SBP Issues Guidelines for DFIs to Undertake Shariah Compliant Business

To enlarge the scope of Shariah compliant financial services in the country, State Bank of Pakistan (SBP) has taken another important step by issuing guidelines for Development Finance Institutions (DFIs) to undertake Shariah compliant businesses and operations.

DFI shall be required to have and maintain at all times a minimum Islamic Finance Fund of Rs. 150 million and they shall also maintain Capital Adequacy Ratio (CAR) as prescribed by SBP from time to time.

The conventional side of the DFI may provide support functions/services like human resource management, administration, accounting, IT and other secretarial and general services for the IBD/ IFD under BoD approved service level agreements (SLAs) which shall inter alia include detailed transfer pricing mechanism.

DFI shall ensure that proper systems and controls are in place in order to ensure segregation of funds between Shariah compliant and conventional business and operations and to protect the interest of all stakeholders. The DFI shall be required to prepare procedure manuals for Shariah compliant business and operations duly vetted by their Shariah Board /Shariah Adviser.

Conventional banks opening Islamic banking branches shall formulate pool management and profit and loss distribution policy in light of SBP instructions issued from time to time. In this regard, the bank shall have in place an adequate IT based system which inter alia suitably caters to the requirements of allocation of (a) deposits, (b) financing, investments and placements, (c) income and expenses and (d) movement of assets to/from different pools.

In order to efficiently utilize the existing conventional branch network, the DFI may as per relevant SBP regulations issued from time to time operate at its conventional branches separate Islamic banking windows/Islamic finance windows (IBWs/IFWs).

However, proper systems and control should be in place to ensure complete segregation and that the fund transfer takes place on the same day. The authorized branches shall not, in any manner whatsoever, receive/pay interest on such services. The authorized branches may charge a reasonable fee/commission on sale of such products and services under their BoD and Shariah Board /Shariah Adviser approved policy.

SBP has also updated the guidelines, introduced in 2004, for establishing Islamic banking Institutions keeping in view the various developments, such as changes in the licensing and regulatory regime for banks.

The updated guidelines deal with the establishment of a full-fledged Islamic bank, Islamic banking subsidiary and Islamic banking branches of conventional banks. In addition, these guidelines cover different areas including minimum capital adequacy, requirements related to sponsor directors, business plan, Shariah governance, application fees, and preconditions for the commencement of business.

The guidelines for conventional banks and DFIs to undertake Shariah-compliant business and operations also cover the eligibility criteria for in-principle approval, proposal requirements, shariah governance, minimum capital requirement and systems and controls.

Further, separation of Islamic banking/finance division and its different components, responsibilities of head of the Islamic banking/finance division and requirements for commencement of operations are part of these guidelines.

It is expected that these guidelines will facilitate the new entrants in the field of Islamic banking through establishment of full-fledged Islamic banks, Islamic banking subsidiaries by conventional banks and the commencement of Shariah-compliant business and operations by conventional banks and DFIs.