SBP di­rects Is­lamic bank­ing in­dus­try to fol­low stan­dard­ised prac­tices

The Pak Banker - - Front Page - Staff Re­porter


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.

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