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SBP issues rules for mudaraba-based Islamic deposits

November 21, 2012

Through a series of reforms, Pakistan’s regulators aim to lift Islamic finance’s share of its banking sector to 15 per cent in the next five years.—File Photo

DUBAI: 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 Islamic finance.

The pools will have to maintain at least 20 per cent of their assets in liquid securities, though this level can be reduced to 10 per cent 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 per cent 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 per cent in the next five years. Islamic banks held 8.2 per cent of total banking assets and 8.9 per cent 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.