State Bank of Pakistan adds transparency for mudaraba deposits

The State Bank of Pakistan released its new regulations (pdf) recently for how Islamic banks treat mudaraba deposits, and it is a welcome dose of transparency that should provide protection to depositors by providing greater transparency about the source of profits paid on the mudaraba depositor accounts.  The new regulations require Islamic banks to allocate deposits to separate 'pools' of assets and also require them to "specify the objectives, investment strategy, and risk characteristics of each pool".  

There appears to be little in the new rules that limit depositors to being invested in one pool, and the banks can likely use a 'fund-of-funds' approach to meet the liquidity and risk needs of the depositors.  For example, a longer-tenor deposit product (analogous to a fixed term certificate of deposit) couuld be more heavily allocated to longer-tenor deposit pools to generate extra yield, while shorter-tenor deposits will be more heavily allocated to shorter-term pools, with more assets like short-term murabaha and wakala and fewer long-term assets to maintain liquidity for depositors.  Islamic banks can invest their own equity as well as current accounts (qard), so long as they maintain the principal value and bear the investment risk themselves.

In addition to regulating how deposits are invested, there are requirements for each pool to maintain a liquidity buffer by holding 20% of assets in tradable contracts like ijara financing, ijara sukuk and diminishing musharaka (which can be reduced to 10% with Shari'ah-board approval).  This is likely a prudent move since each pool functions like a 'bank-within-a-bank', with its own assets, liabilities, funding sources and expenses.  If the assets were not liquid, then the bank would have trouble redeeming depositor's money (non-tradable assets like murabaha are typically only traded at par).

The liquid assets in each pool serve as a source of liquidity if depositors withdraw funds.  With an executive committee's approval, the bank can move assets between pools.  The only way this can be done equitably is with tradable assets; otherwise it is just moving assets (like murabaha receivables) between pools and shifting losses from one pool to another.  This is the one point where there is weakness in the regulations: there does not seem to be specific rules for banks that have pools which have run out of liquid assets before they meet withdrawal requests.

It is generally frowned upon for sukuk issuers to advance liquidity to mudaraba sukuk to meet periodic distributions, but would it be equally problematic for Islamic banks to advance liquidity to depositor pools by buying out the share held by depositors as rabb ul-maal if it is done at market value, with any loss first absorbed by the Investment Risk Reserve (IRR)?  Could the Profit Equalization Reserve (PER) be used to make up any of the shortfall in principal?

These are not clear from my brief read of the new regulations (readers who can help me understand anything I might have missed, should email me).  However, in general, I am supportive of efforts to introduce greater transparency into the Islamic finance industry, particularly transparency that delineates equity investors more formally from investment account holders.  The level of disclosure around the new rules, as well as the central bank's ability (as a regulator) to determine whether the actual pool investments meet the stated objectives of each pool will be the biggest factor in determining how beneficial these new rules can be.