Introduction to Pool Management By Mujeeb Beig

1. Introduction to Pool Management By Mujeeb Beig

2. The specific pools are created for the following purposes • Treasury / Financial Institutions (F.I.) Pool • 2. Islamic Export Refinance Pool (IERS) Pool • 3 Equity Pool • Specific Customers’ Pools • 5. FCY pool  

3. 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 should be done through an internal entry. The proper allocation of earning assets should be based on related risks and rewards of the relevant eraning assets

4. Pool Composition A pool will composed of earning assets which to be booked/already booked. To abide by Shari’ah rulings at any stage the assets of the pool shall constitute at least 20% fixed assets (like Ijarah or DM).

5. Specific pools for depositors • Specific deposits pools are created with the funds received from customers in remunerative accounts such as • Saving Accounts, • Term Deposit Accounts

6. Specific pools for Financial Institutions Funds from financial institution (FI) can be accepted by creating specific pools under Musharakah arrangements. Specific pool for equity The Equity Pool may be created with the bank’s equity. The equity funds may be used specifically for the investment in equity market & other permissible Islamic modes having risk of loss greater than money market. The current accounts deposits are also mixed with the bank’s equity. 

7. Purpose for specific Customers’ Pools (PKR & FCY) Specific Customers’ Pools are created primarily to give higher return than the general pool return to corporate customers and high net worth individuals, based on Musharakah arrangements. The high earning assets are financed with these funds, either by specifically disclosing the financing avenues to the depositors or not. Already booked assets may also be used for such purpose, by selling the assets from general pool to specific pool

8. Utilization Ijarah/Car 2700 MN Murabaha 2000 MN DM Equipment/HF 500 MN Ijarah Equip 100 MN Murabaha 200 MN Ijarah 200 MN FE 25 Murabaha 300 MN FCY Ijarah 100 MN Murabaha 600 MN Ijarah 100 MN Murabaha 200 MN Ijarah 200 MN Murabaha 400 MN Equity market 400 MN Total 8000 MN Sources Saving and TDRs Deposits: PKR 4700 MN Saving FX 300 MN F.I.: PKR 500 MN SBP: PKR 1500 MN Equity: PKR1000 MN Total PKR 8000 MN

9. Fund Utilization • The bank allocates the funds received from the customers to a specific pool having earning assets of profit yield more than the profit yield expected by the Rabb-ul-Maal owners of the specific pool . • The earning assets may have existence in the books of the bank at the time of creation of specific pool or the earning assets can also be created with the Raas-ul-Maal of Rabb-ul-Maal of specific pool. In case earning assets already exist then the general pool will sell these assets to specific pool through a Memorandum Entry. Bank’s equity/current accounts deposits are also be used to finance earning assets. For this purpose, bank plays the role of “Shareek” in the specific pool having two roles, Rabb-ul-Maal and the working partner(i.e bank’s role for other Rabb-ul-Maal and for its own equity/current accounts funds)

10. Pool Investments/Financing Sources Depositors Funds Mixed pool of Funds Murabaha Ijarah Diminishing Musharakah Bank’s equity plus current accounts deposits Profit Profits

11. 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 up to 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.

12. The Gross Income will be shared between the bank (as Rabbul-Maal and working partner) and Depositors (Rabb –ul- Maal) in a predetermined ratio (%) of the accrued profit and the same is fixed by the bank being working partner. • This ratio of profit for bank & depositors is announced • at the beginning of the month and • is available at each branch and at the website of the bank or • can be obtained from the bank upon request by the specific pool holders .

13. Illustration 1 Example Bank (as Rabbul-Maal and working partner) Up to “X” % Say 50 % Investment Pool (For Investors) (1 – “X”) % 100- 50% =50% Profit Sharing Ratio

14. Illustration 2 Bank’s share = Gross Income x (X%) say 50% Investment Pool’s share = Gross Income x (1-X)% say 100-50% =50% At the time of profit sharing, bank (as Rabbul-Maal and working partner) on its sole discretion can reduce its share of Income with out being a contractual obligation in order to equalize the profit yield expected by other Rabb-ul-Maal of the specific pool (depositors). However, after revision, this revised profit sharing ratio is again disclosed at the branch notice board or at the web site of the bank or is available for the specific pool Rabb-ul-Maal upon request. This provision should be made part of account opening form for saving & TDRs holders

15. The profit is distributed among different Rabb-ul-Maal of the specific pool on the basis of predetermined weightages, announced at the beginning of the month, by the bank. The weighatges are assigned based on each Rabb-ul-Maal desire to earn some specific return. Loss Sharing In case of any loss, it will be shared by all Rabb-ul-Maal in the ratio of their investment in the specific pool. For all practical purposes, bank by its own will with out being a contractual obligation may bear all the loss to specific pool based on “Tabarru”

16. The specific pool operates on Musharakah basis. • Different categories of depositors in the specific pools are assigned different profit sharing weightages based on: • Investment tenure • Profit payment options (monthly/quarterly/semi annually/at maturity) • Amount tiers(different amounts) • These profit weightages are announced at the beginning of the month/beginning of creating specific pool.

17. Investors Categories Weightages Profit sharing - Weightages Saving Account Tier 1 ( up to 100,000) 0.23 Illustration 3 Saving Account Tier 2 (above 100,000) 0.42 TDRs– 1 year maturity 1.36 TDRs– 3 years maturity 1.69 TDRs– 5 years maturity 1.83

18. Bank’s Participation in Investment Pool The bank can also participate in the Investment Pool (as an investor) in any proportion, However the weightage assigned to the bank should not be greater than the highest weightage assigned to any of the depositors in the specific Pool, based on principle of fairness.

19. Investors Categories Weightages Saving Account Tier 1 ( upto 100,000) 0.23 Illustration 4 Saving Account Tier 2 (above 100,000) 0.42 TDRs– 1 year maturity 1.36 TDRs– 3 years maturity 1.69 TDRs– 5 years maturity 1.83 Equity (bank) 1.83

20. Working for Weightages

21. Weightages Mechanism 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

22. F.I. Pool size : 100 M Tenor : 28 days Expected Return on Asset from the Pool: 10 % p.a. Pool No/PIN code No. ASKARI 01.007.2007 Share of XYZ Bank (INVESTOR) PKR 50 M profit share 40% Share of ABC Bank (ACCEPTOR) PKR 50 M profit share 60%

23. Profit Distribution (at Maturity – after 28 days) income of the Pool: 767,000 XYZ Bank’s share 306800/360*28(767000x 40%)= 306800 or 6.14% p.a. ABC Bank’s share 460200/360*28(767000 x 60%) = 460200 or 9.20% p.a.

24. Deal Confirmation Agreement for FIs • Acceptance of funds from any F.I. are acknowledged by a Deal Confirmation agreement (which suffice the purpose of Musharakah agreement) • The Deal Confirmation also contains the unique PIN of the F.I. Pool that defines the underlying assets for that arrangement. • By recognizing the PIN code the assets after the maturity of specific pool are transferred back to general pool.