SECP notifies three Shariah standards of AAOIFI

The SECP has notified for public consultation three Shariah standards of Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI); Shariah Standard No 17 - Investment Sukuk, Shariah Standard No 18 - Possession (Qabd) and Shariah Standard No 23 - Agency and the Act of an un-commissioned agent (Fodooli).
According to an announcement of the SECP here Wednesday, the SECP has been playing an active role in the Islamisation of the economy. The SECP has endeavored to replicate the best international practices in the Islamic financial services. In order to ensure harmonization and standardisation in the business practices of Islamic financial institutions, the SECP has been gradually adopting Accounting and Shariah standards issued by AAOIFI as a benchmark for Islamic financial services while keeping in view the local business context.
Under SRO.1222(I)/2017 issued here on Thursday, the draft Shariah Standards of Accounting and Auditing Organization of Islamic Financial Institutions (AAOIFI) namely; Shariah Standard No. 17-Investment Sukuk; Shariah Standard No. 18-Possession (Qabd); and Shariah Standard No. 23 - Agency and the Act of an Un-commissioned agent (Fodooli); proposed to be adopted by the SECP are hereby published for information of all persons likely to be affected thereby and notice is hereby given that objections and suggestions, if any, received within fourteen days from the date of placement on the Commission's website, shall be taken into consideration.
The aim of the standard is to elaborate the Shariah rules for the issuance and trading of investment Sukuk (certificates) as well as the elaboration of their types, characteristics, Shariah regulations and the conditions for the issuance of Sukuk and dealings in them for trading by Islamic financial institutions (institution/institutions), the SECP said.
The basis for the permissibility of issuing investment certificates is that such certificates are usually issued on the basis of Shariah-nominated contracts. Hence issuance of Sukuk on the basis of any of these contracts becomes acceptable as well.
The basis for considering the issue prospectus as an offer arid the fact of subscription as an acceptance is that valid contracts take place on the basis of anything that indicates consent without specifying a particular form of expression. It is thus not objectionable that an offer comes from one person and acceptance from a large number of persons, accounting standards said.
The basis for the right of certificate holders to management is that they own the property that their certificates represent, and management is part of ownership. The basis for permissibility of trading in investment Sukuk when such Sukuk represent shares in tangible assets or usufruct is that the trading is, in fact, on the assets and usufructs. Since these assets may be traded so too the certificates that represent them.
The basis for impermissibility of trading in Salam certificates is that the certificate represents a share in the Salam debt in which case the certificates is subject to rules of debt trading.
The accounting standards stated that the basis for permissibility of trading in Istisna'a certificates after conversion of the realized funds into assets is that such assets represent properties that can be disposed of. The basis for the impermissibility of trading in Istisna'a certificates in case of using the realized funds as a price in a parallel Istisna'a and in case of delivering the manufactured asset to the ultimate purchaser is that the certificate represents the price in the liability of the purchaser. The price then is a monetary debt for which trading of the Sukuk at this stage is subject to the rules of debt trading.
The basis for the impermissibility of trading in Murabahah certificates after the commodity is sold and delivered to the buyer is that the certificates represent a monetary debt against the buyer, in which case trading is not permissible except in accordance with the limitations of debt trading. However, if purchase of the commodity has taken place and is yet to be sold, trading in these certificates is permissible because the certificates represent assets that can be traded.
Earlier, the SECP had notified three Islamic Financial Accounting Standards for adoption: IFAS 1-Morabahah, IFAS 2- Ijarah, and IFAS 3- Profit and Loss Sharing on Deposits in 2005, 2007 and 2013, respectively. While it also notified the four Shariah Standards of AAOIFI; Shariah Standard No 3- Default in Payment by a Debtor, Shariah Standard No 8-Murabahah to the Purchase Order, Shariah Standard No 9- Ijarah and Ijarah Muntahia Bittamleek; and Shariah Standard No.13- Mudarabah in January 2016.
Keeping in view the significance of the standards in the Islamic financial services market of Pakistan, Shariah Advisory Board of SECP in its 9th meeting held on November 20, 2017, had approved for adoption of aforementioned three Shariah Standards. Consequently, the Islamic Finance Department (IFD) presented the Shariah Standards to the Commission for its approval. The Commission has approved them for public consultation. The members of the public are invited to provide their comments.