Islamic banks in Pakistan anxiously wait for standardized framework
30 Nov 2012 08:44 GMT
 
Karachi: A standardized framework on distribution of profit and pool management mechanism for the Islamic banking institutions in Pakistan is being anxiously awaited so that the procedure of financial reporting and general disclosure could be streamlined. By Farhan Iqbal

Karachi: A standardized framework on distribution of profit and pool management mechanism for the Islamic banking institutions in Pakistan is being anxiously awaited so that the procedure of financial reporting and general disclosure could be streamlined.

The State Bank of Pakistan (SBP) authorities have reportedly said that the bank has developed a comprehensive profit distribution and pool management framework in consultation with the industry in order to improve transparency and bring standardization in the Islamic banking institutions’ practices regarding profit distribution and pool management.

Kazi Abdul Muktadir, Deputy Governor of the central bank, on an occasion in September had revealed that the framework will be issued soon most probably within the same month and will be instrumental in improving public confidence in Islamic banking, in general, and profit distribution policies and functioning of the Islamic banking institutions (IBIs), in particular.

He also said that the SBP in collaboration with the industry will also develop strategic plan for the industry for the next five years, 2013-17.

The strategic plan aims at making a detailed assessment of the earlier plan (2007-12), as well as the existing environment and will set the strategic direction for the industry, he added.

However, banking sources said, the framework has been upheld with the SBP and no development has so far been made on the working of the strategic plan.

Interestingly, the central bank in its recently issued Financial Stability Review, has not only admitted that the profit and loss computation and distribution policies of the Islamic banking institutions lack uniformity but hinted that the framework is likely to be introduced and enforced (before the year-end) during the second half of the current calendar year.

The SBP review also said that the Islamic banking institutions are contractually obliged to share profits and losses with the PLS depositors.

A representative of one of the leading full-fledged Islamic banks in Pakistan said that as the Islamic financial industry is in the developing phase, there is no formal policy by the central bank about the financial disclosure and sharing profit and losses information with the saving depositors.

“We have given our output in the form of recommendations on the issue to the authorities of the central bank and have been pushing it to issue clear instructions and framework on profit distribution method for the last few years but it has not been come out yet,” said a banker at an Islamic bank.

Banking sources said that all the Islamic banking institutions have uniformity in the product and they use Mudarabah for the distribution of profits. They have to be competitive with their conventional counterparts as regard the profit payment is concerned, they said.

They not only fix the profit sharing ratio in between respective IBI (Mudarib) and its depositors (Rabb-ul-Maal) but also assign appropriate sub-profit sharing ratios (weightages) to different depositors based on the amount and duration / tenure of deposits, to distribute profits, said sources.

However, to remain competitive in the market, the IBIs have to sacrifice their profit in favour of some of depositors to remove any heavy fluctuation in between the expected profit and the profit received by a depositor, based on profit sharing ratio and weightages.

Accordingly, the main problem is to how any such fluctuation is removed. Consequently, it is generally said that “IBI have different policies to distribute their profits.”

“Profit and loss allocation or pool management function of an Islamic bank is a key area where Islamic bank needs to focus its resources, said Muhammad Faisal Shaikh, Head of product and business development , BankIslami Limited.



-- Al Arabiya Digital


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