SBP Issues Guidelines for Pool Management for Islamic Banking Institutions

The State Bank of Pakistan (SBP) recently issued guidelines through its circulars/notifications regarding Profit and Loss Distribution and Pool Management for Islamic Banking Institutions (IBIs) and amended the IFRS 9 Application Instructions.  In a note brokerage House Topline Securities highlighted that the central bank has clarified that the provisions created against non-performing assets as per relevant SBP regulations will be charged to the respective pool.  Moreover, in para 2 of IFPD Circular No. 9 dated November 26, 2024, the phrase “(excluding fixed assets)” stands deleted, the brokerage house added.  Topline said that with these changes, the cost of borrowings for Islamic banks will reduce by around 30bps. This will result in a positive impact of Rs. 0.77 per share (2 percent of 2025 EPS) for Meezan Bank (MEBL).  Moreover, in order to facilitate the implementation of IFRS 9, SBP has amended the implementation of IFRS 9 Application Instructions.  Modification accounting is to be applied retrospectively, however, the same may be effective on loans modified on or after Jan 01, 2020. Financial Institutions are permitted to maintain general reserves/ provisions over and above the ECL, worked out for Stage 1 and Stage 2, up to Dec31, 2026.  Revenue Recognition from Islamic Operations: Islamic Banking Institutions (IB Is) are allowed to follow Islamic Financial Accounting Standards (IFAS) 1 & 2 where applicable and continue the existing accounting methodology on other Islamic products until issuance of further instruction in this regard. However, IBIs are advised to disclose the impact, in notes to financial statements, had IFRS 9 been adopted in its entirety.  IBD Circular No. 02 of 2008 clearly states that the “Charity Fund shall not constitute income of the IBI”. Hence, the treatment of charity should be in line with the existing practices as defined in SBP instructions and should not be recognized as income.  The brokerage house said it believes these changes are neutral for banks as the impact of IFRS-9 on banks will be gradual rather than more volatile. It has also maintained market weight stance on banking sector where Meezan Bank (MEBL), Habib Bank (HBL) are its top picks