KARACHI: With a view to further strengthening Shariah compliance framework and harmonize the Shariah practices in Islamic Banking Institutions (IBIs), the State Bank of Pakistan (SBP) has adopted two AAOIFI Shariah standards.
Two Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) Shariah Standards No. 36 titled “Impact of Contingent Incidents on Commitments” and No. 37 titled “Credit Agreement” have been adopted with immediate effect, the SBP said on Tuesday.
The adoption of these standards is in addition to applicable regulations, instructions and directives issued by the SBP from time to time.These Shariah Standards are applicable with some clarifications and amendments.
SBP directs IBI to adopt new AAOIFI Shariah Standards
The definition of Contingent Incidents Contingent incidents in this standard refer to those incidents which occur suddenly and cause influence on transactions or commitments arising from those transactions after their valid occurrence. Therefore, contingent incidents are different from defects of will, which exist since the time of signing the contract, although their impact occurs later on.
Contingent incidents are also different from termination of commitments on mutual consent of the two parties or as per the desire of any of them; when a party is entitled to such right by virtue of the nature of the contract or due to the condition stipulated in the contract.
In addition, the decision of granting credit facilities refers to the approval of the Institution to enter into a credit facility with a specific client. The approved facility will be subject to a specific financial limit that can be used during a specific period of validity and subject to a certain date of maturity.
The credit facility would also comprise specific conditions relating to guarantees, method of repayment and regulatory requirements. The decision of granting the facility is usually issued in the form of a letter addressed from the Institution to the client, indicating that the letter does not constitute any commitment from the part of the Institution unless transactions are actually commenced. In some banking practices, it is endorsed/confirmed through credit facility agreements.
SBP has warned that failure to comply with these instructions may invoke penal action under the relevant provisions of the Banking Companies Ordinance 1962.
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