SBP makes key revisions to Minimum Profit Rate requirements, Islamic banking guidelines

In a major development for the banking sector, the State Bank of Pakistan (SBP) on Tuesday announced that the Minimum Profit Rate (MPR) requirement will no longer apply to financial institutions, public sector enterprises and public limited companies.

Moreover, the central bank has directed Islamic Banking Institutions (IBIs) to pay at least 75% of the weighted average gross yield from their investment pools as profit on PKR savings deposits.

As per a circular issued by the SBP, the MPR requirement specified vide BPRD Circular No. 05 of 2014 dated May 27, 2014 and BPRD Circular No. 07 of 2013 dated September 27, 2013 “shall not be applicable on the deposits of financial institutions, public sector enterprises and public limited companies.”

Previously, banks were required to pay an MPR on all Pak Rupee Saving Deposits equivalent to 50 basis points below the prevailing SBP Repo Rate (Interest Rate Corridor - Floor).

Meanwhile, experts have termed the changes a positive development for the banking industry.

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“The measure is overall positive development for the banking sector,” Sana Tawfik, Head of Research at Arif Habib Limited (AHL), told Business Recorder. “This will help commercial banks reduce the cost of deposits,” she added.

Sunny Kumar of Topline Securities noted that the measure will benefit banks with a higher mix of corporate deposits, as they are no longer required to pay any MDR.

“Banks will now pay negotiated rates to corporates,” Kumar said in a note.

In a separate circular, Pakistan’s central bank has also introduced revisions to the profit distribution framework for IBIs.

The SBP has decided that IBIs “shall pay profit on their PKR saving deposits (excluding deposits of financial institutions, public sector enterprises and public limited companies) equivalent to at least 75% of the weighted average gross yield of all pools of an IBI”.

“For the purpose of determining the gross yield of each pool, the monthly gross earnings of the pool shall be divided by the monthly average assets of the pool (excluding fixed assets).

“However, the pool(s) created by IBIs for Shariah-compliant standing ceiling facility and Shariah-compliant open market operations (OMOs) will be excluded while calculating the weighted average gross yield of pool(s),” read the central bank’s circular.

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The SBP announced revisions in the “Instructions for Profit & Loss Distribution and Pool Management for IBIs” issued vide IBD Circular No. 03 dated November 19, 2012 and IBD Circular Letter No. 01 dated January 01, 2013.

It stated that “Clause 4.2.3 shall stand deleted.

“Clause 5.2.1 shall be replaced with “IBI may forego a part of its Mudarib share as hiba to meet the market expectation in case of lower than expected/market returns earned by the pool. However, IBIs maintaining PER will reduce their Mudarib share only if the PER is insufficient to improve the profit payouts to the depositors.”

Moreover, “Clause 5.2.2 shall be replaced with “If needed, IBIs may give hiba to saving account depositors to meet the requirement of minimum profit rate.”

SBP said the instructions shall be effective from January 01, 2025.