The State Bank of Pakistan on Monday issued detailed instructions for profit and loss distribution and pool management in the Islamic Banking Institutions (IBIs). The central bank said the regulatory move was aimed at improving transparency and disclosures and bringing standardization in the Sharia-complaint banks’ profit and loss distribution policies and practices.With the issuance of these instructions that, the State Bank of Pakistan (SBP) said, are applicable with immediate effect Para IV of annexure-II of IBD Circular No. 2 of 2008 stands withdrawn. Further, it said, the provisions of BPRD Circular No. 7 of 2008 regarding minimum rate of return on savings deposits as amended from time to time shall no more be applicable on the IBIs. “Failure to comply with SBP instructions shall invoke penal action under the provisions of Banking Companies Ordinance, 1962,” the SBP said in its IBD Circular No.3 issued to the heads of all Islamic banks and all conventional banks, having Islamic banking branches on Monday. It may be pointed out that the peculiar nature of relationship between the depositors and IBIs, where income earned by the IBIs has a direct impact on depositors’ return, there was a need for Islamic banking industry to have well defined, transparent and standardized policies and practices for profit and loss computation and distribution. As per SBP 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 depositors’ funds. The central bank’s other regulatory changes cover areas like the creation of pools, identification and allocation of pool related income and expenses, investment and financing losses, profit and loss allocation between depositors’ fund and IBI’s equity, profit sharing ratio and weightages, profit smoothening, Investment Risk Reserve (IRR), verification/audit and disclosures.
