SBP’s Upcoming Decision on Deposit Rates Can Drastically Cut Islamic Banks’ Profits

Earnings of listed Islamic banks on the Pakistan Stock Exchange could fall if the State Bank of Pakistan (SBP) imposes a minimum deposit rate on their savings accounts, according to a report by Arif Habib Limited (AHL).

In the conventional banking system, a bank is obligated to pay interest on savings accounts, with the interest rate tied to the SBP Repo Rate (Interest Rate Corridor – Floor).

This minimum rate is linked to a floor rate (which currently is at 21 percent) i.e. 0.5 percent lower than the floor rate. Given the current policy rate of 22 percent and floor as stated above, the minimum savings rate for conventional banks currently stands at 20.5 percent.

While conventional banks face a minimum deposit rate on their savings accounts, Islamic banks have been granted an exemption from this requirement. This exemption primarily aims to promote Islamic banking and is a response to the relatively underdeveloped market for Islamic financial services.

However, in light of renewed discussions regarding the potential imposition of MDR on Islamic Banks, AHL has conducted a sensitivity analysis to assess the prospective impact of an increase in the cost of savings deposits (in case of imposition of MDR) on the bottom line of AHL’s coverage of fully-fledged Islamic Banks.

The results indicate that a 1 percent change in the cost of savings deposits corresponds to a per-share impact of Rs. 2.27 for MEBL, Rs. 1.35 for FABL, and Rs. 0.53 for BIPL.

It’s important to highlight that the proportion of savings to total deposits stands at 40 percent for MEBL, 42 percent for FABL, and 25 percent for BIPL, as of September 2023.

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