SBP seeks transparency in Islamic banking

Amanullah Khan

SBP seeks transparency in Islamic banking Tuesday, November 20, 2012 - KarachióAll the Islamic Banks are advised to maintain transparency in Profit & Loss Distribution and Pool Management in order to improve standardization in Islamic Banking Institutionís (IBIsí) profit and loss distribution policies and practices.

The State Bank of Pakistan has issued these instructions to the IBI, which are applicable with immediate effect.

Failure to comply with SBP instructions shall invoke penal action under the provisions of Banking Companies Ordinance, conveyed to the Presidents/Chief Executives of all Islamic banks and all conventional banks having Islamic banking branches today.

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 depositorsí 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.

Under the 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 depositorsí funds.

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 allocating different types of deposits to different pools, 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).

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