In a significant move to enhance the regulatory framework of Islamic banking in Pakistan, the State Bank of Pakistan (SBP) has made it mandatory for Islamic Banking Institutions (IBIs) to pledge collateral when availing Sharia-compliant Mudarabah-based Standing Ceiling Facility and Open Market Operations (OMO-Injections) using the Global Information System (GIS) within the Central Depository System (CDS). This new regulatory requirement is designed to ensure greater security and compliance in the Islamic banking sector while also aligning with SBP’s broader financial stability objectives.
The new directive outlines that Islamic banks must pledge collateral in favor of the SBP in the CDS based on designated codes for each type of facility. Specifically, the ceiling facility will be associated with the code 2025-30, while the OMO injection facility will be linked to code 2025-29. This move is expected to streamline the process and ensure that Islamic banks maintain adequate safeguards when utilizing these facilities.
According to the new regulations, the market value of the collateral pledged by an Islamic bank must be at least equivalent to the sum of the financing amount received from the SBP, the anticipated profit on the Mudarabah-based facility, and any applicable haircut on the market value of the collateral. The collateral value must also adhere to the collateral requirements set by the SBP, which may change from time to time to reflect market conditions.
The GIS (CDC) used as collateral will be valued according to the revaluation rates published by the Financial Market Association of Pakistan (FMAP) on the last working day before the requested facility date. This ensures that the value of the collateral remains aligned with prevailing market conditions, offering further protection for the Islamic banks as well as the SBP.
Additionally, the SBP’s new policy stipulates that collateral pledged for these facilities will not be counted toward the Statutory Liquidity Requirement (SLR) of the Islamic banks during the period in which the facility is active. This provision aims to ensure that the collateral is not considered liquid assets that could otherwise be used to meet other regulatory requirements, thus ensuring that the pledged collateral remains secure throughout the duration of the facility.
Once the SBP receives confirmation from the IBI that the collateral has been pledged in the CDS, funds will be transferred to the IBI’s current account at the SBP. On the settlement or maturity date of each financing transaction under the Mudarabah-based facilities, the SBP will debit the IBI’s current account to recover the financing amount along with the profit at the expected rate. Following the completion of the transaction, the pledged securities in the CDS will be released.
To further formalize this process, SBP has instructed all IBIs availing the Mudarabah-based facilities to submit a deal confirmation letter, duly signed by the authorized signatories, to the Chief Manager of the SBP Banking Services Corporation (BSC) in Karachi. This ensures that all transactions are properly documented and compliant with SBP regulations.
While these changes may require some adjustments for the Islamic banking sector, they are in line with SBP’s ongoing efforts to strengthen the regulatory oversight of Islamic financial products and services. By requiring collateral pledging for Mudarabah-based facilities, the SBP aims to ensure that Islamic banks operate with greater financial security, ultimately contributing to the stability and growth of the Islamic banking sector in Pakistan.
This development is also a reflection of Pakistan’s commitment to maintaining a robust financial system that aligns with international best practices, enhancing the transparency and credibility of the country’s financial institutions.