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MEBL Braces for Potential MDR Regulation Impact on Islamic Banking

Karachi, Meezan Bank Limited (MEBL), a leading Islamic bank in Pakistan, is preparing for potential regulatory changes following the Caretaker Finance Minister's recent comments on the Islamic Banking industry. The minister's statement, which highlighted the lower savings return offered to deposit holders by Islamic banks compared to conventional banks, has sparked discussions about the possible implications of such changes on listed Islamic banks.

According to JS Research, the current regulatory framework exempts Islamic Banks from offering a Minimum Deposit Rate (MDR), which is mandatory for conventional banks under the State Bank of Pakistan's (SBP) regulations. The MDR for conventional banks is set at 150 basis points below the Policy Rate, currently at 20.50%. If similar regulations are applied to Islamic Banks, it could have a significant negative impact on their Return on Equity (ROE), as Islamic banks currently offer savings rates approximately 700-950 basis points lower than the MDR of conventional banks.

The report recalls that the SBP initially introduced minimum profit rates for eligible savings accounts in the Pakistani banking sector, including Islamic Banking, in May 2008. Islamic Banking was later excluded from this instruction in November 2012. Given the recent sharp rise in interest rates, the spread between Islamic and conventional banks' rates has widened, leading to concerns about the potential impact of MDR regulation on Islamic banks.

JS Research presents a base case scenario where they expect the spread to normalize to approximately 400 basis points by the first quarter of CY2025. Under this scenario, MEBL's savings rate is expected to decline by 4.5 percentage points from 11% to 6.5% in the same period, with an average recurring ROE of 27%. The report also outlines sensitivity scenarios considering the possible implementation of MDR for Islamic banks, either similar to conventional banks or at a more relaxed rate.

The analysis suggests that MEBL has the potential to mitigate the negative impact of MDR regulation, despite possible short-term pressure. Factors such as MEBL's focus on the Shariah-conscious market segment and the growth potential of its deposits are highlighted as key advantages. The report indicates a possibility of boosting the bank's deposit base growth beyond the base case assumption of 15% per annum.

JS Research reiterates a 'Buy' recommendation on MEBL, noting its significant market outperformance and potential value play in the ongoing fiscal year. The expectation is that MEBL's book value growth, outpacing its peers, will continue to drive its market performance.

The post MEBL Braces for Potential MDR Regulation Impact on Islamic Banking appeared first on Pakistan Business News.

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