Karachi, November 22, 2024 – The State Bank of Pakistan (SBP) has revised the Shariah Governance Framework for Islamic Banking Institutions to align it with international best practices.
The SBP stated that the revised Shariah Governance Framework (SGF) will become effective from January 1, 2025. Islamic Banking Institutions (IBIs) have been instructed to make the necessary arrangements to comply with the requirements of the revised SGF and submit their compliance status to the State Bank of Pakistan by March 31, 2025.
The SBP warned that any non-compliance with the provisions of the SGF will subject the bank to penal action under the relevant provisions of the Banking Companies Ordinance, 1962.
The central bank emphasized the importance of a sound and effective Shariah compliance framework to instill public confidence in the Shariah conformity of products and services offered by Islamic Banking Institutions (IBIs).
The SBP strives to ensure that IBIs operate in conformity with Shariah principles. Since the re-launch of Islamic banking in 2001, it has been issuing regulations, instructions, and guidelines on Shariah compliance. In 2008, the SBP issued a detailed set of instructions and guidelines for Shariah compliance via IBD Circular No. 02 of 2008. Comprehensive Shariah Governance Frameworks were introduced in 2015 and 2018. However, to address ongoing developments in the Islamic banking industry and align with international best practices, the SGF has been further enhanced.
The SGF applies to all IBIs, including full-fledged Islamic banks, Islamic banking subsidiaries, and Islamic banking divisions of conventional banks. Its primary objective is to strengthen the Shariah compliance environment of IBIs and clearly define the roles and responsibilities of various organs of IBIs, including the Board of Directors (BOD), Executive Management (EM), Shariah Board (SB), Shariah Compliance Department (SCD), Product Development (PD), Internal Audit, and External Audit.
Key elements of the revised SGF include:
1. A mechanism for BOD oversight of Shariah compliance.
2. Accountability of management and staff for implementing the SGF.
3. An independent Shariah Board (SB) with at least one Resident Shariah Board Member (RSBM) to oversee implementation.
4. A Shariah Compliance Department (SCD) to assist the SB and liaise with management.
5. A Shariah compliance review mechanism to assess effectiveness.
6. An independent Internal Shariah Audit Unit (ISAU).
7. A Product Development unit for innovative Shariah-compliant products.
8. External Shariah Audit conducted alongside the annual audit.
