Many scholars are against the keeping of PER for extended period of time as it is rightfully the profit derived from investors funds and therefore should be distributed. I also understand the view that Banks prefer to retain PER as a matter of stabilising the returns to the investors.

As a personal view, I believe PER can be taken from the investor’s profit portion with the intention of re-distribution of the PER quickly to the investors after a period of time. Many banks continue to take PER continuously and has retained a huge balance in PER. I feel there should be a policy where the Bank retains PER up until a maximum cap or period of time before distributing it.

From the B/S, the PER can be re-distributed when certain events happens, based on internal Bank policies such as:
1) when there is a drop in return to investors exceeding a certain percentage. For example, the previous period investment returns is 3%, but now the actual returns are 2.4% which is a 20% drop. PER should be distributed to improve this.
2) when the monthly PER allocation greatly exceeds the default rate or market risk rates. As you mentioned above, you can reduce the PER allocation if the Bank feels it is too high. For example, as a benchmark, the default rates in the market is 3%, and the PER is 12%, which is 4x the default rates. The PER can be reduce to perhaps 6% or 7% of the gross ditributable profit because of this. The immediate impact is that moving forward, the investors get more of their profits on their investments.
3) when it reached a certain threshold, for example the PER is more than 30% the monthly average balance of the Mudharabah assets, in such cases, PER allocation should be temporarily suspended. This means the investors will recieve better returns for the period as there are no PER deductions.
4) when PER exceeds a certain time period. I believe PER should not be kept for an extended period of time, as most of the investors might have exited the Bank and will never enjoy the profit allocated into the PER from their investment. As a matter of Bank policy, a PER should be distributed every half yearly or yearly at a certain percentage, for example 40% of the outstanding PER is distributed each year-end to investors. Otherwise, a short-term investor who exits the Bank after 3 months may never see the profit allocated to PER from his investments if the PER is never re-distributed on a regular basis. I think there is an element of unfairness here.

Of course, the above are all my personal views, and I know Banks are reluctant to re-distribute quickly as such reserves improves the Bank’s financial ratios at the very least. Banks stands to gains from a huge PER balance, but the investors may not be able to enjoy the profit until an extended period of time. I feel a policy needs to be drawn up to address these issues.

I hope the above helps. Thanks.

CURRENTLY OUR PER IS MORE THAN 30%, WE DECIDED TO GIVE HIBAH TO OUR DEPOSITORS BASED ON PROFIT THAT THEY WILL RECEIVED ON YEAR END. CAN WE REVERSED DIRECTLY FROM PER B/S AND CHARGE TO DEPOSITORS?
OR ANY SUGGESTION TO REDUCE THE PER

now my salary pay on 7hb per month

I attended a one day course organised by INCIEF and regarding the profit margin, the professor mentioned that there is a provision in quran qouted only one third can treated as a profit margin…
Maybe i heard wrong, but if it been told in quran, can you eleborate more on that and provide me with the surah. Thank

Determining profit margin, how much can a bank earn from a financing, is always going to be tricky. The law said not to charge excessively, but the question is, who’s point of view are you looking from? For the customer, it will be too high or shouldn’t be as high as the non-Islamic loans as Islamic Banking is supposed to help the ummah. For the Banks, there are shareholders, risk of defaults, cost of funds and operational expenses to think about. So I guess, this is a better question to put to a Shariá scholar, which I am not one.

As a practitioner in Islamic finance though, I have to say that it is an offer and acceptance kind of arrangement. Banks have their intended target returns to achieve to be economically viable in the future. Pricing is always an issue within the banking circle; if we price too high, the customers won’t come but too low puts the Bank at risk.

As far as I know, there are no specific guidelines to a sale and purchase agreement, as the pricing that’s offered needs to be accepted by all parties. If the pricing is too high, the buyer should move on to the next seller… for a better offer. There are no specific formula to pricing, so it always gets benchmarked against a known pricing methodology, which is unfortunately, a conventional pricing mechanism. In Malaysia, where there is a dual banking system, it is always a matter of staying in competition with each other that results in the pricing being closely decided based on a conventional benchmark. When it comes to pricing, it is always competition between an Islamic Bank and a conventional Bank, never in competition with another Islamic Bank. In that sense, it will be hard to come up with a specific pricing formula that will benefit both the ummah and the banks due to the competition from conventional banks.

Apologies if I can’t help much with your question. Appreciate your input.