History of Islamic banking in Pakistan & its Shariah compliance procedures

History of Islamic banking in Pakistan Objective resolution in 1949 Pakistan declared as Islamic Republic under Article 1 of The Constitution of Pakistan, 1956 Islamic Provisions of 1973 Constitution among others include… “ the state shall eliminate riba as early as possible”… In 1980’s banks were prohibited to accept any interest bearing deposits and new terminology of Profit and Loss Sharing (PLS) was introduced

Continues.. July 1, 1985, all commercial banks in Pak Rupee was made interest free This was however declared un-Islamic by the Federal Shariah Court (FSC) in Nov 1991 After the landmark decision of the Federal Shariah court in 1999,Commission for Transformation of Financial System (CTFS) was constituted in January 2000 in the State Bank of Pakistan.

Causes of failure of Previous Efforts Absence of Shariah audit in financial institutions Absence of Shariah Supervisory Boards in banks Non-availability of Shariah compliant govt. securities Lack of research and development Inadequate training to the staff of SBP and banks

Continues.. In September 2001 it was decided by government to shift to the interest free economy would be made in a gradual and phased manner and without causing any disruptions For this purpose, SBP was given the task to start Islamic banking in Pakistan

The central bank is pursuing a three-pronged strategy to promote Islamic Banking in Pakistan. Establishing full-fledged Islamic banks in the private sector; Setting up of subsidiaries by the existing commercial banks Allowing stand-alone branches for Islamic banking by the existing commercial

In January, 2002 State Bank of Pakistan gave first Islamic Banking License to Meezan Bank Ltd. Presently, five full fledged Islamic banks with 387 branches 13 commercial banks with 133 Islamic banking branches So total 520 Islamic banking branches (387+133)

Shariah compliance procedures for Islamic banking in Pakistan

State Bank of Pakistan (SBP) regulates and supervise the financial system to ensure its soundness and stability as well as to protect the interests of depositors. SBP also regulates Islamic Banking Institutions (IBI) through its Shariah Board

In Pakistan, the banks are authorized to offer products based on Islamic modes under the Banking Companies Ordinance, 1962 Each Islamic banking institution (IBI) is required to appoint a Shariah Advisor who is responsible to give approval regarding Shariah compliance of all products of IBIs and issue Shariah rulings.

Composition of SBP’s Shariah board The Shariah Board comprises members drawn from fields such as Islamic Shariah, banking, accounting, law and other relevant fields. It has a minimum of five members and was formally established in 2003

Continues.. At least two members have to be Shariah scholars, one member to be a Chartered accountant, one a lawyer and one representing the bankers and the State Bank to be the Director of Islamic Banking Department of SBP, who also serves as the secretary of the Shariah Board.

The Chairman of the Shariah Board has to be from among the Shariah scholars. The technical members, i.e. the lawyer, the accountant and the banker give their opinion in the relevant areas of their expertise to the Shariah scholars, who consider their views while giving a Shariah ruling on issues under review.

Term of office The initial term of office of all members of the Shariah Board is of two years. All members, excluding the ex-officio member, shall have a term of two years and shall be eligible for reappointment. The Chairman and members of the Shariah Board shall remain in office until their successors are appointed.

Role and Responsibilities of SBP Shariah board: The SBP Shariah Board advises State Bank in formulation of regulations on Islamic banking. Review and approve for Shariah compliance the products/instruments developed by State Bank of Pakistan for conducting its central banking and monetary management functions under the Islamic modes. Advise State Bank of Pakistan on Prudential regulations developed for Islamic banking sector.

Approve the fit and proper criteria for appointment of Shariah advisors of institutions conducting Islamic banking activities. SBP ‘s Shariah board keeps an edge over the Shariah board or governing bodies of Islamic banking in other countries in a way that it contains members from other professional areas like law and accountancy in addition to Islamic scholars while the governing bodies of Islamic banks in other countries only includes Islamic scholars

Due to this composition, SBP’s Shariah Board cover and understand almost all aspects of any issue discussed in the meetings which gives comprehensiveness to its decisions. The rulings given by the Board are not only Shariah compliant but are also workable as they take into consideration the legal and financial infrastructure of the country and the business needs.

AAOIFI The Accounting and Auditing Organization for Islamic Financial Institutions(AAOIFI) is an Islamic international autonomous non-for-profit corporate body that prepares accounting, auditing, governance, ethics and Shari'a standards for Islamic financial institutions and the industry AAOIFI was established in 1990 in Algiers

Continues.. As an independent international organization, AAOIFI is supported by institutional members (200 members from 45 countries, so far) including central banks, Islamic financial institutions, and other participants from the international Islamic banking and finance industry, worldwide.

AAOIFI has gained assuring support for the implementation of its standards, which are now adopted in the Kingdom of Bahrain, Dubai International Financial Centre, Jordan, Lebanon, Qatar, Sudan and Syria. The relevant authorities in Australia, Indonesia, Malaysia, Pakistan, Kingdom of Saudi Arabia, and South Africa have issued guidelines that are based on AAOIFI’s standards.