In a recent directive, the State Bank of Pakistan (SBP) has revised the profit-sharing mechanism for savings deposits held by Islamic Banking Institutions (IBIs) through IFPD Circular No. 09 of 2024. This new regulation aims to create a level playing field across the banking sector but introduces significant changes that could impact the profitability of IBIs.

According to Arif Habib Limited, the profitability of Islamic banks is expected to come under pressure due to the increased cost of savings deposits, driven by the Minimum Deposit Rate (MDR) requirement. This impact will primarily affect Pakistani Rupee (PKR) savings deposits, excluding those held by financial institutions, public sector enterprises, and public limited companies.

Meezan Bank Limited (MEBL) has been downgraded to a “Sell” rating by Arif Habib Limited. The firm has revised its earnings estimate for the calendar year 2025 to Rs. 34.4 per share, reflecting a decline of Rs. 9.0 per share from previous estimates. Consequently, the target price has been reduced to Rs. 205.2 per share, down from Rs. 289.3 per share, implying a total return of -3.3 percent from the last closing price.

Outlook

The extent of the profitability impact on IBIs will depend on the incremental cost of savings deposits and their ability to offset these higher costs through enhanced non-funded income and capital gains. The report maintains a cautious outlook on Islamic banks, favoring those better equipped to absorb the pressure on spreads.