SBP directs Islamic banking industry to follow standardised practices
The State Bank of Pakistan (SBP) has issued detailed instructions for Profit & Loss Distribution and Pool Management in Islamic Banking Institutions (IBIs) in order to improve transparency and disclosures and bring standardization in IBIs’ profit and loss distribution policies and practices.
With the issuance of these instructions, which are applicable with immediate effect, Para IV of annexure-II of IBD Circular No. 2 of 2008 stands withdrawn. Further, the provisions of BPRD Circular No. 7 of 2008 regarding minimum rate of return on savings deposits as amended from time to time shall no more be applicable on Islamic Banking Institutions.
Failure to comply with SBP instructions shall invoke penal action under the provisions of Banking Companies Ordinance, 1962, says a circular issued to the Presidents/Chief Executives of all Islamic banks and all conventional banks having Islamic banking branches on Monday.
It may be pointed out that the peculiar nature of relationship between the depositors and Islamic banking institutions (IBIs) where income earned by the IBI has a direct impact on depositors’ return; there was a need for Islamic banking industry to have well defined, transparent and standardized policies and practices for profit & loss computation and distribution.
As per SBP instructions, each pool of deposit established by IBIs would act like a virtual enterprise having explicitly demarcated sources of funds, ownership of specific assets and income and expenses. The profit earned on the financing and investments made through such pool of deposits will be shared between IBIs and the depositors as per pre-agreed profit sharing ratio. In case of loss, the same will be borne by the depositors in proportion of their investments unless caused by the negligence and misconduct by the IBIs in managing the depositors’ funds.
SBP’s detailed instructions for Profit & Loss distribution are as under:
Creation of Pools: IBIs shall have a well-defined profit and loss distribution and pool management framework for creation of one or more pools of assets to be financed by different types of Mudaraba-based (individual, corporate or financial institutions) deposits. The framework shall interalia specify the objectives, investment strategy, and risk characteristics of each pool. It shall also explicitly define the basis for (i) allocating different types of deposits to different pools (ii) assigning weightages to each deposit category of a particular pool. The framework shall be approved by the Shariah Advisor and Board of Directors (BOD) of the IBI and a duly approved copy of the same shall be submitted to Islamic Banking Department, SBP within three months of issuance of these instructions. Further, changes (if any), warranted in the framework shall also be approved by Shariah Advisor and BOD under intimation to SBP within 15 days of such change(s). All the pools to be created by the IBI shall be in conformity with the aforementioned framework and shall be created through a memorandum signed by the authorized senior executive to be defined in the framework documenting the objectives, investment startegy.