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I S L A MI C FIN A N CE IN D US T RY N E WS L ETT E R V O L UM E 3 IS S U E 1 1 DE C EM BE R 2 0 12
State Bank of Pakistan (SBP) has recently issued the instructions for Profit and Loss Distribution and Pool Management for Islamic banking institutions in November 2012
Comments on the instructions by industry expert Mr. Omar Mustafa Ansari
These instructions on Shariah compliance for profit and loss distribution policies are actually a step forward towards an improved, more compliant with Shariah and near to ideal system of Islamic finance. Profit and loss sharing is an area which is very much neglected by Islamic financial institutions throughout the world. Till very recent, proper guidelines and standards were also not available on this area. SBP had started this initiative a few years back and certain studies, surveys and training sessions were conducted by SBP. This process took some time, but however, the document that came out is a very good document of its kind and probably can be termed as the only comprehensive guidelines on this area issued by any central bank. SBP needs to be praised for this initiative. These instructions have been developed taking into consideration the Shariah requirements, as well as the risk management requirements including clues taken from the IFSBs standards. While no such regulations can even be termed as perfect, yet these cater to the most of the Shariah compliance and risk management issues that these IBIs are facing. It can generally be concluded that if an IBI follows these instructions in their essence, it will have to face some difficulties in the initial periods but the new system would evolve as a more Shariah compliant and more risk averse system of profit and loss sharing with depositors. Coming on the views from the industry, which particularly were echoed during the time when the draft was under discussion at various forums; it can be noted that the industry is not-so-happy on this move. They feel that these are too strict guidelines and SBP is trying to get smarter (and difficult, as well) as compared to other regulators and supervisors. However, the Shariah Advisors and scholars are generally praising these instructions as a step forward. The effects of these instructions will inter-alia include improved internal controls and mechanism of pool creation, asset transfers and earmarking, reduced reliance on ( as well as permissibility of) Hiba, reduced difference between haves and have-nots by having controls over the weightages assigned and transfer of assets from one pool to another. IBIs will be required to maintain appropriate accounting records for each of the pools and shall maintain Profit Equalization Reserve (PER) and Investment Risk Reserve (IRR) for improved risk management and decreased reliance on Hiba. As in past, a verification by the Shariah Advisor, as well as, the auditors will be required to validate the workings. This is important to note that at the same time the Islamic Financial Accounting Standards (IFAS) 3 on the same subject is being finalized at ICAP, and once it is approved by ICAPs council and notified by SECP, this will add relevant accounting and disclosure requirements. Their combined effect is expected to improve the overall system in many ways.
Ayat of the Month Wealth and children are the embellishment of the worldly life, and the everlasting virtues are better with your Lord, both in rewards and in creating good hopes. [Al-Kahf: 46]
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Editorial
LIBOR rigging is, now a days, appeared to be the most burning issue in the financial markets all over the globe. It was revealed just few months ago that some leading European banks, including Barclays, had been understating their offered rate for inter bank transactions during 2005-07. This was followed by investigations which led to the penal action and resignation of Barclays CEO Bob Diamond. The stability and integrity of European financial market is shaken by this catastrophic jolt. The funds and players in the derivatives market are still in shock by knowing that they had been paying more than what they were suppose to and that they paid more, for hedging lesser risks. I am not intending to highlight the issue of LIBOR rigging, rather here I want to drag the attention of readers towards the spider-web nature of conventional banking system which, truly, seems to be a paradox by first sight but weakest of all in real. This banking system is called the backbone of any economy. The conventional banking system represents an economy where rich is called rich for the numbers stored in a computer of bank under his name. Despite knowing the fact that this water-bubble banking system is like the water which is only clear from its surface and can turn grimy if touched in bottom, real asset markets linked their financial decisions with the preferences of non-real asset market. If someone argues that this was a fault of few people not the system as a whole, my reply is that this was an inevitable event which is a minor part of consequences of conventional economic system, and if we persist on it, we should wait for more. Dick Bove, a well known financial analyst, concludes his analysis on this issue by saying: This problem is not one that will disappear instantly. Not only it is required to discover who else is involved in this scandal, but a whole new system must be developed for pricing loans that is not dependent on bank inputs. This will take time. In the interim, who can believe the rates in the loan markets? The need of real asset-backed banking system is being realized globally. The time for Islamic banks has now come to surface to make the world financial intellectuals believe that the only salvation lies beneath the adoption and promotion if Islamic banking system as the stand alone banking system. But first we are needed to bring ourselves out of the influence of conventional banking system and dig out the solutions from our own earth.
Advisory Board
Mufti Irshad Ahmed Aijaz Mufti Najeeb Khan Anwar Ahmed Meenai Mohammad Aslam Mujeeb Baig Syed Shahjahan Salahuddin Faizan Memon
Editor-in-Chief
NusratUllah Khan
Associate Editors
Muhammad Shahzad Hussain Arshad Hussain Zubairi Ammar Khalid Rima Farooq
Happy Reading!
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Summary of instruction issued by SBP on Profit and Loss Distribution and Pool Management for Islamic Banking Institutions (IBIs)
SBP has exclusively mentioned in the instructions issued about the key features that an IFI or IBI should comply in order to ensure proper profit and loss distribution among the depositors and the IFI or IBI as a manager of funds. Some of the key instructions and features are summarized below. enlighten and stipulate objectives, investment strategy and risk characteristics. Afterwards it should be approved by the Shariah Advisory and Board of the Directors (BOD) of the IBIs and suitably approved copy should be submitted to Islamic Banking Department of SBP within three months of issuance of these directions.
Creation of pools
Deposits which are based on Mudaraba comprises of IBIs deposits mix. In the deposit mix the IBIs requires allotment of profits in placements, financing and investments. The depositors are elaborated as Rabbulmal and the IBIs are regarded as Mudarib by the deposits as funded. Percentage of their investments will be borne by the
Smaller sized IBIs can approach SBP for extension in time frame for development of the IT system
Every pool has its own segregated sources of funds, income, expenses and rights of particular assets
depositors in case of loss. One or more pools are being set in for the depositors funds, and each of the pool has its own separate risks and rewards features. The profit and loss divisions have an impact considerably from the practices and policies of IBIs pool management. Every pool has its own segregated sources of funds, income, expenses and rights of particular assets. IBIs must have a discrete and a very well defined framework that elaborates profit, loss distribution and pool management framework that is being financed by diverse types of Mudaraba based deposits for the creation of novel pools. The framework of every pool should include every phenomenon that
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The pools that are being created should have a compliance with the aforesaid framework that is being formed through an accord signed by the certified senior executive. The pool shall be recognized and ensured at the occasion of accepting and allotment of such deposits to the particular pool. IBIs are also allowed to create treasury pools as according to pool management frame work for interbank transaction. However they shall be maintained separately due to its nature. i.e. liquidity management.
The losses on financings and investments due to negligence / breach of contract by IBI shall not be charged to the pool
either specific or general created against non-performing financings shall also be borne by the IBIs as Mudarib. However, write off of financings and loss on sale of investments shall be charged to their respective pools along with other direct expenses as well. The losses on financings and investments due to misconduct / negligence / breach of contract by IBI shall not be charged to the pool; the IBI as Mudarib shall be considered as responsible for absorbing such losses.
Investments
The IBIs shall invest the Mudaraba based deposits in earning assets like financing, investments etc and the IBDs can also invest its own equity with the depositors fund in a pool.
Continued Summary of Instruction issued by SBP on Profit and Loss Distribution and Pool Management for Islamic Banking Institutions (IBIs)
and loss on the Mudaraba based deposits shall be computed and distributed on the basis of average balance in the depositors account during the profit computation period. as reserve. For managing PER the profit sharing ratio for IBI as Mudarib should not be more than 10% though the funds of PER should only be invested in the Shariah compliant SLR Securities. The funds of PER to a total extent or to a limit, may be used by the IBI to improve the returns of the allocators depositors on the basis of these directions shall be focused to
The Profit Equalization Reserve (PER) sustain by IBIs from the net income of pool
In case of lower than market returns earned by the pool, IBI may forego up to 60% of its Mudarib share as Hiba to meet the market expectation
verification / audit which will be jointly conducted by Shariah advisors and External auditors.
From the pools profit the Mudarib share is permitted plainly on profit to the depositors
permitted plainly on profit to the depositors. Moreover, the distributable profit shall not exceed over 50% of Mudarib share.
eventhough the profits of the pool are somehow inferior to market prospects. In case of lower than market returns earned by the pool, IBI may forego up to 60% of its Mudarib share as Hiba to meet the market expectation. Nevertheless, the IBIs sustained PER will only shrink their Mudarib share if the PER is inadequate to improve the profits pay outs to the depositors.
Weightages
In the pool management framework the weightages to different class of deposits in a pool should be based on parameters / criteria as defined. The Mudarba based deposit of any ,nature, tenor and amount shall have the maximum weightage of not more then 3 times of the weightages assigned to saving deposits.
Profit smoothening
Profit equalization reserve may be maintained by IBIs from the net income of the pool i.e. the gross income less direct expenses and losses. In the books of the IBI 50% of the balance in PER is elaborated as liability and the remaining 50% is considered
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Verification / Audit
The allocation of profits / loss to the
Mr. Allam Muhammad Arshad - Junior Shariah Coordinator at Burj Bank Limited
Mr. Allam Muhammad Arshad has joined as a Junior Shariah coordinator at Burj bank.
Mr. Arbab Riaz Ahmed - Head of proposed Islamic Banking Division at BOP
Mr. Arbab Riaz Ahmed has joined BOP as Head of proposed Islamic Banking Division.
Mr. Abdul Razaq - Group Head of Corporate and Investment at Al-Baraka Islamic Bank
Mr. Abdul Razaq Husain is promoted as Group Head of Corporate and Investment of Al-Baraka Islamic bank. Previously he was the Head of Credit.
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An initiative of IFP forum
May 2012 Pakistans first International Islamic finance expo and conference held at Expo Centre
Pakistans first International Islamic finance expo was held on May 18-19, 2012 at expo center Karachi. The event was organized by Publicity Channel with the support of State Bank of Pakistan and Ernst and Young Ford Rhodes Sidat Hyder was the technical partner for the conferences. The event showcased products and services of Islamic banking industry. The exhibition was followed by a conference on growth of Islamic finance industry with its strategic outlook.
November 2012 SBP released Instructions on Profit and Loss Distribution and Pool Management for Islamic Banking Institutions (IBIs)
SBP felt that there was a need for the Islamic banking industry to have well-defined, transparent and standardized 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. In light of the above, SBP recently released the Instructions on Profit and Loss Distribution and Pool Management for IBIs, applicable on all the Islamic banks effective immediately.
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An initiative of IFP forum
Islamic finance house opens its new main branch in Abu Dhabi
It has been reported that Islamic Finance House Pvt. JSC, (IFH) has announced the grand opening of its new main branch, which is located at the heart of the capital city, Abu Dhabi. Committing to grow across the UAE and serve customers' seeking Shariah compliant financial services through its wide and diversified portfolio of Shari ah co m pli an t p ro du c ts including, personal and business finance.
Entrepreneurs 2012
Entrepreneurs 2012 held at the Excel Centre, from 13th 16th November 2012 incorporating the Leaders First Conference & Gala Dinner. President Clinton team at Global Islamic Finance magazine attended Entrepreneurs 2012 in London. It is said that the conference was held to promote Islamic finance and business to all entrepreneurs and not only those who already know the concept of ethical financing and banking.
18 months and is structured as a revolving Murabaha facility, was provided by Qatar Islamic bank in a capacity as sole mandated lead arranger.
Emirates Islamic Bank partners with RTA to launch credit card with special city transport features
Emirates Islamic Bank , the Islamic banking arm of Emirates NBD Group, and Roads and Transports Authority (RTA) on 20 November 2012 announced the launch of a new Shariah-compliant visa credit card that is packed with special city transport features, and targeted at car drivers as well as metro commuters. The new Emirates Islamic bank RTA Credit card combines the features and benefits of a credit card and the proprietary Nol transit application, used for making payments on the RTA transit network and at parking meters. The unique product, which is fully Shariah-compliant, is the result of technical integration and careful planning in choosing meaningful benefits that provide customers with added value.
Disclaimer:
The news included here is on the basis of information obtained from local and international print and electronic media sources. IFP team does not accept any responsibility about their bona-fide.
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An initiative of IFP forum
actions by regional countries, Asian Institute of Finance (AIF) board member Tan Sri Azman Hashim said. He said regional financial and economic integration within Asia will continue to take centre stage and countries within Asian must work together to sustain growth and close inequality in its diverse society.
Disclaimer:
The news included here is on the basis of information obtained from local and international print and electronic media sources. IFP team does not accept any responsibility about their bona-fide.
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An initiative of IFP forum
AAOIFI - World Bank Annual Conference on Islamic Banking and Finance to be held early December
Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) will host the the AAOIFI - World Bank Annual Conference on Islamic Banking and Finance on 3 and 4 December 2012 in Manama, Kingdom of Bahrain. The conference will be held in cooperation with the World Bank and under the auspices of the Central Bank of Bahrain.
in the wake of challenging global economic landscape. While opening and chairing the 2nd meeting of central bank governors of the D-8 countries in Islamabad, Anwar said there was aneed for exploring sustainable models to promote Islamic finance in the D-8 economies.
Korangi, Karachi. The meeting was chaired by world-renowned Islamic scholar and Chairman of Meezan Banks Shariah Supervisory Board, Justice (R) Mufti Muhammad Taqi Usmani.
finance
Al Baraka Islamic Bank is not only going to introduce new Islamic financial products but will also open new branches in Pakistan to facilitate the consumers of Islamic financial products. CEO of Al Baraka bank Adnan Ahmad Yousaf said that Islamic banking is in fashion today and has earned a shine that continues to attract funds. He said that Islamic mode of banking and all its tools are fast gaining ground in Pakistan when compared to conventional mode of banking, though it is a highly untapped market as yet.
Disclaimer:
The news included here is on the basis of information obtained from local and international print and electronic media sources. IFP team does not accept any responsibility about their bona-fide.
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An initiative of IFP forum
Shariah rulings. This debate is followed by another debate highlighting what Shariah has to say about some professions i.e. if they were mentioned in Ahadees of the
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Ask Us
By Mufti Ibrahim Essa and Mufti Javed Ahmed
Question
In the case of bank guarantee, if the bank (as guarantor) or the debtor is discharged from the debt by the creditor, will the other party be liable for the debt? Likewise, if the bank is receiving any discount from the creditor, will he be entitled to charge full amount of debt from the debtor? Kindly guide us in the light of Shariah ? the original debt, the guarantor is entitled to recover only the amount he has actually paid to the creditor; he cannot demand that the debtor pay the assumed to be a genuine sale. And we know that in a usual sale, the customer can return the subject matter due to suspected defect (s). How an Islamic bank can manage this risk within the circle of Shariah?
Answer
It is permissible for the institution to stipulate in the contract of Murabaha to the purchase orderer a condition that the institution is free from responsibility for all or some of the defects of the asset. In the case of stipulating such a condition, it is preferable that the institution should assign to the customer the right of recourse to the supplier to obtain compensation for any defects that are established, which would otherwise be recoverable by the institution from the supplier .
Answer
If the creditor discharges the debtor from the debt, the guarantor is also discharged automatically from his liability. However, if the creditor discharges the guarantor from liability, the debtor remains in debt. If the guarantor secures a discount that results in paying an amount less than
Question
Murabaha to the purchase orderer is
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Upcoming Events
NIBAF - Islamic Banking Certificate Course # 24
NIBAF has have arranged a training session on Islamic Banking Certificate Course # 24 from 03 December to 22 December 2012 at NIBAF; H-8/1; Pitras Bokhari Road: Islamabad. Banker, non bankers and individuals are invited to participate in this course. Fee for attending this course is Rs. 70,000 per participant.
Workshop on Profit and Loss Sharing Distribution and Pool Management for IBIs.
SBP has introduced new guidelines for profit and loss distribution and pool management in Islamic banking institutions (IBIs). Keeping the significance of this in mind, Ernst & Young Ford Rhodes Sidat Hyder (EYFRSH) Islamic Financial Services Group (IFSG) has arranged a 3 day workshop, which is to provide an understanding related to Profit and loss distribution and pool management mechanism in light of new SBP guidelines. The workshop is expected to benefit audience from a variety of corporate and banking professionals from: Finance; Treasury; Shariah Advisory; Regulatory Authorities; Internal Audit; and Compliance.
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