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-forprofit 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.