support for the initiative. Therefore, it is necessary to understand the rationale and the proposed steps to be followed.

To begin with, one must have the correct information about production numbers and storage facilities. Pakistan produces nearly 40 million tons of different cereals annually, out of this wheat alone account for more than 25 million tons. As against this, there exists warehousing capacity of around 5 million tons. Storing grains in ‘technically unsuitable warehouses’ is the single largest reason for substantial quantities going stale or not being suitable for human consumption. As per various conservative estimates the losses to grains are between 15-20 percent and for horticulture (fruit and vegetables) is more than 25 percent. The province wise losses for grains at harvesting and in the supply chain were estimated in a study conducted by University of Faisalabad which elaborates as under:

Grain losses in storage

Province
Aggregate Loss
Threshing
Farm level
Market level
Public Sector
Consumer level
Punjab
13.8%
1.9%
1.5%
7.3%
5.5%
6.5%
Sind
15.7%
1.7%
1.3%
6.9%
6.2%
8.6%
NWFP
14.7%
1.5%
2.7%
3.4%
3.6%
8.5%
Balochistan
15.6%
1.5%
1.7%
4.6%
5.2%
7.1%
Pakistan
15.3%
1.6%
1.5%
7.8%
6.5%
8.0%

Source : Iqrar A. Khan. 2007. Vice-Chancellor, University of Agriculture, Faisalabad

There is potential for loss throughout the grain harvesting and agricultural marketing chains. For example:

  • During stripping of maize grain from the cob, known as shelling, losses can occur when mechanical shelling is not followed up by hand-stripping of the grains that are missed. Improper shelling damages the grain and make insect penetration easier.
  • For crops other than maize, threshing losses occur as a result of spillage, incomplete removal of the grain or by damage to grain during the threshing.
  • Losses also occur after threshing due to poor separation of grain from the chaff during cleaning or winnowing.
  • A wet season's paddy harvest may clog the screens and grain will be lost.
  • Wind, either natural or from passing vehicles in the case of road drying, can blow grain away. With high moisture content, grain is susceptible to mould, heating, discoloration and a variety of chemical changes.
  • Losses in stored grain are determined by the interaction between the grain, the storage environment and a variety of organisms.
  • In general, grain is not infested by insects below 17 °C whereas mite infestations can occur between 3 and 30 °C and above 12% moisture content. The metabolic activity of insects and mites causes an increase in both the moisture content and temperature of infested grain.

There might be various reasons like high cost of infrastructure, running expenses of storage facilities, adoption of technical know how. However, the major reason is the involvement of a number of players that include farmers, warehouse operators, federal and provincial governments, regulators, commodity exchange, banks, collateral managers and lack of a common platform. Therefore, to fill the gap, SBP has initiated to make available the common platform for all the stakeholders.

Despite the fact the SBP launched a subsidized financing scheme for construction of warehouses, silos and cold storages for storing agricultural produce couple of years ago, efforts have  remained focused on cold storages. This shows that the cost of financing is not an issue, but the main reason is putting in place a mechanism, from production to consumption to adopt the system.

The central bank wants to involve business community and financial institutions, including Islamic banks to realize the business viability and an opportunity to participate in a profitable business and at the same time contribute to a crucial sector in food security. Establishment of the system will enable the business community to unlock its assets to the investment, thorough Warehouse Receipts that provide the convenience of trade, endorse/exchange, finance and sell in local and international markets. This will also save the huge losses, if controlled can feed 10 million people.  In addition, this will facilitate in addressing the issue of access to finance for the farmers through warehouse receipts.

In line with international best practices like Brazil, USA, South Africa and Bulgaria, a centralized collateral manager can be made responsible for accreditation, inspection and monitoring of warehouses. The central bank intends to start a pilot scheme through one of the renowned international collateral managers  ACE Global Depository involved in this business for a very long time. Reportedly, ACE has established its office in Pakistan and also agreed to bring in its expertise and international storage standards to Pakistan. It has also a global Professional Indemnity Assurance.

Besides Professional Indemnity Assurance, SBP is also facilitating linkages between local insurance companies and collateral management companies to develop insurance products to deal with situations not covered under the Professional Indemnity Assurance. This will provide comfort to the depositor that they are secured from losses in storage. Once the WHR system is expanded, other collateral and warehouse managers will be interested to play an active role in Pakistan. Experts envisage a healthy competition in this area after the idea takes off on a full fledged basis.

Recently, Saeed Ahmad, Deputy Governor SBP chaired a meeting on the formulation of the group. Talking to the representatives of different stakeholders, he said “Adoption of a warehouse receipt financing system would facilitate development of efficient and accessible rural financial system. Development of physical trade and marketing system of commodities would improve performance of the agricultural sector. Financial institutions would find it profitable to lend money for the construction of new warehouses”.

This initiative offers tremendous opportunities to the companies involved in this trade around the globe. These entities can form joint ventures with Pakistani entrepreneurs by involving IFC; mobilize funds globally or by listing the companies at the local stock exchanges. Central bank already has a plan for extending soft-term loans for the construction of warehouses. Those interested in the construction of warehouses can also approach Pakistani banks enjoying a significantly large share in lending to farmers for inputs and developmental work.