Profit and loss distribution and pooi management framework for IBIs in Pakistan : progress, issues and implications

Abstract EN

Pakistan is among the three countries that opted for economy-wide transformation to Islamic financial system in 1980s, the other two being Iran and Sudan.

But the ‘non-interest based’ banking system introduced in mid-eighties was declared un-Islamic by the ‘Federal Shariat Court’ because the same was largely based on ‘buy-back’ (bai‘al-‘Inah) and sale of debt instruments (bai‘ al-dayn).

In the new system introduced since December 2002, Islamic banking institutions (IBIs) operating in parallel with the conventional banks are using mudarabah as the major mode to raise investment deposits from individuals as also the corporate sector.

But based on the assumption that depositors’ risk tolerance level is close to zero, they have been giving profit to the investment depositors comparable with their conventional counterparts by way of discretionary hibah without proper disclosure.

The rules of mudàrabah were not being followed in letter and spirit.

The main issue was to give arbitrary gifts to priority depositors.

The State Bank of Pakistan recently issued a comprehensive profit distribution and pool management framework in order to improve transparency and bring standardization in the IBIs’ practices while taking care for stability of the system.

This paper analyses the new framework and finds that the SBP has taken a step in right direction to replace the indiscriminate use of hibah with a well thought-out profit distribution and allocation procedure along with provisions for specific reserves necessary for sustainability of the system.