KARACHI: Share prices of Islamic banks took a beating on Monday, thanks to Finance Minister Dr Shamshad Akhtar’s recent statement that customers are getting short-changed by Sharia-compliant lenders by way of insufficient returns on deposits.

Speaking to a TV host, Dr Akhtar said the State Bank of Pakistan (SBP) should review the issue of minimum deposit rate (MDR) — a provision that Islamic banks are currently exempted from.

With every new finance minister in Islamabad comes a fresh wave of measures aimed at shifting money from the bottom lines of banks to the national exchequer. But for the first time in many years, there’s a proposal on the cards that, if adopted, will transfer money from (Islamic) banks to customers.

Back in 2008 when the current finance minister held the position of SBP governor, the regulator directed banks, including Islamic ones, to pay minimum profit rates on savings accounts. Even though Islamic banks were exempted from the provision in subsequent years, conventional banks are still required to pay a certain rate on all savings accounts.

The MDR is 150 basis points less than the prevailing benchmark interest rate. In other words, every conventional bank is bound to pay an interest rate of 20.5 per cent to its savings account holders as long as the key interest rate remains 22pc.

According to Arif Habib Ltd analyst Sana Tawfik, Islamic banks have been exempted from this requirement to promote Sharia-compliant banking in the country.

Among the three full-fledged Islamic banks listed on the Pakistan Stock Exchange (PSX), the proportion of savings deposits in their total deposits stood at 40pc for Meezan Bank Ltd, 42pc for Faysal Bank Ltd and 25pc for BankIslami Pakistan Ltd at the end of the September quarter, according to Ms Tawfik.

A sensitivity analysis conducted by her brokerage showed that a 1pc increase in the cost of savings deposits will reduce the earnings per share of Meezan Bank Ltd by Rs2.27, Faysal Bank Ltd by Rs1.35 and BankIslami Pakistan Ltd by Rs0.53.

A research report written by JS Global Head of Research Amreen Soorani stated that Islamic banks are currently offering savings rates that are between seven and 9.5 percentage points lower than the MDR offered by conventional banks.

“The recent sharp rise in interest rates has widened the said spread, which used to range between 300-500 basis points previously,” she said.

However, a lender like Meezan Bank Ltd with an outsize market share within the Islamic banking industry is expected to successfully counter the negative impact of the MDR for a host of reasons, she said.

For instance, it’ll be able to mobilise higher deposits by offering the same returns that are being offered by its conventional peers. “This would likely boost the volumetric growth of the bank’s deposit base,” she said.

Published in Dawn, November 28th, 2023