The Presidents/Chief Executive Officers
All Islamic Banks/ Islamic Banking Branches of Conventional Banks

Dear Sirs/ Madams,

Shariah Compliant Mudarabah Based Open Market Operations -Injections (OMO-Injection)

In order to enhance monetary policy transmission and improve management of market liquidity, SBP has decided to introduce Shariah Compliant Mudarabah based Open Market Operations (OMO-Injections) for Islamic Banking Institutions, in exercise of the powers conferred under Section 18 of SBP Act 1956.

The Mudarabah based OMO-Injections will be conducted under the following structure and terms & conditions:

1. Eligible Institutions: All Islamic Banks (IBs), and Islamic Banking Branches (IBBs), hereinafter referred as Islamic Banking Institutions (IBIs), will be eligible to participate in SBP’s Shariah Compliant Mudarabah based OMO- Injections.
   
   
2. Tenor: SBP may conduct the OMO-Injections for tenors as announced by SBP.
   
   
3. Shariah Structure & Procedure of the Mudarabah transaction:
   
   1. SBP will provide financing to IBIs through the OMO-Injections via a multiple price competitive auction process.
   The transaction will be governed by the terms & conditions embodied in Master Mudarabah Financing Facility (MFF) Agreement attached as Annexure- A (to be signed one-time between SBP & respective IBI availing the facility).
   
   2. Under the transaction, SBP will be Rab-ul-Maal while successful bidders will be Mudarib, which subsequent to receipt of funds will invest the funds in their special pools (either newly created or existing special pool). The Special Pool will consist of High Quality Assets, as defined in MFF Agreement.
   
   3. Profit Sharing Ratio (PSR) will be set at the outset for profit distribution between Mudarib and Rab-ul-Maal.
   
   4. IBIs shall be required to maintain the record of the MFF and its special pool appropriately, for submission to SBP, as and when required, and for regular on-site inspection to check the accuracy of the returns earned on special pools.
   
   5. Shariah Compliance Department (SCD) of respective IBI will be responsible to verify Shariah compliance of each MFF transaction with SBP. On maturity date, SCD will submit Shariah compliance report of the transaction to its Resident Shariah Board Member.
   
   
4. Eligible Collateral:
   
   1. Eligible collateral shall include (i) Government of Pakistan Ijara Sukuk (GIS), (ii) obligations of GOP arising from Bai-Muajjal transactions (GOP Bai-Muajjal), (iii) Obligations of SBP arising from Bai-Muajjal transactions (SBP Bai-Muajjal); and (iv) any other Sharia Compliant SLR eligible security notified by SBP for the purpose, from time to time.
   
   2. The market value of collateral provided by IBI to SBP must be at least equivalent to sum of financing amount availed from SBP and the expected profit.
   
   3. The collateral provided by IBI shall be transferred to SBP account except in case of non-transferable security (such as Bai-Muajjal) for which lien will be marked in favor of SBP. Accordingly, the security/ instrument held as collateral will cease to be un-encumbered and will not be counted towards SLR of the IBIs, during the period of facility.
   
   4. SBP may also decide to apply haircut, if any, on the eligible collateral
   
   5. The securities classified by the eligible participants under Held to Maturity category cannot be used in OMOs.
   
   
5. OMO Announcement and Bids Submission Mechanism:
   
   1. SBP would announce the OMO-Injections (inviting financing requests from eligible participants) as and when deemed necessary according to the assessment of market conditions. OMO notice and OMO results would be published on SBPK pages on Refinitiv and Bloomberg.
   
   2. Eligible participants can submit their bids through:
   
   a. Refinitiv Dealing system using SBP’s dealing code “SBPD” ; and/or
   
   b. Using format attached at Annexure-B (via Fax/electronic mode etc. in case of unavailability of Refinitiv Dealing terminal for any reason). However, SBP will not accept any bid on telephone.
   
   3. An eligible participant can submit up to three bids in a single OMO tenor.
   
   4. The minimum Bid amount will be Rs. 100 million and multiples of Rs. 50 million thereof.
   
   5. Bids should include (i) face value of collateral; (ii) expected rate of return (% per annum up to two decimal places) on which IBI intends to borrow funds from SBP; and (iii) the financing amount which will be the market value of collateral after deducting amount of expected return and haircut, if any.
   
   6. The participants are advised to strictly observe the cut-off time for submission of bids in the OMO. Any bid submitted after the cut-off time will not be entertained by SBP.
   
   
6. Pricing Mechanism:
   
   1. OMOs will be based on multiple price competitive auction process, where successful bidders in the auction will be provided financing on their respective quoted expected rate of return.
   
   2. SBP would decide the cut-off rate i.e. expected rate at and/or above which SBP would place its funds with successful bidders. (SBP reserves the right to reject all or any of the bids without assigning any reason in the OMOs).
   
   3. PKISRV rates published on the last working day will be used to calculate the market value of marketable GOP securities placed as collateral by the successful bidder with the SBP. For Bai-Muajjal, the value will be equivalent to sum of first price (Sukuk price at the time of sale) plus profit to the extent accrued.
   
   4. If any Mudarabah transaction under the OMO-Injections is maturing on a public/bank holiday then maturity of such transaction will be extended to the next business day and actual return calculation will incorporate this extended period. The expected rate of return will remain the same for extended period as used in original contract.
   
   5. SBP will have the discretion to accept bids submitted in the OMO-Injections on a ‘pro-rata’ volume basis if the amount of bids submitted at the cut-off rate in a particular tenor is more than the amount required by SBP.
   
   6. In case SBP decides to accept bids on a pro-rata volume basis, participants will be allocated an amount equivalent to their proportion in the total bids submitted at the given cut-off rate. Amounts allocated to the participants on pro-rata volume basis will be rounded off to the nearest Rs. 50 million (face value) subject to minimum of Rs. 100 million.
   
   7. An example to illustrate the procedure for acceptance of bids on pro-rata volume basis is provided in Annexure-C.
   
   
7. Submission of OMO contracts:
   
   1. After confirmation of deal details with DMMD, successful bidders will provide Mudarabah Deal Confirmation (as per format attached as Annexure- D), (via Data Acquisition Portal -DAP), duly signed by the authorized signatories, to Chief Manager, SBP (BSC) Karachi Office.
   
   2. After getting deal confirmation from IBI, the funds will be transferred to IBI’s current account at SBP with simultaneous transfer of the collateral to SBP account, except in case of non-transferable security such as Bai-Muajjal for which lien will be marked in favor of SBP.
   
   
8. Settlement of OMO Injection transaction on maturity
   
   1. On settlement/maturity date of each financing transaction under the OMO-Injections, SBP will debit the current account of the IBI maintained with SBP to recover the amount of financing and the profit (as per the expected rate), and release collateralized/ pledged/lien marked securities.
   
   2. On maturity of the MFF transaction; the IBI will liquidate the pool and shall determine SBP’s share of profit in accordance with Profit Sharing Ratio (as per Mudarabah deal confirmation) in respect of each financing transaction, and intimate the actual profit (amount and rate) to SBP (BSC-KO). Any adjustments required will be made, in case of any difference between the actual profit and expected profit.

Enclosed:

Annexure A – Master Mudarabah Financing Facility (MFF) Agreement
Annexure B – Financing Request Format
Annexure C – Illustration of Acceptance of Bids on Pro-Rata Volume Basis
Annexure D – Mudarabah Deal Confirmation Letter