By: Jawaid IqbalMonday 16th November 2009

Al- Sadiq (A.S) Institute of Islamic Banking, Finance & Takaful

The financing assets of the Islamic bank are grouped in different Investment Pools with respect to the source of funds.

 General Types of Investment Pools

1. General Deposit Pool (PKR & FCY)2. Treasury / Financial Institutions (F.I.) Pool3. Islamic Export Refinance Pool (IERS) Pool4. Equity Pool5. Specific Customers’ Pools  

Concept of Pools

Asset Allocation

At the time of disbursement, each asset must be properly assigned to a specific pool at General Ledger or Sub-GL level.

This can also be done with the help of an internal non-financial entry.

The proper allocation of financing assets implies that related risk and reward (Profit or Return) of the asset are clearly linked to a specific pool and at any point in time the asset’s identification in terms of which pool it belongs to, is determinable

Rules for Pool Management

Pool Composition

A pool will composed of all financing assets booked by utilizing funds from the pool.

To make the periodic redemption of investment and profit payment to pool participants possible, at any stage the assets of the pool shall constitute at least 10% fixed assets (like Ijarah or fixed asset Musharakah etc).

Rules for Pool Management

General Deposit Pools (PKR & FCY-Remunerative) Deposit Pools are made up of funds received from customers in remunerative schemes such as

• Saving Account, • Certificate of Islamic Investment (COIIs)• Term Deposit Account

Concept of Pools

Financial Institutions Pools  Funds from financial institution (FI) can be accepted in these pools under the mode of Musharakah or Mudarabah.

At maturity, normally these F.I. Pools are dissolved and assets are transferred back to other investment pools. Equity Pool The Equity Pool consists of funds from the Bank’s equity. The funds are primarily invested in permissible equities & other permissible Islamic modes. The equity pool may also utilize the funds received from non-remunerative deposits. 

Concept of Pools

 Specific Customers’ Pools (PKR & FCY) Specific Customers’ Pools are made up of funds received from customers under some special arrangement either on Musharakah basis or on Mudarabah basis.

The funds from these pools are invested under Islamic modes of finance.

Concept of Pools

Utilization

Ijarah/Car 1500 MNMurabaha 2000 MNCash 500 MNIjarah 100 MNMurabaha 200 MN

Ijarah 200 MNMurabaha 500 MN

Ijarah 100 MNMurabaha 400 MN

Ijarah 100 MNMurabaha/IERS 200 MN

Ijarah 200 MNMurabaha 400 MNInvestment 400 MN

Total 8000 MN

Sources

Deposit: General PKR 4000 MN

FX 300 MN

Specific PKR 700 MN

F.I.: PKR 500 MN

SBP: PKR 1500 MN

Equity: PKR1000 MN

Total PKR 8000 MN

• The bank allocates the funds received from the customers to a deposit pool.

• These funds from the pool are utilized to provide financing to customers under Islamic modes that include, but are not restricted to, Murabaha and Ijarah.

Fund Utilization

Funds

Depositors

Sources

Murabaha

Ijarah

Diminishing Musharakah

Investment Pool Investments/Financing

ProfitProfits

Bank

Fund Utilization

- The bank calculates the profit of the deposit pool every month.

- Gross Income (Return) of the pool will be calculated by taking all the assets booked upto the beginning of the month as well as assets booked/investments made during the month by utilizing the funds from the Investment Pool.

-The Gross Income of the pool will be announced on a monthly basis.

-The profit will be calculated by 5th of each subsequent month for the previous month.

Profit Calculation

The Gross Income will be shared between the bank (as Mudarib) and Depositors (Rabul Mal) in a predetermined ratio (%) of the actual profit earned.

This ratio of profit for bank & Investment Pool (for depositors) is announced

• at the beginning of the month and • is available at the website of the bank or • can be obtained from the bank upon request.

Profit Distribution - Pool

Profit Sharing Ratio

    Example

Bank (as Mudarib) Upto X % 50 %

Investment Pool (For Investors)

(1 – X) % 50%

Illustration 1

Bank’s share = Gross Income x (X%)Investment Pool’s share = Gross Income x (1-X)%

At the time of profit sharing, bank (as Mudarib) on its sole discretion can reduce its share of Income in order to pass benefit to the Investment Pool (depositors).

Illustration 2

The profit is distributed among the customers/account holders on the basis of predetermined weightages, announced at the beginning of the month, based on their respective category/tiers.

Loss Sharing

In case of any loss, it will be shared by the members of Investment Pool in ratio of their investment.

Profit Distribution - Account

The Investment Pool operates on Musharakah basis.

Different categories of depositors in the Investment Pools are assigned different profit sharing weightages based on:

-Investment tenure-Profit payment option-Amount tiers

These profit weightages are announced at the beginning of the month.

The bank can also participate in the Investment Pool (as an investor) in any proportion.

Pool - Relationship b/w Investors

Investors Categories Weightages

Saving Account Tier 1 ( upto 100K) 0.23

Saving Account Tier 2 (above 100K) 0.42

Term Deposits– 1 year maturity 1.36

Term Deposits– 3 years maturity 1.69

Term Deposits– 5 years maturity 1.83

Equity (bank) 1.83

Bank’s Participation in Investment Pool

Profit sharing in Mudarabah based structure

Depositors

EGIBL

Weightage System

Pool of Funds

Businesses/Corporates

Financing

Rab-ul-Mal Profit share

Deposits

Gross Profit

Mudarib Profit Share

Profits

Premium Payment

Premiums are offered to stimulate higher deposit mobilization from high net-worth clients in addition to the normal share of profit. Rationale for offering Premiums The administrative and operating costs associated with high value investments are lower; therefore bank passes on the advantage of these lower costs to high net worth investors to induce them to bank with MBL.

Premium Payment

-Premiums are declared by the bank from its share of income as a Mudarib voluntarily and will be paid only if overall pool has earned profit.

-Total premium paid cannot be more than 50% of the bank’s share of profit as a Mudarib

-MBL has unilateral right to reduce/withdraw premium offer.

-Premium may be calculated as a percentage of investment.

Premium Payment - Rules

Working for Weightages

Following factors complicate the profit sharing mechanism of Musharakah Pool:

-Large number of partners (Account holders)-Account holders continually join and leave the

Musharakah pool-Investment of Account holders also fluctuates

Simple profit sharing mechanism with this continual fluctuation of investment and profit ratios is impractical

Weightages Mechanism

Example

Deposit Category Deposits Days invested in Weightage

3 Months 700,000 133 Months 2,000,000 23

6 Months 800,000 196 Months 300,000 13

12 Months 3,000,000 1212 Months 600,000 21

Total size of the Asset Pool 7,500,000

Total Income of the pool 100,000

Days in Month 31

Profit Sharing ratio of Mudarib 25%

Weightage of the Equity 1.0

0.6

0.70

1.0

Example

Deposit Category Deposits (A)Days invested in

(B)Weighted Avg

InvestmentAverage Balance

C = A*B D = C/313 Months 700,000 13 9,100,000 3 Months 2,000,000 23 46,000,000 1,777,419

6 Months 800,000 19 15,200,000 6 Months 300,000 13 3,900,000 616,129

12 Months 3,000,000 12 36,000,000 12 Months 600,000 21 12,600,000 1,567,742

Profit Sharing

Mudarib 25% 25,000 Depositors 75% 75,000

Example

Weighted AnnualizedDeposit Category Average Weightage Average Income Rate of

Balance Assigned Liabilities Allocation ReturnA B C = A*B

3 Months 1,777,419 0.6 1,066,452 12,111 8.02%

6 Months 616,129 0.7 431,290 4,898 9.36%

12 Months 1,567,742 1.0 1,567,742 17,804 13.37%

Equity(balaning figure) 3,538,710 1.0 3,538,710 40,187 13.37%

Total 7,500,000 6,604,194 75,000