Introduction to Pool Management
By
Mujeeb Beig
The specific pools are created for the following purposes
1. Treasury / Financial Institutions (F.I.) Pool
2. Islamic Export Refinance Pool (IERS) Pool
3 Equity Pool
4. Specific Customers’ Pools
5. FCY pool
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
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).
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
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.
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
Utilization
Sources
Saving and TDRs Deposits:
PKR 4700 MN
Saving FX
300 MN
Ijarah/Car
Murabaha
DM Equipment/HF
Ijarah Equip
Murabaha
2700 MN
2000 MN
500 MN
100 MN
200 MN
F.I.:
PKR 500 MN
Ijarah
FE 25 Murabaha
SBP:
PKR 1500 MN
Ijarah
Murabaha
100 MN
600 MN
PKR1000 MN
Ijarah
Murabaha
100 MN
200 MN
Equity:
Total
PKR 8000 MN
200 MN
300 MN FCY
Ijarah
Murabaha
Equity market
200 MN
400 MN
400 MN
Total
8000 MN
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)
Sources
Pool
Investments/Financing
Depositors
Murabaha
Funds
Mixed pool of Funds
Ijarah
Diminishing Musharakah
Bank’s
equity plus
current
accounts
deposits
Profits
Profit
- 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.
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 .
Illustration 1
Profit Sharing Ratio
Example
Bank (as Rabbul-Maal and
working partner)
Up to “X”
%
Say 50 %
Investment Pool (For
Investors)
(1 – “X”)
%
100- 50%
=50%
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 Rabbul-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
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”
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.
Profit sharing - Weightages
Illustration 3
Investors Categories
Weightages
Saving Account Tier 1 ( up to 100,000)
0.23
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
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.
Illustration 4
Investors Categories
Weightages
Saving Account Tier 1 ( upto 100,000)
0.23
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
Working for Weightages
Weightages Mechanism
Following factors complicate
mechanism of Musharakah Pool:
the
profit
sharing
-Large number of partners (Account holders)
-Account holders continually join and leave
Musharakah pool
-Investment of Account holders also fluctuates
the
Simple profit sharing mechanism with this continual
fluctuation of investment and profit ratios is impractical
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%
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 or 9.20% p.a.
460200/360*28(767000 x 60%) =
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.