SBP Eliminates Minimum Deposit Requirement for Conventional Banks
The State Bank of Pakistan, SBP, has decided to eliminate the Minimum Deposit Requirement for conventional banks on all deposits from financial institutions, public sector enterprises, and public limited companies. That will be effective from January 1, 2025 and is likely to help the bigger share of corporate deposits which banks have.
What are Minimum Deposit Requirements?
The MDR is a regulation that forces conventional banks to give a minimum return on deposits. For example, the deposit rate was set 150 basis points below the policy rate prevailing at any given time. If the policy interest rate is 15%, then the bank would have to offer a return of 13.5% to the depositors. The rule did not bind Islamic banks.
Effect on Conventional Banks
The removal of the MDR will eliminate the need for conventional banks to pay a fixed minimum return on deposits from corporate entities like financial institutions and public sector companies. This leaves the banks free to negotiate deposit rates with such organizations.
For the banks that depend mostly on corporate deposits, this change will positively impact them because they will not be required to offer rates less than 1.5% of the policy interest rate. However, for individual depositors, MDR will still apply so people with personal savings will continue to be protected.
Changes for Islamic Banks
The SBP also introduced new guidelines for Islamic Banking Institutions (IBIs). Under these guidelines, IBIs will have to pay a profit on rupee savings deposits (except from financial institutions and public limited companies) that is at least 75% of the weighted average gross yield of all their pools. This rule will also come into effect from January 1, 2025.
In cases where the profits are short, IBIs may use a portion of their Mudharib share as a “hiba” (donation) to top up for depositors.
What’s Next?
According to Sunny Kumar of Topline Research, the total deposit base of Pakistan stands at Rs27 trillion, while corporate deposits account for over half of that amount, or 53%. Some of the conventional banks with a larger share of corporate deposits are expected to benefit from this, such as Bank of Punjab, Bank of Khyber, and National Bank.
For consumers, the SBP has clarified that the MDR will continue to exist, thus ensuring personal savings accounts receive a fair minimum return.
