Pak issues Islamic trading mudaraba norms
Agencies: Nov 21 2012, 12:17 IST
Pakistan's central bank has issued new rules for Islamic bank deposits backed by asset pools using mudaraba, a form of investment partnership that is common in Islamic finance.The pools will have to maintain at least 20 percent of their assets in liquid securities, though this level can be reduced to 10 percent with the approval of sharia scholars. The rules allow banks to aggregate pools to help them manage liquidity in the short-term money market.Under mudaraba, assets are managed by a bank on behalf of clients, with income and expenses shared under a pre-agreed ratio. The rules stipulate this ratio cannot be reduced during the deposit's tenor.The equity-like nature of mudaraba accounts can make them vulnerable to market price swings, so the rules allow the smoothing of profits using a profit equalisation reserve.Banks will also be required to set up an investment risk reserve (IRR) which they can use to offset losses from future investments. They can develop their own models to determine the size of the IRR; if they have no model, banks have to contribute up to 1 percent of available profit to the IRR.REFORMSThrough a series of reforms, Pakistan's regulators aim to lift Islamic finance's share of its banking sector to 15 percent in the next five years. Islamic banks held 8.2 percent of total banking assets and 8.9 percent of deposits in June this year, central bank data showed.The new rules are among the most comprehensive issued by any central bank in this area, said Omar
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