SBP introduces Shariah-compliant OMO injection facility

JS Global Capital: In a move to improve the management of market liquidity, the State Bank of Pakistan (SBP) had introduced Shariah-compliant open market operation (OMO) injection and standing ceiling facility for Islamic banking in Pakistan in the later part of 2021.

With the inclusion of Islamic banks in the Interest Rate Corridor (IRC), the next development that may follow for Islamic banks could be the implementation of minimum profit rates and minimum deposits rates (MDR), which is currently exempted for the segment.

The MDR is charged at 150bps below the policy rate for conventional banks, which means the MDR, which is applicable on all categories of savings and PLS saving deposits, including any other profit bearing deposit with no fixed maturity, is currently at 13.50 per cent.

If the same is applicable for Islamic banks, this would not be a new phenomenon. To recall, the SBP introduced the concept of minimum profit rates on the eligible savings accounts mentioned above in May 2008 on the Pakistan banking sector, including Islamic banking. The Islamic banking was later excluded from the instruction in November 2012.

The Islamic banks are currently offering savings rates at 300 to 700bps lower than the conventional banks’ MDR. These rates are not subject to any regulation and are set by the respective Islamic banks on their own.

This means any regulation of a similar MDR on the Islamic banking industry on a standalone basis could have a significant negative impact on their prospective return on equity (ROE).

Though industry sources suggest mixed reports regarding discussions over the subject with the central bank, we believe the Islamic banking industry, as a whole, is still not on a level-playing field with the conventional banks until the introduction of shorter tenor Shariah government securities and consistency in the Shariah government securities auctions.