State Bank of Pakistan (SBP) has directed Islamic banking institutions (IBIs) to introduce a system of internal Shariah audit to ensure that the goals and objectives of Shariah compliance are achieved. The IBIs have also been asked to appoint a Shariah Advisor as per the instructions of SBP.
The SBP on Tuesday issued "Instructions & Guidelines for Shariah Compliance" in Islamic Banking Institutions (IBIs) to further strengthen the Shariah compliance framework in Islamic banking industry.
These "Instructions and Guidelines for Shariah Compliance" have been finalised in consultation with various stakeholders and reviewed and approved by the SBP Shariah Board. It may be pointed out that the Instructions and Guidelines for IBIs are in addition to the current Prudential Regulations, guidelines and other directives issued by the central bank.
The ''Instructions for Shariah compliance in IBIs'' cover various areas related to appointment, removal and working of Shariah Advisors (SAs); conflict resolution in Shariah rulings; Shariah compliant modes; use of charity fund, introduction of new products and services and schedule of service charges etc. It may be pointed out that essentials of Islamic modes of financing, issued by SBP in April 2005, have now been augmented and made part of these instructions.
According to the instructions, the appointment of Shariah Advisor will be approved by the Board of Directors and Shariah Advisor will be required to meet the "Fit and Proper Criteria for Shariah Advisors"'' notified by the SBP, while the Fatawa and rulings of the Shariah Advisor in all financial matters shall be binding on the IBIs etc.
In terms of duties & responsibilities of the Shariah Advisor (SA), the SA will be responsible to review operations of the IBI on periodic basis in coordination with officials responsible for Shariah compliance to ensure that all the products and services being offered by the IBI conform to the injunctions of Shariah.
If any income is declared as non-Shariah compliant by the SA, the same shall be credited to Charity Account opened for this purpose. According to the instructions, the SA will also be required to prepare a report on the IBI''s annual financial statement in respect of its Shariah compliance.
As per the guidelines, Internal Shariah Audit of IBI may form part of the regular internal audit or as a separate unit depending upon size of operations of the IBI.
These instructions also deal with Conflict Resolution in Shariah rulings wherein in case of any difference of opinion arising between the SA of an IBI and the State Bank''s inspection staff or other SBP departments regarding Islamic Banking practices, the State Bank may refer the case to the SBP Shariah Board and the decision of SBP Shariah Board will be final.
The SBP has also introduced a complete set of Shariah-compliant modes of Banking and Financing for IBIs that include Mudaraba; Musharaka; Diminishing Musharaka; Equity participation in the form of shares in a corporate entity; Ijarah or Ijarah wa Iqtina; Murabaha; Musawamah; Salam; Istisna; Tawarruq; Qard; Wakalah; Assignment of Debt and Kafalah.
The instructions also prescribe essentials of Islamic modes of financing as minimum requirement for Shariah compliance in respect of products developed on the basis of such modes. For the Islamic modes for which essentials have not been prescribed, Accounting and Auditing Organisation for Islamic Financial Institution (AAOIFI) Shariah standards may be used as guidelines by IBIs in consultation with their Shariah Advisors.
It may be mentioned here that the State Bank is promoting and developing Islamic banking industry in Pakistan as a parallel system and this sector has witnessed tremendous growth. Currently, total assets of Islamic banking industry have exceeded Rs 200 billion and the branch network of 18 Islamic banking institutions (ie 6 full-fledged Islamic banks and 12 conventional banks having Islamic banking branches) has expanded to 47 cities all over Pakistan.
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