Pakistan's central bank amends minimum profit rate requirement to bolster cash flow in economy

Pakistan's central bank announced on Tuesday that it was amending the minimum rate of return (MRR) requirements on saving deposits to help improve cash flows in the economy and encourage investment.

In a notification, the State Bank of Pakistan said that from January 1, minimum profit rate will not be applicable on deposits of financial institutions, public sector enterprises and public limited companies.

A financial expert told Nukta that the measure would encourage companies to invest in the economy and not place deposits with banks to earn interest. In addition, they would be able to directly invest in government securities, bypassing banks. This way, the spread paid to the bank will be saved for the government and help in bringing the interest rate down, he commented.

The idea is to spur economic activity and generate employment, he pointed.

"As banks earn high and pay less to the depositors, so this is a mechanism put in place by the SBP," another banking expert elaborated. However, current emphasis may be because of penalty being imposed on high balance due to banks inability to maintain advance-to-deposits ratio, he commented.

Saad Hanif, head of research at Ismail Iqbal Securities, said that the removal of the minimum profit rate requirement on savings deposits appears to be aimed at enhancing banking efficiency and competitiveness. "By excluding these large depositors, banks can better manage their cost of funds, offer more competitive rates to smaller depositors, and align with international market practices where institutional deposit rates are often negotiated," he said.

Hanif explained that the step likely reflects the State Bank of Pakistan’s focus on protecting individual depositors while allowing banks greater flexibility in liquidity and interest rate management.

To provide a level playing field for conventional and Islamic banks and reduce disparity in the deposit rates being offered by Islamic banks and conventional banks, the SBP also directed Islamic banking institutions to pay at least 75% of the average profit earned on all their investment pools to regular savings account holders, excluding financial institutions, public sector enterprises and public limited companies.

Mustafa Mustansir, director research and business development at Taurus Securities, said that overall, these measures would "prove detrimental for the future growth of Islamic banking in Pakistan because the relatively higher spreads on offer under the Islamic banking umbrella were one of its biggest attractions".