SBP releases directives for Islamic banking

Instructions pertain to distribution of profits and losses

Ppi November 20, 2012

KARACHI: The State Bank of Pakistan (SBP) has issued detailed instructions for profit and Loss distribution and pool management in Islamic banking institutions (IBIs) in order to improve transparency and disclosures and bring standardisation in IBIs’ profit and loss distribution policies and practices.

Failure to comply with SBP instructions shall invoke penal action, says a circular issued to the presidents and chief executives of all Islamic banks and conventional banks having Islamic banking branches today.

The SBP has said that there was a need for the Islamic banking industry to have well-defined, transparent and standardised policies profit and loss computation and distribution due to “the peculiar nature of the relationship between depositors and IBIs, where income earned by the IBI has a direct impact on depositors’ return.”

According to the SBP’s instructions, each pool of deposit established by IBIs will 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 a pool of deposits will be shared between IBIs and depositors as per a pre-agreed profit-sharing ratio.  In case of loss, the same will be borne by depositors in proportion of their investments, unless it has been caused by the negligence and misconduct of an IBI in managing depositors’ funds.

Published in The Express Tribune, November 20th, 2012.


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