The State Bank of Pakistan (SBP) has decided that Islamic Banking Institutions (IBIs) shall pay profit on their PKR saving deposits (excluding deposits of financial institutions, public sector enterprises, and public limited companies) equivalent to at least 75 percent of the weighted average gross yield of all pools of an IBI.
This will have a positive impact on Banks’ earnings on average by 7 percent on a 50bps reduction in deposit cost. This is our initial understanding, and we await further clarity on this from the banks, Topline Securities said in a report.
To determine the gross yield of each pool, the monthly gross earnings of the pool shall be divided by the monthly average assets of the pool (excluding fixed assets). However, the pool(s) created by IBIs for Shariah-compliant standing ceiling facilities and Shariah-compliant open market operations (OMOs) will be excluded while calculating the weighted average gross yield of pool(s).
Accordingly, the following revisions have been made in the “Instructions for Profit & Loss Distribution and Pool Management for IBIs” issued vide IBD Circular No. 03 dated November 19, 201,2 and IBD Circular Letter No. 01 dated January 01, 2013:
- Clause 4.2.3 shall stand deleted.
- Clause 5.2.1 shall be replaced with “IBI may forego a part of its Mudarib share as hiba to meet the market expectation in case of lower than expected/market returns earned by the pool. However, IBIs maintaining PER will reduce their Mudarib share only if the PER is insufficient to improve the profit payouts to the depositors.”
- Clause 5.2.2 shall be replaced with “If needed, IBIs may give hiba to saving account depositors to meet the requirement of minimum profit rate.”
These instructions shall be effective from January 01, 2025.
A senior central bank official told ProPakistani,
Tough but good if long-term. It could align deposit returns with the simple principles of Islamic banking. Depositors will be able to receive a proportionate share of the profits generated by the bank’s Shariah-compliant financing activities. Many at SBP would agree that by offering a higher profit-sharing ratio of 75%, Islamic banks can enhance their appeal to savers and increase deposit inflows. More cash holders would start shifting their deposits to Islamic banks. This is good news for everyone.
He further said, “Also, a higher profit payout encourages savings and brings conventional and Islamic banking systems on equal terms. However, it is SBP’s job to monitor the operational efficiency of this as Islamic banks may seek alternate business ventures to offset the profit payout”.
Is this good?
In the case of Meezan Bank, the existing annualized gross yield on assets (net of fixed assets) is 15.2 percent, and based on the report, 75 percent of 15.2 percent ie. 11.4 percent has to be paid.
However, the current weighted average cost of the deposit of the bank is 6.1 percent and adjusted for current accounts, the cost of the deposit is 13.1 percent. On the surface, it seems like Meezan is already paying more than the minimum required of 11.4 percent (i.e. 13.1 percent) to depositors.
Based on the Meezan bank website, the bank paid depositors a return of 2.4-13.09 percent. As per a few branch managers, the majority of the savings deposits are tied in a 7.5 percent yielding Meezan Bachat tier II account. Assuming the average of 9-10 percent being paid to retail accounts, the bank will be required to pay an additional 1.5-2.5 percent to their retail deposit holders of Rs933bn.
Our initial analysis is that this will have a pre-tax impact of Rs. 15-20 billion and an after-tax impact of Rs. 7.5- 10 billion on Meezan’s profit. This translates into a per share impact of Rs. 4-6 per share which is 8-11 percent. Today Meezan’s share is down 10 percent already (intra-day down 15% from peak).
How can any ‘fixed’ figure be Islamic?