The State Bank of Pakistan (SBP) on Tuesday announced key revisions to the Minimum Profit Rate (MPR) requirements and introduced new guidelines for Islamic banking institutions (IBIs).

The central bank has confirmed that the MPR requirement, previously applicable to all Pak Rupee savings deposits, will no longer apply to deposits held by financial institutions, public sector enterprises, and public limited companies.

The decision, which aims to streamline banking operations, was detailed in a circular issued by the SBP, superseding previous directives under BPRD Circular Nos. 05 of 2014 and 07 of 2013.

MPR removal for corporate deposits

Under the revised rules, banks are no longer mandated to pay a Minimum Profit Rate equivalent to 50 basis points below the prevailing SBP Repo Rate (Interest Rate Corridor - Floor) on savings deposits held by financial institutions, public sector enterprises, and public limited companies. This change is expected to provide commercial banks with greater flexibility, particularly in managing corporate deposits.

In a separate but equally significant move, the SBP introduced revisions to the profit distribution framework for IBIs. The revised guidelines stipulate that IBIs must pay at least 75% of the weighted average gross yield from their investment pools as profit on PKR savings deposits, excluding those from financial institutions, public sector enterprises, and public limited companies.

The central bank further clarified that, for the purpose of calculating the gross yield, IBIs will divide the monthly gross earnings of their investment pools by the monthly average assets of those pools, excluding fixed assets. However, pools created for Shariah-compliant standing ceiling facilities and open market operations (OMOs) will not be included in this calculation.

The revised framework also includes several updates to existing regulations under the "Instructions for Profit & Loss Distribution and Pool Management for IBIs" issued in 2012. Notably, IBIs may now forego a portion of their Mudarib share as hiba (charity) to meet market expectations in the event of lower-than-expected returns. Additionally, in cases where the profit earnings fall short, IBIs may give hiba to savings account depositors to fulfill the minimum profit rate requirement.

Industry reactions

Experts have largely welcomed the revisions as a step forward in modernizing and strengthening Pakistan's banking system. The removal of the MPR for certain categories of deposits is expected to lead to lower deposit costs for banks, particularly those with significant corporate deposit bases. Meanwhile, the new guidelines for IBIs will enhance profit-sharing mechanisms, ensuring a more transparent and equitable distribution of profits among depositors.

The revisions are set to come into effect from January 1, 2025, providing sufficient time for Islamic banking institutions to align their operations with the new guidelines.

With the size of Pakistan’s Islamic finance industry estimated to have surpassed $42 billion, according to the Securities and Exchange Commission of Pakistan (SECP), these revisions signal the SBP’s continued efforts to develop and regulate the sector, ensuring its growth and stability in an increasingly competitive global financial landscape.