BAIMUAJJAL OF SUKUK

MARCH, 2014

ISLAMIC BANKING DIVISION

SINDH BANK LIMITED – HEAD OFFICE

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 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

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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

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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 1st 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.

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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: 01-Jan-2014

To: 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)

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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)

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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.

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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.

SINDH BANK LIMITED

INTER OFFICE MEMO

Date: 1st January 2014

To: Islamic Banking Division / Shariah Advisor

From: 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 HBL
buy the Sukuk from in the 1st Leg AlBarakah Islamic
Price at which each Sukuk Certificate may be PKR 100,090
purchased -Price as per Market Practice in %age
terms 100.0900
SNDBL’s Internal Average Holding Cost of the PKR 100,110
Sukuk -As per Market Practice in %age terms
after the purchase at above proposed price 100.1100
Quantity of the Sukuk Certificates to be used in 20,000
the Transaction with each Certificate having a Face
Value of PKR 100,000
Financing Amount as per SNDBL’s Internal Average PKR 2,002,200,000
Holding Cost of the Sukuk
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

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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

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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

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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.

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