Diversification of Islamic Financial Instruments
72
However, one interesting aspect to note in Table earlier depicting Islamic banks’ offered profit
rates was that the profit rates offered by Islamic banks on Mudarabah-based deposit
instruments are slightly lower than those offered by their conventional counterparts. The table
uses the interest rates prevailing in fiscal year 2017 of the two largest banks in Pakistan:
National Bank of Pakistan and Habib Bank (though both conventional banks operate Islamic
windows as well), and they exceed the Islamic rates by over 120 basis points. In the market,
this is attributed to the lack of Shariah-compliant investment opportunities available for
Islamic banks, which adversely impact their profitability. It should be noted that the year by
year growth in deposits of Islamic banks in Pakistan has been despite these comparatively low
profit rates, and therefore may be partially attributed to the perceived demand of faith-based
depositors for Shariah-compliant banking instruments.
Islamic banks in Pakistan also offer foreign currency accounts to their depositors. These
products are usually Qard-e-Hasan (loan) - based and most banks offer the products for US
dollars, GBP and Euro. Very low profit rates are offered to Pakistani investors in these foreign
currency deposit accounts. However, they tend to be higher than those offered by conventional
banks, such as 0.12% - 0.70% annualized.
The Islamic banks in Pakistan operate deposit instruments on month-long Mudarabah bases,
and the Mudarabah is automatically renewed every month. They announce the weightages
(and Profit-sharing ratio) at the start of each month, and the profit rates at the end of the
month (typically in the first week of the next month). An extract from Meezan Bank’s declared
profit rates for the month of April 2017 is shown above, demonstrating the different local and
foreign currency deposit instruments used by Islamic banks in Pakistan.
As the extracts show, the Mudarabah deposit instruments differ in their profit rates based on
the amounts, profit payment frequency and tenure. Islamic banks also offer Mudarabah based
Certificates of Islamic Investments (CCI), or Term Deposits, in which depositors are given
marginally higher profit rates for fixing their deposit for one month to seven years.
As the Extract from Bank Dubai Islami Pakistan (DIBPAK)’s profit distribution pool shows,
Islamic banks use the Mudarabah structure with their depositors for profit distribution in their
following products: Saving accounts (current accounts are operated on Qard ul Hasan
structure with no profits), Term deposits (ranging from 1 month to 3 years), special savings
accounts (with higher rates, e.g. for financial institutions, teenage savers etc.) and Mudarabah
Certificates (ranging from 6 months to 7 years). Funds are combined in a ‘Common Mudarabah
Pool’) which is then added to funds from Mudarib (Islamic bank’s) equity pool, using
Musharakah. The funds are then utilized in different structures in consumer financing, project
financing and corporate ventures, via the structures of Diminishing Musharakah and
Murabahah (most popular in Pakistan), Ijarah, Salam and Istisna, and limited Sukuk.
In Pakistan, almost 60% of the consumer financing, including House financing and car
financing, is now done by Islamic banks. This is remarkable given that Islamic banking only
commenced in 2003, and is still only 13.3% of the overall banking industry. Islamic banks’