Government Investment Certificates (GIC):

4.5 Government Investment Certificates (GIC):

Government Investment Certificates (GIC) are new instruments that has been introduced since 2003. Learning from experiments with earlier instruments CMC and GMC as well as changed economic needs are behind the development of this new instrument. Major Differences between Government Musharakah Certificate (GMC) and Government Investment Certificate (GIC) are:

GMC

GIC

1. Purpose of GMCs Purpose of GICs is to finance trade, was to finance procurement, and development projects of the government budget government. deficit.

2. Based on Based on partnership for financing of the state Musharakah in the owned enterprise through ijarah, murabaha, (set of) state owned and istisna[. With ijarah having a dominant enterprises.

portion in the contract pool.

3. Holders of GMCs The SFSC is a mudarib for GIC holders in a become owner of restricted mudarabah which allows it to deal the assets in only in government assets and projects. proportion to their investments.

The SFSC becomes owner of the specific assets which it procures from the market or get them manufactured before it sells them on murabaha or rents them out (as the case may be); while it works as mudarib for the GICs holders. Therefore, GIC holders as rabb al- mal have undivided ownership in the business (or asset and contract pool) of the SFSC but not in the specific assets.

4. Bullet payment of Stream of profits paid at regular intervals principal and profit (semi annually). Profit sharing ratio 95% for at maturity.

GIC holders (rabb al-mal) and 5% for SFSC (the mudarib).

5. Tradable in the Redeemable only on maturity at the then secondary market assessed market value of the asset pool. In (from immediately between GIC is tradable in the secondary after issuance).

market (after transformation of proceeds into real assets).

6. Short-term maturity Maturity of larger range from few months to ranging from 6 to 12 several years. months.

7. Large denomination Small denomination 10,000SD minimum.

50,000SD minimum.

8. Foreigners cannot Foreigners can invest. invest

Why government is replacing GMC with GIC?

1. The government budget deficit has narrowed since last few years due to multiple factors such as: rise in tax revenue, increase in government income through rise in oil prices, increased remittances and financial inflows after 9/11. These factors not only decreased government deficit but also increased the availability of hard currency. Therefore government does not have a pressing need to raise funds to finance budget deficit.

2. GMC were more costly for the government due to their short maturity and bullet payment structure of the principal and the profit. While at the same time the proceeds from sale of GMC were not necessarily generating

income as it were used for financing of current expenditures of the

government. Where as the GIC are of longer maturity and payment structure is such that the government has to worry only about periodic profit payment in short-term. And in the long-run the investment allocations in development and construction have positive economic effects.

3. Government faced difficulty in using GMC as a monetary policy instrument because of constrained supply of certificates due to limited asset base against which these could be issued. Moreover, the rate of return is known ex post. While conduct of monetary policy requires ex ante knowledge of rate of return.

4.5.1 Structure of Government Investment Certificates (GIC):

There are three parties to the contract:

1. Investors or certificate holders who are the rabb al-mal

2. Sudan Financial Services Company (SFSC) which acts as mudarib (agent). It is an investment company.

3. The Ministry of Finance of the Government of Sudan which is the users of finance.