SBP issues instructions for risk mitigation in monetary policy lending operations, Mudarabah-based financing facilities

KARACHI: The State Bank of Pakistan (SBP) issued updated guidelines on Thursday for the enhancement of the risk mitigation measures in monetary policy lending operations and Mudarabah-based financing facilities, a circular said.

These instructions will be effective from July 2, 2025.

The SBP will apply the haircuts on the market value of government securities (calculated using the relevant benchmark) offered as collateral for financing under its monetary policy lending operations or financing facilities, such as open market operation (OMO) injections and ceiling facilities, based on estimates of duration and volatility.

Saad Hanif, head of research at Ismail Iqbal Securities said the SBP specifies haircuts on government securities based on residual maturity, with longer-term securities facing higher discounts to account for risk.

According to the circular, institutions must meet strict eligibility criteria, including being SBP-regulated, maintaining a current account with SBP-BSC, participating in the Pakistan Real Time Interbank Settlement Mechanism (PRISM), and complying with capital and liquidity requirements.

Non-compliant institutions may be placed on a watch list with limited participation or deemed ineligible if issues persist.

“These measures aim to enhance the stability and effectiveness of the SBP’s monetary policy tools while ensuring the financial health of participating institutions,” Hanif said.

The circular states that the SBP will implement haircuts on the government securities’ buckets with maturities ranging from three months to ten years, with haircuts ranging from 0.2 per cent to 10 per cent.

According to the SBP, haircuts will be applied to floating-rate instruments such as the Government Ijarah Sukuk (GIS) and Pakistan Investment Bonds (PIBs). Up to a three-month maturity bucket haircut will be applied to floating-rate instruments with a quarterly coupon/rental. In addition, the instruments with semiannual coupon/rental will be subject to the haircut of a three- to six-month maturity bucket.

The SBP will apply the criteria for the purpose of extending financing under its monetary policy lending operations and financing facilities. According to the requirements, the institution must be a regulated entity of the SBP and a part of PRISM.