DUBAI Nov 21 Pakistan's central bank has issued
new rules for Islamic bank deposits backed by asset pools using
mudaraba, a form of investment partnership that is common in
The pools will have to maintain at least 20 percent of their
assets in liquid securities, though this level can be reduced to
10 percent with the approval of sharia scholars. The rules allow
banks to aggregate pools to help them manage liquidity in the
short-term money market.
Under mudaraba, assets are managed by a bank on behalf of
clients, with income and expenses shared under a pre-agreed
ratio. The rules stipulate this ratio cannot be reduced during
the deposit's tenor.
The equity-like nature of mudaraba accounts can make them
vulnerable to market price swings, so the rules allow the
smoothing of profits using a profit equalisation reserve.
Banks will also be required to set up an investment risk
reserve (IRR) which they can use to offset losses from future
investments. They can develop their own models to determine the
size of the IRR; if they have no model, banks have to contribute
up to 1 percent of available profit to the IRR.
Through a series of reforms, Pakistan's regulators aim to
lift Islamic finance's share of its banking sector to 15 percent
in the next five years. Islamic banks held 8.2 percent of total
banking assets and 8.9 percent of deposits in June this year,
central bank data showed.
The new rules are among the most comprehensive issued by any
central bank in this area, said Omar Mustafa Ansari,
Karachi-based partner at Ernst & Young Ford Rhodes Sidat Hyder.
"Sharia advisors and scholars are generally praising these
instructions as a step forward."
Market players, however, may not see it that way.
"The industry is not so happy on this move. They feel that
these are too strict guidelines and (the central bank) is trying
to get smarter as compared to other regulators and supervisors,"
said Ansari, adding that his comments were his personal views
and not those of any company or institution.
If Islamic banks follow the instructions in their essence,
they will face initial difficulties but the banking system will
become more sharia-compliant and risk-averse, Ansari added.
In addition, the Institute of Chartered Accountants of
Pakistan is finalising a standard which would add further
accounting and disclosure requirements, he said.
A June report by the central bank raised concerns about the
sustainability of Islamic banks' profitability, which has grown
since 2010, since the increase in profits has been driven
primarily by investments rather than basic banking business.
(Editing by Andrew Torchia)