Yesterday, I was having an “exchange-of-ideas” session with a few colleagues and the issue of PER became an interesting topic of discussion. Since not many of us knows what PER means, I have extracted a few pertinent point from various sources on the subject :
PER is a mechanism act to mitigate the fluctuation of Rates of Return arising from the flux of income, provisioning and total deposits.
The creation of PER is to ensure that Islamic Banking Institutions (IBIs) Rates of Return remained competitive and stable. During times of low returns to depositors and investors, IBIs can choose to utilize the PER to improve and stabilize the Rate of Return to its depositors and investors. The main purpose is to protect depositors and investors interest as far as possible.
Currently, PER can be allocated up to a maximum 15% of the total gross income every month. The formula for how much PER can be allocated is as follows:
PER (maximum monthly provision) = (15% x gross income) + net trading income + other income + irregular income such as recovery of non-performing financing (NPF) and write back of provisions.
In Malaysia, as per BNM Guidelines, IBIs are only allowed to maintain a maximum accumulated PER of 30% of Islamic Banking Shareholders’ Fund.
The IBIs may write back the PER into the total gross income, at their discretion, in the event that the prevailing rates have become less competitive. PER is recognized as a liability in the Balance Sheet and as an expense in the Income Statement.
Misconception by IBIs on PER
Although IBIs are given the right to allocate some of its income into PER, it is not right for IBIs to treat PER as another source of income as most bankers assume. PER is a way on how an IBI can manage or control its Rates of Returns. By right, any income generated from the utilization of funds i.e. depositors funds, must be returned back in full to customers accordingly.
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