KARACHI: The State Bank of Pakistan (SBP) said on Monday it had adopted more Sharia standards to promote Islamic banking.
However, the SBP has recently approached the Supreme Court of Pakistan to find a solution for the implementation of riba-free banking. The Federal Shariat Court (FSC) came up with a final verdict on interest-free banking and gave a timeline to implement the decision.
The FSC on April 28 announced a verdict in a long-pending case on riba, declaring the prevailing interest-based banking system as against Sharia and directed the government to facilitate all loans under an interest-free system. The court ruled that the federal government and provincial governments must amend relevant laws and issue directives that the country’s banking system should be free of interest by December 2027.
On June 26, commercial banks and their regulator – the SBP – filed an appeal before the SC challenging the FSC direction to the government for a complete transformation of the banking system into Sharia-compliant banking by December 2027 and seeking guidance from the appellate bench on the matter.
The SBP’s decision to approach the SC was shocking for many in the financial sector since the central bank is playing a key role in the promotion of Islamic banking.
The SBP on Monday said it had been adopting Sharia standards of the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI).
“The standardisation and harmonisation in Sharia practices and procedures are helping in elevating the local Islamic banking industry at par with the international best practices,” said the SBP.
The SBP said it adopts more AAOIFI Sharia Standards for the Islamic Banking Industry Strengthening Sharia compliance of the Islamic banking industry in line with best international practices is one of the key pillars of SBP’s 3rd Strategic Plan for the Islamic Banking Industry 2021-25.
“After a comprehensive process of evaluation and deliberations with the internal and external stakeholders, keeping in view our local environment, today the State Bank has adopted four more AAOIFI Sharia standards on Salam and Parallel Salam; Istisna and Parallel Istisna; and Combination of Contracts and Irrigation Partnership (Musaqat), with certain clarifications and amendments,” said the SBP.
Salam is a mode of financing frequently used in agriculture, while Istisna’a is a mode generally used by Islamic banking institutions to provide financing where manufacturing, assembling, and processing are involved.
The irrigation partnership (Musaqat) standard can be used in the agriculture sector, especially for orchard financing, while the standard on the combination of contracts provides guidance to Islamic banking institutions when making use of multiple contracts in their various arrangements to meet the needs of the customers.
“The SBP has already issued detailed general guidelines on Islamic financing for the agriculture sector.”
“With the adoption of these four standards, the total number of AAOIFI sharia standards adopted by SBP has reached twenty while work on the remaining standards is underway,” said the SBP.