ISR Method

Income Sharing Ratio (ISR) is a Shari’ah-compliant mechanism used by MTB Islamic for distributing investment income among Mudarabah Depositors (Rab-ul-Maal).

To ensure strict compliance with Shari’ah principles, MTB Islamic does not declare any fixed or provisional rate of return for its depositors. Instead, returns are distributed based on a pre-declared Income Sharing Ratio (ISR). Based on the declared ISR and the actual investment income earned by MTB Islamic, the profit rate payable to depositors is determined at the end of each month.

Example:
If the declared ISR is Depositor / Bank = 80 : 20, it means that:

• 80% of the distributable investment income is allocated to the depositor, and
• 20% is allocated to the Bank as the Mudarib.

Distinguishing Features of ISR:

The conventional weightage-based profit distribution framework assigns different weightages to different groups of depositors while maintaining a uniform management fee for the bank. Under such a framework, any increase in weightage for one depositor group adversely affects the returns of other depositor groups, while the bank’s share remains unchanged. This approach is inequitable and involves a two-tier calculation mechanism, which is often difficult for clients to understand.

The revised ISR framework adopted by MTB Islamic overcomes these limitations and ensures fairness and transparency. It is based on a single-tier calculation, making it simpler and easier for clients to comprehend. Under this framework, if the bank decides to offer any special benefit to a particular group of depositors, the cost is borne by the bank itself, rather than being passed on to other depositors.

The ISR framework offers a simple and transparent calculation process, carried out on a monthly basis. Annual profit rates can be derived from the accumulated monthly rates, if required.

Since actual profit rates are determined and updated regularly, no provisional rates are used. This eliminates the need for frequent rate adjustments, which are otherwise common in provisional rate-based systems.

Transparency is a key feature of the ISR framework. Updated month-by-month profit rates are displayed on electronic boards placed in the lobbies of Islamic Banking branches for the information of clients. Customers appreciate this arrangement as it allows them to clearly understand the basis of profit calculation without waiting until the end of the financial year.

As the updated rates of different deposit products remain known to both bankers and clients, meaningful and informed discussions and negotiations can take place between them.

Principles of ISR:

• Mudarabah depositors shall share income derived from investment activities carried out using Mudarabah funds. Such income includes profit, dividends, capital gains, rental income, exchange gains, and any other income generated from Shari’ah-compliant deployment of funds.
• The Investment Income Sharing Ratio (IISR) for each category of Mudarabah depositors and the Bank must be declared prior to the start of the accounting year and/or at the time of entering into the Mudarabah contract (account opening) and must be duly disclosed to the depositors.
• The Bank may increase or reduce the IISR before the start of any accounting year or at the time of entering into a new Mudarabah contract. However, once declared for an accounting year or agreed under a Mudarabah contract, the IISR cannot be reduced during that period.
• Mudarabah funds accepted by MTB Islamic shall be deployed in Shari’ah-approved investment activities, including general investments, investments in shares and securities, and placements with other banks and financial institutions, as approved by the Shari’ah Supervisory Committee and the Board of Directors.
• Exchange gains arising from foreign currency transactions conducted using Mudarabah funds shall be added to funded income for the purpose of profit distribution.
• Profit calculation for different types of Mudarabah deposit accounts shall be carried out in accordance with their respective rules, considering the period, manner of deposit, and withdrawal restrictions.
• Doubtful income, unearned income (if any), and provisions for Depositors’ Profit Equalization Fund may be deducted from funded income prior to distribution.
• Mudarabah depositors shall not share any non-funded income. Non-funded income includes commissions and fees earned by the Bank from activities such as utility bill collection, demand drafts (DD), telegraphic transfers (TT), issuance, amendment, and cancellation of letters of credit (L/C), issuance of traveler’s cheques, bank guarantees, locker rent, and recovery of postage, telephone, fax, and SWIFT charges.