The State Bank of Pakistan (SBP) has issued comprehensive guidelines to help Islamic Banking Institutions (IBIs) mitigate the economic impact of COVID-19 on their customers.
The SBP issued this directive, issued on Thursday, aims to provide regulatory relief to facilitate the continued financial support of the real economy by IBIs.
To address the adverse effects of the pandemic and ensure the stability of financial services, the SBP had previously revised prudential regulations across various banking sectors on March 26, 2020. These sectors include corporate/commercial banking, consumer financing, agriculture financing, microfinance, SME financing, and housing finance.
Key Directives for Islamic Banking Institutions
The SBP’s guidelines focus on the deferment of principal amounts and the rescheduling or restructuring of financing facilities. To achieve this the SBP instructed IBIs to follow general principles outlined in Appendix-A for different Islamic financing products.
1. Deferment and Rescheduling: The SBP said that IBIs may refer to the major mode-wise general principles in Appendix-A to defer principal amounts or restructure various Islamic financing products. This appendix provides detailed procedures for handling products like Murabahah, Musawamah, Salam, Istisna, Diminishing Musharakah, and Ijarah.
2. Product Coverage: While Appendix-A covers major Islamic financing products, the SBP allowed IBIs to reschedule or restructure other products according to their approved financing policies.
3. Shariah Compliance: All products, arrangements, documents, and agreements related to the deferment or restructuring must be approved by the respective Shariah Boards of the IBIs.
Appendix-A: Mode Wise General Principles
• Murabahah/Musawamah: The SBP said Adjustments include increasing the price and tenor before execution, and for executed transactions, additional profit cannot be charged. Instead, separate transactions based on Tawarruq or other Islamic financing modes may be executed.
• Salam/Istisna: Delivery extensions and price increases are permitted for goods not yet delivered. For goods sold by the customer as the bank’s agent, the tenor may be extended with additional profit charged through increased selling prices.
• Diminishing Musharakah: Unit sale/purchase deferment with extended tenor is allowed, with corresponding rent adjustments.
• Ijarah: Rent deferment, both full and partial, with revised schedules is permitted.
• Musharakah: Tenor extension and revised terms are allowed, with reduced rates applied for future provisional payments.
Additional Provisions
• For Shariah-compliant financing modes not covered in the table, IBIs must develop solutions with their Shariah Boards’ approval.
• IBIs may substitute existing products with other Shariah-compliant products, again subject to Shariah Board approval.
• In urgent cases, IBIs are permitted to use Tawarruq/Commodity Murabahah/Musawamah, with Shariah Board approval.
The SBP’s guidelines ensure that all necessary documentation and approvals are maintained, enabling IBIs to provide the required relief effectively while adhering to Shariah principles. This initiative is part of a broader effort to support the financial sector and its customers during these challenging times.