SBP plans deposit protection body for Islamic banks

KARACHI: The central bank on Monday unveiled a framework to protect depositors of Islamic banks in case of a financial institution’s bankruptcy, promising a protection to shariah-compliant banking deposits that hold less than 15 percent market share.

The State Bank of Pakistan (SBP) launched the framework for the protection of depositors of Islamic banks following its approval by the central bank’s shariah advisory committee.

“A Deposit Protection Waqf (DP Waqf) shall be established under this mechanism for protection of depositors of Islamic banking institutions (IBIs),” the SBP said in a statement.

“The nature of DP Waqf shall be as an account established by the corporation to receive premium contributions from participatory member IBIs for the purpose of reimbursement of protected deposits of a failed participatory/member IBI.”

The SBP recorded market shares of Islamic banking assets and deposits in the overall banking industry at 12.9 percent and 14.8 percent, respectively by June-end. Yet, Pakistan, Malaysia and Turkey have been dubbed as the thriving markets for Islamic finance sectors.

“Starting from a low base and boosted by strong political will, the industry has experienced swift growth in these countries,” the SBP said in its latest Islamic banking bulletin. There were five full-fledged Islamic banks and 16 conventional banks having standalone Islamic banking branches till the end of the current fiscal year.

Deposits of Islamic banking industry showed a quarterly growth of 6.1 percent (Rs117 billion) year-on-year in the April-June period and were recorded at Rs2.033 trillion by June-end, according to the SBP.

In June, the SBP started its subsidiary Deposit Protection Corporation to safeguard depositors and compensate them to the extent of their protected deposits in the event of failure of a member bank.

The SBP said the DP Waqf will be set up with an amount of one million rupees only as seed money contributed by the corporation, with approval of its board. The corporation will be responsible for management of the DP Waqf. It will act as manager agent (wakeel) of the DP Waqf under Wakalah relationship.

“Under this arrangement, as per shariah principles, the DP Waqf shall be the principal and the corporation shall act as its agent,” the SBP said. The central bank said each member IBI would pay premium contribution amount from their own sources with no cost to the depositors into the DP Waqf as determined by the corporation in terms of the deposit protection rules.

The corporation would open and maintain separate shariah compliant account(s) for managing resources of the DP Waqf with the SBP, SBP Banking Services Corporation or any other Islamic banking/financial institution with prior approval of the board. The corporation may raise funds for the DP Waqf through Islamic financing modes, financial arrangements from the SBP and special allocation from the national budget.