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Reinventing Risk-Sharing: The Theory and Practice of Investment Pools and Weightage Mechanism in Pakistani Islamic Banking
Prof. Dr. Hafiz Abdul Basit Khan; Waqas Ali Haider
Abstract:
This study explores the theoretical and operational framework of Profit and Loss Sharing (PLS) mechanisms in Islamic banking, focusing on pool management practices in Pakistan under State Bank of Pakistan (SBP) guidelines. It examines the complete process of investment pool formation on Musharakah and Mudarabah principles, associated risks (including Displaced Commercial Risk), Shariah-compliant investment allocation, profit calculation, expense deduction, reserve management (PER & IRR), and the widely used weightage system for profit distribution. The paper explains how weightages are assigned based on deposit tenure, amount, profit payment frequency, and customer category, along with their mathematical calculation and regulatory limits. It further discusses profit and loss distribution methods, transparency requirements, treatment of early withdrawals, and the gradual phasing out of special Hiba. The weightage system is justified from a Shariah perspective by analogy with Quranic inheritance shares. The study concludes that transparent and disciplined application of SBP’s Pool Management Guidelines is essential for upholding authentic PLS principles, ensuring fairness, and maintaining depositors’ trust in Islamic banking.
Keywords:
Islamic banking, Profit and Loss Sharing, Pool management, Weightage system, Mudarabah, Musharakah, State Bank of Pakistan, Shariah compliance
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